gauteng - agsa 2012-13/2012_13_mfma... · 2017-03-27 · gener epor on the audit outcomes of...

Gauteng

General reporton the audit outcomes of local government

MFMA 2012-13

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Our reputation promise/mission

“The Auditor-General of South Africa 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.”

Gauteng MFMA 2012-13

The information and insights

presented in my office’s flagship

publication are aimed at

empowering oversight structures,

local government and provincial

leaders to focus on those issues

that will result in reliable financial

statements, credible reporting on

service delivery and compliance with

legislation.

This publication also captures the

commitments that leaders have made

to improve audit outcomes.

Our responsibility extends to citizens,

who trust us to make a contribution

towards a better South Africa.

Kimi Makwetu

Auditor-General

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General report on the audit outcomes of Gauteng local government for 2012-13

Overview

7 SCM Regulation 44 and uncompetitive and unfair procurement processes remained a challenge Page 22

1 Message from the Auditor-General Page 7 4 Material non-compliance

with legislation still unacceptably high at 92% of the auditees Page 17

6 51% of auditees avoided financially qualified opinions by correcting material misstatements in financial statements identified during audit process Page 21

2 Overall improvement in the audit outcomes of Gauteng local government Page 14

3 Considerable increase in the number of auditees with no findings on their annual performance reports Page 15

5 Substantial reduction in unauthorised, irregular as well as fruitless and wasteful expenditure Page 19

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12 Processing and reconciling controls, compliance issues and action plans remained a challenge Page 31

14 The level of assurance provided by key role players were still not at the desired level Page 34

16 The provision of water and sanitation services and road infrastructure should receive urgent attention Page 39

10 Confidentiality, integrity and availability of information remained at risk Page 27

15 The initiatives and commitments of key role players did not yield the desired impact on audit outcomes Page 36

11 Significant risks that affect the financial health of local government remained Page 28

13 Inadequate business processes and ineffective operational plans resulted in slow progress in implementing recommendations and action plans Page 32

8 Vacancies in key positions, average months in positions and appointed officials lacking minimum competencies Page 24

9 Continued reliance on consultants and ineffective management of this resource Page 25

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Contents

FOREWORD 7

SUMMARY OF AUDIT OUTCOMES AND KEY RECOMMENDATIONS FOR IMPROVEMENT 11

OUR AUDIT AND REPORTINg PROCESS 12

STATUS OF ThE ThREE AREAS ThAT WE AUDIT AND REPORT ON 14

SIx RISK AREAS ShOUlD CONTINUE TO RECEIVE ATTENTION 20

SIgNIFICANT DEFICIENCIES IN INTERNAl CONTROlS AND ROOT CAUSES ShOUlD bE ADDRESSED TO IMPROVE AUDIT OUTCOMES 31

ThE lEVEl OF ASSURANCE PROVIDED bY KEY ROlE PlAYERS NEEDS TO bE IMPROVED 34

ThE INITIATIVES AND COMMITMENTS OF All ROlE PlAYERS ShOUlD hAVE A POSITIVE IMPACT ON FUTURE AUDIT OUTCOMES 38

ThE PROVISION OF WATER AND SANITATION SERVICES AND ROAD INFRASTRUCTURE ShOUlD RECEIVE URgENT ATTENTION 39

AUDIT OUTCOMES OF INDIVIDUAl MUNICIPAlITIES 41

METROS 45

Ekurhuleni Metropolitan Municipality and its entities 48

City of Johannesburg Metropolitan Municipality 54

City of Tshwane Metropolitan Municipality and its entities 60

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SEDIbENg DISTRICT 63

Sedibeng District Municipality 66

Emfuleni Local Municipality 70

Lesedi Local Municipality 74

Midvaal Local Municipality 78

WEST RAND DISTRICT 79

West Rand District Municipality and its entity 82

Merafong City Local Municipality 86

Mogale City Local Municipality 90

Randfontein Local Municipality 94

Westonaria Local Municipality 98

ANNExURES 101

Annexure 1 Auditees’ audit outcomes, areas qualified, findings on predetermined objectives, non-compliance and specific focus areas 102

Annexure 2 Assessment of auditees’ key controls at the time of the audit 104

Annexure 3 Comparison of five-year audit outcome 106

glOSSARY OF TERMS 109

Glossary of terms of key terminology used in this report 110

Acronyms and abbreviations 115

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GAUTENG ClEAN AUDITS 2012-13

MUNICIPAlITY

Sedibeng District

MUNICIPAl ENTITYJohannesburg Fresh Produce MarketJohannesburg Social Housing Company

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FoREWoRD

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It is with pleasure that I present to the Gauteng Provincial Legislature and municipal councils my 2012-13 general report summarising the audit outcomes of local government for the financial year ended 30 June 2013.

I am encouraged by the significant improvement in the overall audit outcomes compared to the previous year. I am also pleased with the considerable attention and effort that has been dedicated to qualification areas over the past three years. The significant reduction in auditees with qualified audit opinions is evidence of this commendable effort.

I am especially encouraged by the Sedibeng District Municipality attaining a clean audit outcome; the Johannesburg Social Housing Company and Johannesburg Fresh Produce maintaining their clean audit outcomes; and the City of Johannesburg, Johannesburg City Power and Johannesburg Water, which all improved to attain financially unqualified opinions with findings on compliance and predetermined objectives.

These improvements can largely be attributed to strong drivers of internal controls being supported by commendable leadership and governance structures at the affected auditees. Day-to-day internal control disciplines were enhanced and monitored, and commitments made in the previous year were implemented by the role players that provide essential assurance, including the political and administrative leadership.

FOREWORD

The role played by senior management, internal audit units, audit committees and coordinating departments resulted in a reduction of overall qualification areas. Less irregular, fruitless and wasteful expenditure was incurred compared to the previous year.

While significant progress has been achieved over the past five years, substantial attention is needed in financial and performance management. This is especially true in the areas of procurement and contract management, and the quality of financial statements, as these areas continue to be key barriers to attaining clean audit outcomes.

Based on our financial health analysis, it is clear that there is a need for a viable strategy for some municipalities in Gauteng to stabilise liquidity concerns. These constraints may impact on their ability to meet service delivery objectives and operational expenditure, and to effectively address audit outcomes and action plans.

Some auditees’ audit outcomes did not improve because they did not implement a majority of the commitments made by various stakeholders in the previous year. This is evident by 86% of auditees receiving financially unqualified audit opinions with findings on legislation. We should focus on the key reasons for this stagnation, which are similar to those reported in the previous year, including:

Kimi MakwetuAuditor-General

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• the lack of discipline within the finance and other supporting units to implement basic business processes and effective operational procedures

• the administrative leadership not implementing action plans and recommendations promptly due to a lack of stability in some key positions

• the lack of adequate consequence management against officials that transgress legislation and internal policies or procedures, and against poor performance

To improve the value of work done by governance structures, the activities of risk departments should be aligned to the operational plans of internal auditors for adequate coverage of all key risk areas. This will result in an integrated risk management approach, internal audit plans that respond directly to auditees’ key risks, and less reliance being placed on external auditors’ findings.

I am, however, encouraged by the commitment to achieving clean administration that is reflected in interactions with the political leadership of municipalities. It is therefore imperative that the auditees and coordinating institutions in Gauteng intensify and accelerate ongoing improvement initiatives to make clean administration in the province a reality.

I want to convey to the administrative and political leadership the crucial message that it is possible to obtain clean audit outcomes if the basics of internal controls are fully in place. The focus should therefore be on embedding the basic day-to-day internal control disciplines of financial management and good governance practices.

Clean administration at all municipalities and municipal entities remains a vision my organisation fully subscribes to in our effort to strengthen South Africa’s democracy and build public confidence. I am confident that this goal will be reached if all role players continue to join forces in a concerted and unwavering effort. In this regard, my office will continue to encourage meaningful stakeholder engagement between the auditees, the oversight authorities and ourselves.

I wish to thank the audit teams from my office and the audit firms that assisted with the audit of local government for their diligent efforts towards fulfilling our constitutional mandate and the manner in which they continue to strengthen cooperation with the leadership of the province

Auditor-general Pretoria July 2014


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11 SUMMARY OF AUDIT OUTCOMES AND KEY RECOMMENDATIONS FOR IMPROVEMENT


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Our audit and reporting process

We audit all municipalities and their municipal entities in the province, also called auditees in this report, so that we can report on:

the quality of their financial statements the quality of their annual performance reports their compliance with legislation.

We also assess the root cause of any error or non-compliance, based on the internal control that had failed to prevent or detect it. This year we also audited key aspects of the provision of water and sanitation services and roads infrastructure by municipalities. We include these aspects in the following three types of reports:

We report our findings, root causes and recommendations in management reports to the senior management and accounting officers or authorities of auditees, which are also shared with the mayors and audit committees.

Our opinion on the financial statements, material findings on the performance report and non-compliance with legislation, as well as significant deficiencies in internal controls, are included in an audit report, which is published with the auditee’s annual report and dealt with by the municipal council.

Annually we report on the audit outcomes of all auditees in a provincial general report (such as this one), in which we also analyse the root causes that need to be addressed to improve audit outcomes in the province. Before the general reports are published, we share the outcomes and root causes with the provincial leadership, the provincial legislature and key role players in national and provincial government.

Over the past few years, we have intensified our efforts to assist local government to improve its audit outcomes by identifying the key controls that should be in place at auditees; assessing these on a quarterly basis; and sharing the assessment with mayors, accounting officers and audit committees.

We further identified the following six key risk areas that need to be addressed to improve audit outcomes and financial and performance management, and we specifically audit these so that we can report on the status thereof: ■ quality of submitted financial statements ■ quality of annual performance reports ■ supply chain management ■ financial health ■ information technology controls ■ human resource management.

During the audit process, we work closely with the accounting officer, senior management, audit committee and internal audit unit, as they are key role players in providing assurance on the credibility of the auditees’ financial statements, performance report as well as compliance with legislation.

We also continuously strengthen our relationships with mayors, the premier, the provincial treasury, the provincial department of corporative governance as well as the provincial legislature, as we are convinced that their involvement and oversight should play – and will continue to play – a crucial role in the performance of local government in the province. We share our messages on key controls, risk areas and root causes with them and obtain and monitor their commitments to implement initiatives that can improve audit outcomes.

Figure 1 that follows gives an overview of our message on the 2012-13 audit outcomes, which is a continuation of what we had reported and recommended in our last report on the audit outcomes of local government in the province. Please note the following about the figure and when reading the rest of the report:

If municipalities have municipal entities under their control, the audit opinion on their financial statements is that of the consolidated financial statements.

‘With findings’ means findings on either the quality of the annual performance reports or non-compliance with legislation, or findings on both these aspects. Clean audits are achieved when the financial statements receive unqualified audit opinions and there are no findings on the quality of the annual performance reports or non-compliance with legislation.

Movement of more than 5% is regarded as an improvement or a regression. Movement is depicted as follows:

Improved Stagnant or little progress Regressed

The rest of the section summarises the audit outcomes and our key recommendations for improvement. This summary is followed by the results of our audits at district level and per municipality. The report also includes three annexures that detail the audit outcomes and findings per auditee, the status of the drivers of internal controls at the auditees, and a five-year view of the audit outcomes. The glossary of terms included after the annexures defines the terminology used in this report.


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Figure 1: Overview of audit outcomes and key recommendations for improvements

Assurance provided by key role players

THE KEY ROLE PLAYERS NEED TO ...

Provides assurance Provides some assurance Provides limited/no assurance

Drivers of internal control should be improved

LEADERSHIP

FINANCIAL AND

PERFORMANCE

MANAGEMENTGOVERNANCE

Root causes should be addressed

Political and administrative leadership response results in inadequate business processes and ineffective operational plans

A root cause at of the auditees (2011-12: 33%)

... TAKE SOME VITAL ACTIONS ...

Improvement in audit outcomes

Unqualified with

no findings

Unqualified

with findings

Qualified with

findings

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

Good Concerning Intervention required

... IN KEY AREAS ...

... TO ENSURE IMPROVED RESULTS.

Seni

or

man

agem

ent

Mun

icip

al

man

ager

May

or

Inte

rnal

au

dit

Audi

t co

mm

ittee

Coo

rdin

atin

g de

partm

ents

Mun

icip

al p

ublic

ac

coun

ts

com

mitt

ee

Legi

slat

ure

and

portf

olio

co

mm

ittee

Mun

icip

al

coun

cil

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

Instability in key positions and key officials lacking competencies


Lack of consequences for poor performance and transgressions


Improved Unchanged Regressed

5%16%

24%

86%79%

71%

9% 5% 5%

2012-13 2011-12 2010-11

17%25%

46%42%

37% 33%

2012-13 2011-12

8% 12%

32%44%

59%44%

2012-13 2011-12

38%

54%

41%


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Status of the three areas that we audit and report on

Audit outcomes have improved

There has been an overall improvement in the audit outcomes of local government. Significant aspects of the 2012-13 audit outcomes of the 37 auditees shown in figure 1 are listed below.

Movements in financially unqualified audit opinions with findings and clean audit outcomes

The political leadership has demonstrated their commitment to attaining clean audit outcomes. As a result, the Sedibeng District Municipality, obtained a clean audit outcome and two municipal entities, the Johannesburg Social Housing Company and Johannesburg Fresh Produce Market, maintained their clean audit outcomes. The City of Johannesburg, City Power and Johannesburg Water, improved from having had qualified opinions to attaining unqualified opinions with compliance findings. Reporting against predetermined objectives also improved as six auditees addressed material findings of the previous year.

The improvement in these audit outcomes is an indication of the positive response to our messages. Our quarterly engagements with these auditees reflect that our messages were taken seriously by their political and administrative leadership. The maturing relationship and stability between the political and administrative leadership over the years enabled the auditees to develop, implement and monitor a decisive action plan to address weaknesses in internal controls. This contributed to sustained and improved audit outcomes.

The leadership and officials embraced the concept of clean administration, which also contributed to the effective oversight of basic disciplines of internal control activities. These controls related to the credibility of the financial statements, performance information reporting and compliance with legislation. To further improve audit outcomes in the province, these good practices should be replicated across all auditees.

Despite the above improvements and good practices, 32 (86%) auditees continued to receive financially unqualified audit opinions with findings. The main reasons for this stagnation are a lack of adequate consequence management and poor discipline within the finance and other supporting units when implementing basic business processes and effective operational procedures. These deficiencies resulted in a number of auditees not being able to adequately address compliance findings, which hampered their progress towards the target of a clean audit set for the 2013-14 financial year. It is, however, encouraging that the number of issues across the majority of key risk areas has reduced when compared to the previous year. There is a need for stagnating auditees to respond promptly to our messages as this will further

strengthen internal control disciplines and translate to better audit outcomes in the near future.

Movements in qualified audit outcomes

Two West Rand local municipalities, Randfontein and Westonaria, retained their qualified opinions on bank and cash, as well as on assets, due to the lack of supporting documents for the reconciliations and account balances in the financial statements. These repeat qualifications were mainly due to the political and administrative leadership not responding adequately to our concerns of instability in key positions, inadequate business processes and ineffective operational plans. Economic distress in some of the West Rand municipalities, coupled with financial health challenges such as difficulties in recovering the full operational costs for the services being delivered, led to cash flow constraints. Financial problems coupled with political uncertainties resulted in municipalities not being able to attract the required skills, vacancies undermining an adequate transfer of skills by consultants, and uncertainty about the sustainability of practices meant to improve audit outcomes.

However, the reduction in qualified opinions from 10 auditees (24%) in 2010-11 to two auditees (5%) in 2012-13 reflects a positive trend. When all qualifications are eliminated, focus will be placed on compliance with legislation and predetermined objectives findings. Auditees with qualified opinions have demonstrated the ability to attain a financially unqualified opinion with findings, as the areas of qualification are receiving attention and have reduced compared to last year.

Audit outcomes in metropolitan municipalities

All metros in the province attained unqualified opinions with findings. The City of Johannesburg improved from a financially qualified opinion to a financially unqualified opinion with findings. The improvement was a result of stability in the political and administrative leadership over the years. In addition, the City of Johannesburg established a project management office headed by a chief operations officer, which facilitated clearing the qualifications relating to assets and revenue.

The audit outcomes of the City of Tshwane and Ekurhuleni Metro remained unchanged. Although the political leadership took ownership of the key controls, the administrative leadership did not implement adequate business processes to address material findings of non-compliance. Furthermore, the municipalities’ political leadership did not provide sufficient oversight of municipal entities, which resulted in a lapse of financial and performance management disciplines.

The predetermined objectives’ outcomes improved significantly as the Ekurhuleni Metro and the City of Tshwane did not have findings in this area. The


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City of Johannesburg also improved significantly, as it addressed all findings on the reliability of reported performance information and reduced findings on the usefulness of performance information. This was a result of the political leadership taking a keen interest in the link between service delivery and reporting on predetermined objectives.

Audit outcomes in local and district municipalities

Local municipalities have received financially unqualified opinions with findings for the past two years. This was the result of a lack of skills within the finance units, leading to financial statements being subject to material misstatements identified during the audit process. The administrative leadership has not demonstrated its commitment to attaining clean administration. This is reflected in the weaknesses in control environments and the failure to address or avoid material findings on compliance with all legislation.

The outcomes of the district municipalities have improved. The Sedibeng District Municipality achieved a clean audit outcome in the 2012-13 financial year. This can be attributed to the political leadership embracing the concept of clean audits when it was first introduced. A sound control environment was visualised and the executive leadership was tasked with achieving this goal within the required time frame.

The stability of the political and administrative leadership, stability of key positions over the years and effective oversight of basic disciplines of internal control activities also contributed to this improvement. In addition, the accounting officer held officials accountable for their actions, which contributed to a strong performance management system.

As in previous years, the West Rand District Municipality retained its financially unqualified opinion with findings. The stagnation was mainly due to inadequate controls over the preparation and review of financial statements. Furthermore, the daily and monthly reconciliation controls were not adhered to in full, which compromised the credibility of financial reporting.

Audit outcomes in municipal entities

The overall audit outcomes of municipal entities remained largely unchanged, with two (8%) municipal entities, the Johannesburg Social Housing Company and the Johannesburg Fresh Produce Market, maintaining their clean audit outcomes. The maintenance can be attributed to disciplined financial reporting and to oversight committees implementing, monitoring and addressing internal control deficiencies. The leadership created control environments that were conducive to driving accountability and ownership of the required improvements within the auditee.

Twenty-three municipal entities (92%) achieved financially unqualified audit opinions with findings. Commitments made by key role players were either not implemented or not monitored successfully, or were implemented too late to have an impact on audit outcomes. These municipal entities have the greatest

potential to achieve clean audit outcomes. For this potential to be realised, the political and administrative leadership need to ensure that commitments are honoured.

Way forward

The lack of consequence management and key officials lacking the requisite skills as reported over the past few years resulted in control environments where compliance with legislation was not adequate. This will hamper the achievement of clean audit outcomes targeted for the 2013-14 financial year.

The goal of improved audit outcomes in Gauteng is for all citizens to experience improved service delivery and have a better quality of life. The good practices that resulted in improvements from some of the auditees noted above should be embraced and replicated throughout the province. This is possible as Gauteng has available cash resources, funding capacity and access to highly skilled professionals. The political and administrative leadership should mobilise these resources and allocate them to key priorities. This will assist in ensuring that audit outcomes are aligned to the resources of the province.

The quality of annual performance reports has

improved

Auditees are required to measure their service delivery against the performance indicators and targets set for each of their predetermined performance objectives, and to report on this in their annual performance reports. We audit the annual performance reports to determine whether the information in these reports is useful and reliable. In the audit report, we reported findings that were material enough to be brought to the attention of the users of the annual performance report, including the community.


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Figure 2: Status of quality of annual performance reports

Figure 2 shows the number of auditees in the province with material findings in this regard over the past three years. It is encouraging that the quality of reporting on predetermined objectives has improved over the past two years. In the current year, only 32% (2012: 50%) of auditees had material findings on annual performance reports. Consistent with the previous year, all auditees prepared and submitted their annual performance reports for auditing by the legislated deadline. The continued positive trend is indicative of leadership’s commitment and support of the audit process. The following also contributed to the positive reduction in predetermined objectives audit findings:

Continuous training sessions on performance information provided by the Auditor-General of South Africa (AGSA) in collaboration with National Treasury.

Increased coordination by performance management units to provide evidence that supports the credibility and reliability of reported information.

Improved knowledge and deeper understanding of the disciplines and principles surrounding the performance information environment and its reporting.

We measured the usefulness of the reported information against the criteria of presentation, consistency, relevance and measurability. The number of auditees with material findings in this regard has decreased by 5% since the previous year. The most common findings on usefulness were the following:

Performance targets were not measurable.

Indicators/measures were not well defined.

Performance targets were not specific.

Findings on reliability relate to whether the reported information could be traced back to the source data or documentation and whether the reported information was accurate, complete and valid when compared to the source. The number of auditees with material findings in this regard has decreased by 18% since the previous year. The most common findings on reliability were the following:

Reported performance information was not accurate.

Reported performance information was not valid.

Reported performance information was not complete.

We also reported the following performance-related matters in the audit reports:

Nine auditees (24%) made amendments to the annual performance report submitted for auditing to correct material misstatements identified during the audit process. Therefore, six (16%) auditees had no material findings only because they corrected all the misstatements we had identified during the audit. The reliance on the auditors to identify corrections to be made to the annual performance report may not be a sustainable practice.

The fact that 25 (68%) auditees had no findings on predetermined objectives is an indication that a significant portion of the auditees have mastered the basic discipline of reporting on predetermined objectives and are not relying on the auditors to identify corrections to be made.

Non-achievement of planned targets was only reported for auditees with reliable performance management systems that did not receive adverse or disclaimed audit opinions on reliability. Of the 33 auditees with reliable annual performance reports, 58% did not achieve 20% or more of the planned targets they reported on. The planned targets were not achieved due to various reasons and shortcomings in the performance information process, such as auditees setting unrealistic targets, late receipt of grants earmarked for specific projects, targets not being monitored on a regular basis by administrative leadership and some targets not being supported by adequate funding.


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Only 16% of the auditees had material findings of non-compliance with the legislation that regulates strategic planning, performance management and reporting.

Only three auditees in the province used consultants to assist with predetermined objectives. This indicated that the level of expertise and knowledge was internal and the majority of auditees in the province did not rely on consultants to obtain a positive audit outcome. The trend of improvements in predetermined objectives audit outcomes is therefore expected to be sustainable.

Way forward

The reduction in the material findings on predetermined objectives indicates that our recommendations have been taken seriously and are being implemented. Furthermore, progress has been made in ensuring that objectives are measurable and specific. The majority of targets and objectives have been formulated according to the requirements of the framework and performance reports, and are supported by appropriate evidence. To further improve on this aspect, internal audit and audit committees need to intensify their review of information and the processes of preparing performance reports.

Proper planning and project management should be prioritised to ensure that planned targets are met. This should be supported by a good system of financial and internal controls that will ensure that the delivery of these targets is reported accurately and completely in the accountability reports.

To sustain or improve the results further, continuous training on performance information, similar to the one provided by National Treasury in collaboration with the AGSA, will still be relevant in Gauteng.

The level of compliance with legislation has

improved

We annually audit and report on compliance with legislation applicable to financial matters, financial management and other related matters.

We focused on the following areas in our compliance audits: ■ material misstatements in the submitted annual financial statements ■ asset and liability management ■ audit committee ■ budget management ■ expenditure management ■ unauthorised, irregular as well as fruitless and wasteful expenditure ■ consequence management ■ internal audit ■ revenue management ■ strategic planning and performance management ■ annual financial statements and annual report ■ transfer of funds and conditional grants ■ procurement and contract management (in other words, supply chain management) ■ human resource management and compensation.

In the audit report, we reported findings that were material enough to be brought to the attention of the council and the public.

Figure 3: Status of compliance with legislation

Figure 3 shows the number of auditees with material findings in this regard over the past three years. We reported material findings on compliance with legislation at 34 auditees (92%) in the 2012-13 financial year, a slight improvement on the 36 auditees (95%) in the previous year. Findings of non-compliance continue to pose a challenge to the province and are the only significant barrier to the majority of auditees attaining clean audit outcomes. Unsatisfactory administrative leadership, a lack of consequence management and inadequate training on supply chain management regulations resulted in these findings.

Through our visibility initiatives, recommendations and good practices are communicated to the political and administrative leadership during the course of the year, using our interim and final management reports. In addition, the good practices are discussed during quarterly key control engagements with the political and administrative leadership. There is a need for concerted effort and commitment from the administrative leadership to eradicate compliance findings. This continues to be an area of concern because, if findings of non-compliance are not adequately addressed, the province runs the risk of stagnating at financially unqualified audit opinions with findings.


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Oversight bodies need to further sharpen oversight roles to monitor the extent of non-compliance with legislation and drive accountability. Commitments aimed at addressing findings of non-compliance should be fully implemented to ensure that compliance issues are eliminated and that this trend is reversed.

Figure 4: Trends in findings of non-compliance with legislation

22%

20%

25%

4%

14%

15%

6%

Quality of financial statements

Unauthorised, irregular and fruitless and wasteful expenditure

Competitive bids not invited and/ or deviations not justified(Procurement management)

Annual performance report

Asset management

Establishment , control of expenditure and payment within 30 days

Strategic planning & Performance management

57% (21)

49% (18)

41% (15)

35% (13)

16% (6)

14% (5)

14% (5)

Figure 4 shows compliance areas with the most material findings and the progress made by auditees in addressing these findings. It is worth noting that the actual number of findings has reduced significantly compared to previous years and the overall trend is also on a positive path. This overall improvement can be attributed to implementing stricter controls over the process of identifying conflicts of interest in contracts, implementing consequence management as per circular 68, as well as improved oversight by internal audit units and audit committees. The most common findings across these compliance areas were the following:

Material misstatements in the financial statements submitted for auditing, which is discussed in detail under the section on the quality of financial statements.

Unauthorised, irregular, as well as fruitless and wasteful expenditure incurred as a result of contravening sections of other legislative

requirements. Annexure 1 details the auditees with material findings of non-compliance and the nature of the findings.

Poor management of procurement and/or contracts.

The following were root causes for the lack of improvement on the above findings:

The administrative leadership’s inability to set a tone conducive to proper governance and compliance with legislation

The process for preparing financial statements was not adequate and integration between the risk department and internal audit was not at the required level. This hampered the adequacy of internal audit plans at stagnating auditees

Measures to ensure that appropriate action against employees who breach the code of conduct and contravene legislation were inadequate (lack of consequence management).

To further improve the outcomes, good disciplines of basic business processes and control activities need to be implemented and adequately monitored across all auditees in the province. Figure 5: Trends in unauthorised, irregular as well as fruitless and wasteful expenditure

R52 million

R142 million

R64 million

R1,197 billion

R1,833 billion

R466 million

R251 million

R740 million

R629 million

2010-11

2011-12

2012-13

2010-11

2011-12

2012-13

2010-11

2011-12

2012-13

Unauthorised expenditure

Irregular expenditure

Fruitless and

wasteful

expenditure


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Figure 5 reflects the three-year trend in unauthorised, irregular as well as fruitless and wasteful expenditure incurred by auditees.

Unauthorised expenditure

Unauthorised expenditure is expenditure that was not spent according to the approved budget. Of the R629 million in unauthorised expenditure incurred in 2012-13, 99% was a result of overspending on the budget. It is, however, encouraging that 96% of this expenditure was identified by the auditees. This shows that auditees have sound detection controls. When these controls have been embedded as a norm, auditees should strengthen the preventative controls so that unauthorised expenditure is avoided.

Furthermore, the unauthorised expenditure and the number of auditees that incurred this expenditure reduced when compared to the previous year. The reduction in unauthorised expenditure resulted from half the auditees heeding our message to improve financial disciplines and effectively monitor budgets.

The monetary limits on unforeseen and unavoidable expenditure is R15 million in the case of a municipality with approved total revenue in its current annual budget greater than R500 million. Unauthorised expenditure and the limit of R15 million proves to be a challenge at some metros given their budgets of a few billion rand. The National Treasury should also play a role in addressing the issue of unauthorised expenditure at the metro level. In addition, there is a need to strengthen oversight and prevent unauthorised expenditure. The implementation of proper monthly contract management and budget monitoring mechanisms will deter unauthorised expenditure.

Irregular expenditure

Irregular expenditure is expenditure that was not incurred in the manner prescribed by legislation. Such expenditure does not necessarily mean that money had been wasted or that fraud had been committed, but is an indicator that supply chain management legislation and other applicable regulations are not being adhered to, including the provision aimed at ensuring that procurement processes are competitive and fair. It is the role of municipal council to investigate all irregular expenditure to determine whether it constitutes financial misconduct, fraud or losses that should be recovered.

The majority of irregular expenditure is a result of non-compliance with supply chain management regulation 36, which deals with deviations, and regulations 44 and 45, which relate to awards made to state employees and their close family members. Irregular expenditure decreased by 75%, from R1,83 billion in 2011-12 to R446 million in the 2012-13 financial year. The implementation of our recommendations contributed to this decrease. Our recommendations were highlighted during our engagements with the political and administrative leadership, and affirmed by circular 68, which deals with consequence management. Despite the slow progress in implementing the requirements of the circular, it is encouraging that auditees that incurred the highest amount of

irregular expenditure in the previous period saw the value of enforcing the requirements of the circular. This resulted in disciplinary action being taken against officials and service providers who transgressed procurement and contract management requirements. In addition to these, the following processes and controls were implemented:

Stricter controls regarding the approval of deviations. Most deviations are now signed off by chief financial officers and municipal managers, and reported to the municipal public accounts committees (MPAC) and council.

Computer-assisted audit techniques (CAATs) to identify conflicts of interest prior to awarding contracts.

Robust analysis of irregular expenditure by MPACs and the request for internal audit units to assist with investigations.

Of the R466 million in irregular expenditure, 99% was a result of expenditure that was not incurred in the manner prescribed by legislation. Ninety-five per cent of the expenditure related to the 2012-13 financial year and the remainder was expenditure resulting from transgressions in previous years. As irregular expenditure was not identified and reported in a timely manner, only 20% was identified by the auditees. This shows that systems and processes at the affected auditees continue to lack preventative and detection controls to ensure that non-compliance with legislation is prevented by auditees.

Although there are policies and circulars in place to support compliance with legislation, particularly supply chain management, there is still a need for simplified mechanisms such as compliance checklists and deviation frameworks. These will be adequately and regularly monitored to assist auditees in reducing compliance findings. Where these mechanisms are diligently implemented and monitored, there has been a marked reduction in irregular expenditure. These best practices should therefore be embraced by all auditees in the province.

Fruitless and wasteful expenditure

Fruitless and wasteful expenditure is expenditure that was made in vain and that would have been avoided had reasonable care been taken. Fruitless and wasteful expenditure decreased by 55%, from R142 million in 2011-12 to R64 million in 2012-13. The major variance is the result of a specific water meter contract at one of the metros, which led to fruitless and wasteful expenditure in the previous year. The entire amount of fruitless and wasteful expenditure was disclosed in the previous year’s financial statements and there is no similar amount in the 2012-13 financial year. In addition, financial disciplines were implemented with regard to paying suppliers and improving contract management.


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Of the R64 million incurred in fruitless and wasteful expenditure, only 35% (2012: 51%) was identified by the auditees. This is a reflection of their weak internal control systems in this particular area. These internal control disciplines need to be enhanced to ensure that findings relating to fruitless and wasteful expenditure are eradicated.

Legislation prescribes the actions that municipal managers and councils follow to investigate and deal with unauthorised, irregular as well as fruitless and wasteful expenditure. More information on the effectiveness of these actions is included in the section on human resource management.

Way forward

The high prevalence of findings of non-compliance with applicable legislation can only be addressed effectively if the oversight structures act decisively against transgressors. The political leadership should ensure that accounting officers are held accountable for implementing a robust system of internal controls that adequately addresses the risks associated with non-compliance to legislation. The accounting officers should, in turn, take appropriate steps against officials who undermine financial management disciplines, internal control activities and applicable legislations. Furthermore, continuous training on legislation will assist in the reduction of findings of non-compliance. This will eventually eliminate unauthorised, irregular, as well as fruitless and wasteful expenditure in the province and lead to improved financial statements and service delivery to citizens.

Six risk areas should continue

to receive attention

Our audits of the six risk areas show that our recommendations to address these risks to financial and performance management have not yet been fully implemented. Significant aspects of five of these risk areas are summarised below, while the quality of performance information is discussed as part of the section on audit outcomes above. A view on the effective use of consultants is given as part of the human resource management risk area included below.

Quality of submitted financial statements

The purpose of the annual audit of the financial statements is to provide users with an opinion on whether the financial statements fairly present, in all material respects, the key financial information for the reporting period in accordance with the financial framework and applicable legislation. The audit provides the users with reasonable assurance on the degree to which the financial statements are reliable and credible, on the basis that the audit procedures performed did not identify any material errors or omissions in the financial

statements. We use the term material misstatement to refer to such material errors or omissions.

While all auditees submitted their financial statements for auditing on time, figure 1 shows that only 16 auditees (43%) submitted financial statements that did not contain material misstatements. This is an improvement of eight auditees (22%) compared to the previous year. Ekurhuleni Metro maintained its status of having no material misstatements. Sedibeng District Municipality was the only other municipality that did not have any material misstatements. This was due to the leadership’s commitment to prepare quarterly financial statements that were submitted to the audit committee for review.

The improvement in the quality of submitted financial statements is commendable. This improvement can be attributed to audit committees responding to our request to become more persuasive in getting management to take ownership of decisive action plans with clear time frames. However, as a well-resourced province with sufficient financially skilled professionals, the expectation is that all Gauteng auditees ought to comply with the financial reporting standards when submitting financial statements. There is a need for coordinating institutions to collate good practices and share them with auditees at a convenient forum such as provincial CFO forum to ensure that these are replicated across all auditees in the province.

Furthermore, internal auditors should focus on reviewing the processes for preparing financial statements to ensure the credibility of financial and performance reports. This should be enhanced by the robustness of the review process of regular financial statements by management and audit committees

Figure 6: Quality of submitted financial statements

Outcome if NOT corrected

Outcome aftercorrections

Financially unqualified Financially qualified


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Figure 6 above shows that 19 auditees (51%) received a financially unqualified opinion only because they corrected all the misstatements identified during the audit. The continued reliance on the auditors to identify corrections to be made to the financial statements to obtain an unqualified opinion is not a sustainable practice. This places undue pressure on legislated deadlines and may lead to a regression in audit outcomes.

Even though we reported the material misstatements to management for correction, two auditees (2011-12: six) could not make the necessary corrections to the financial statements, which resulted in qualified opinions. The following were the three most common financial statement qualification areas:

Property, plant and equipment

Cash and cash equivalents

Cash flow statement.

The qualification on assets was due to instability in key positions and officials lacking the required competencies. The political unrest in the area and financial challenges made it difficult for the municipality to attract the required skills. This, coupled with poor record keeping, resulted in a lack of sufficient and appropriate evidence to support the balances. The qualification on cash and cash equivalents was mainly due to reconciliation items that had been outstanding for a long time, and which did not have supporting documentation. This repeat qualification is a confirmation of the slow response by both the political and administrative leadership to our messages, as these qualification areas were also highlighted in the previous year. The qualification on cash flow statements was due to the inclusion of non-cash items in the cash flow statements. This error happened because the responsible official lacked the required technical competencies.

In addition to these deficiencies, the chief financial officer position at Westonaria Local Municipality was vacant for nine months. The acting official lacked authoritative power and accountability. This resulted in weakened monthly financial disciplines. These concerns were discussed with the executive mayor quarterly, but our engagements yielded marginal improvements.

Some auditees appointed consultants to assist with financial reporting. More information in this regard is included in the section on the effective use of consultants.

Way forward

Consistent with recommendations from the previous year, it is critical that the political leadership and management continue to mobilise available cash resources, funding and skilled professionals and employ these resources to improve key priorities. The political leadership should continue to insist on accurate monthly financial statements from the accounting officers, as these are

critical to decision-making. Accounting officers should embed a control environment characterised by daily, weekly and monthly reconciliation controls over significant account balances and transactions. In-year reporting should be strictly followed to serve as a mechanism for council to oversee the implementation of budget and related initiatives. When adequately considered, this can serve as an early warning signal for compliance concerns and financial problems that a municipality may face.

The skills of chief financial officers should be improved continuously, in line with treasury and draft Department of Public Service and Administration competency frameworks. Officials within the finance departments should be adequately trained to ensure that they are kept abreast of the relevant reporting standards and frameworks. Performance agreements of chief financial officers and other officials in finance units should include the requirement of quality monthly financial reports that are free of material misstatements.

Supply chain management

As part of our audits of supply chain management, we tested 874 contracts (with an approximate value of R8,3 billion) and 1 528 quotations (with an approximate value of R104 million), also referred to as awards in this report.

We tested whether the prescribed procurement processes had been followed, which would have ensured that all suppliers were given equal opportunity to compete and that some suppliers were not favoured above others. We also focused on contract management, as shortcomings in this area can result in delays, wastage as well as fruitless and wasteful expenditure, which in turn have a direct impact on service delivery.

We further assessed the financial interests of employees and councillors and whether their close family members were service providers to the auditee as well as the interests of other state officials, as legislation prohibits awards to such suppliers. We also evaluated whether auditees had implemented adequate internal controls to prevent, detect or correct irregularities in the supply chain management processes.

We reported all the findings from the audit to management in a management report, while we reported the material findings of non-compliance in the audit report.

Figure 1 shows that there has been a reduction in the number of auditees that had audit findings on supply chain management since the previous year. We assessed 37 auditees (2011-12: 38) and reported findings in the audit reports of 15 auditees (41%) (2011-12: 25 [66%]). In addition to the reasons provided under trends in unauthorised, irregular as well as fruitless and wasteful expenditure, the reduction in auditees with supply chain management findings illustrates that auditees are responding to our messages and are starting to adopt a zero tolerance approach to non-compliance with legislation. Auditees


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monitor action plans and implement consequence management, resulting in improved audit outcomes on supply chain management compliance. To strengthen compliance further, it is imperative that the administrative leadership establish mechanisms to identify risks and control deficiencies facing their respective environments, with the aim of developing strategies to mitigate against these compliance risks.

Figure 7: Findings on supply chain management

62% (23)

3% (1)

16% (6)

14% (5)

24% (9)

5% (2)

5% (2)

30% (11)

16% (6)

5% (2) 5%

5%

15%

12%

54%

8%

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

Figure 7 indicates the extent of findings in the areas we report on and the movement since the previous year. The following were the most common findings:

It is of concern that we again experienced limitations in auditing supply chain management. We could not audit awards with a value of R8,3 million at four auditees, as they could not provide us with evidence that awards had been made in accordance with the requirements of supply chain management legislation. We also could not perform any alternative audit procedures to obtain assurance that the expenditure incurred in this regard was not irregular. The main reason for these

limitations was the lack of proper systems, record management and a basic checklist to ensure that the minimum documentation requirements were adhered to.

There were 22 instances of awards, with an overall value of R64 million, to suppliers in which employees and councillors of the auditees had an interest. In 45% of these instances, the supplier did not declare the interest, while the employee or councillor did not declare the interest in 27% of the cases. The persons involved included councillors, junior management and administrative officials.

There were 25 instances of awards to suppliers, with an overall value of R9,9 million, in which close family members of employees and councillors of the auditees had an interest. In 40% of these instances, the auditee did not report the interest in the financial statements, as required by the Municipal Finance Management Act (MFMA). In 8% of these instances, the supplier did not declare the interest, while the employee or councillor did declare the interest in all the cases. The persons involved included councillors, junior management and administrative officials.

There were 179 instances of awards to suppliers, with an overall value of R96 million, in which other state officials had an interest. In 69% of these instances, the supplier did not declare the interest.

The following were the most common findings on uncompetitive and unfair procurement processes:

Awards to providers who were in service of other state institutions and failed to submit the declaration of interest (24% of auditees).

Competitive bids were not invited and/or deviations were not justified or approved (22%).

Three written quotations were not invited and/or deviations were not approved or were not reasonable/justified (22%).

The most common finding on contract management was that contracts were amended or extended without approval by a delegated official. This was reported at 5% of the auditees.

The most common finding on internal control deficiencies was inadequate controls to ensure that interest is declared.

Way forward

Some auditees have made an effort to implement a number of our recommendations. This has translated into a marked reduction in the actual number of findings and the number of auditees with supply chain management findings.

With findings With material findings


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Compliance challenges, especially improper supply chain management practices, undermine sound financial management, weaken the spirit of the MFMA and result in an erosion of scarce resources that are intended to improve service delivery. There is a greater need for national and provincial treasuries to enforce and monitor compliance with issued guidance on supply chain management. In addition, coordinating institutions should continue providing support to affected municipalities. Although the provincial treasury provided assistance to delegated municipalities, there was no equivalent support to the metros from the National Treasury.

Further, integrated risk processes should involve adequate risk identification in the area of compliance, especially supply chain management, so that the risk-based internal audit plans can better respond to concerns regarding non-compliance with legislation.

Human resource management

Human resource management is effective if adequate and sufficiently skilled staff are in place and if their performance and productivity are properly managed.

Our audits included an assessment of human resource management that focused on the following areas: ■ human resource planning and organisation ■ management of vacancies ■ appointment processes ■ performance management ■ acting positions ■ management of leave, overtime and suspensions.

Our audits also specifically looked at the management of vacancies and stability in key positions, competencies of key officials, performance management, and consequences for transgressions.

We reported all the findings from the audit to management in a management report, while we reported the material findings of non-compliance in the audit report.

Figure 1 shows that there has been little improvement in the number of auditees that had audit findings on human resource management since the previous year. Overall, 38% of auditees had findings on human resource management. However, only 8% of auditees had findings that were included in the audit report. The key findings in this area were that:

certain human resource policies were outdated

there were irregularities in the appointment processes

some acting positions contravened the applicable legislation.

Human resource planning and succession planning were not adequate to ensure the sustainability of institutional knowledge and that the auditees had sufficient human capital at all times. Another contributing factor to findings in

human resource management was the delays in implementing senior officials’ performance contracts at municipalities. Without approved contracts, coupled with robust performance management, the leadership was not able to promote accountability and enforce consequences for the transgression of legislation.

Figure 8: Vacancies in key positions

Vacant for less than 6 months

Vacant for 6 months or more


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Figure 9: Stability in key positions (average number of months in position)

Figure 8 shows the number of auditees where the positions of municipal manager or chief executive officer, chief financial officer and head of the supply chain management unit were vacant at year-end. It also indicates the period that the positions had been vacant. Figure 9 shows the average number of months key officials had been in their positions.

The instability in key positions and vacancies was due to auditees not being able to recruit and retain suitable candidates. There is no shortage of professionals in Gauteng. However, there is also no shortage of opportunities for professionals in the province. The perceived lack of professionalism in the public sector administration, coupled with other public sector-specific pressures at senior management level, resulted in these professionals not staying long in their positions. Financial constraints also contributed to vacancies at some of the smaller municipalities. These municipalities were not able to attract the right candidates as they were not able to compete with other employers when it came to remuneration.

Long-term vacancies combined with poor succession planning often meant that auditees had to use employees in long-term acting positions. The employee usually had to perform the new acting responsibilities as well as their previous responsibilities. This, and the temporary nature of the position, led to the employee not being fully responsible for the functions and powers of the acting post, which effectively led to a lower commitment to deliverables. Long-term

vacancies and acting positions impaired internal controls and the implementation of action plans, and did not allow for effective accountability and performance management.

The most common findings on the management of vacancies and acting positions were senior managers acting in positions for more than three months and senior manager positions being vacant for more than 12 months.

The Municipal regulations on minimum competency levels issued by the National Treasury on 15 June 2007 defines the minimum competency levels of accounting officers, chief financial officers, senior managers, supply chain management officials and other financial officials, taking into account the size and scope of municipalities.

Figure 10: Key officials that did not have the minimum competencies

Figure 10 shows the percentage and number of auditees where key officials did not meet the competency levels defined in the regulations at year-end.

The above analysis reflects that some municipal mangers, chief executive officers, chief financial officers and heads of supply chain management did not have the minimum competencies required by the National Treasury. Seven (19%) municipal manager and chief executive officer positions were filled by candidates that did not meet the prescribed minimum competency requirement. This resulted in acting positions, which contributed to a lack of accountability at accounting officer level. Senior management accountable to the accounting


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officer were also not held responsible for the non-implementation of action plans and commitments. This instability exacerbated the concern that inadequate business processes were not adequately addressed.

In addition, six (16%) chief financial officer positions were filled by officials who did not meet the minimum competency frameworks. This resulted in ineffective financial reporting processes, as the majority of financial statements were subjected to material corrections. There was also an over-reliance on consultants to perform basic accounting functions without adequate monitoring and a lack of transfer of skills.

Eleven (30%) of the head of supply chain management positions were filled by officials that did not meet the minimum competency frameworks. This resulted in a number of supply chain management compliance findings, as these officials did not have robust knowledge of the supply chain management regulations.

The inadequate skills and competencies could lead to stagnation or regression in audit outcomes and negatively impact clean administration. This would result in poor service delivery and lead to service delivery protests.

The most common finding on the competencies of key officials related to key personnel responsible for financial reporting. To improve the performance and productivity of staff, the leadership should implement sound performance management processes, evaluate and monitor performance, and consistently demonstrate that poor performance has consequences.

At 3% of the auditees, senior managers did not have performance contracts. Other concerns relating to performance management were as follows:

Senior managers that did not sign performance agreements in time for the 2012-13 performance period.

The performance management process and consequence management was a concern at 38% of auditees for employees other than senior managers.

Legislation prescribes how financial misconduct, improper conduct in the supply chain management processes as well as unauthorised, irregular or fruitless and wasteful expenditure should be dealt with through an investigative and disciplinary process, with possible sanctions and criminal proceedings. The following indicate the continued lack of consequences for poor performance and transgression at majority of auditees:

Unauthorised/irregular/fruitless and wasteful expenditure was not recovered from the liable official.

Irregular as well as fruitless and wasteful expenditure was not investigated to determine if any person was liable for the expenditure.

Way forward

There is a need for the strategic alignment of auditees’ human capital with service delivery objectives. Human resource departments should analyse the current workforce and identify future workforce needs aligned to infrastructure roll out programmes. They should also ensure that human resource policies and procedures adequately cater for succession planning to ensure continuity in implementing strategic objectives and credibility of reporting.

Effective use of consultants

As in previous financial years, auditees continued to engage consultants to assist them with financial reporting as well as the preparation of performance information.

Auditees indicated the following as reasons for the continued use of consultants:

Financial Performance

Municipal officials lacked the required skills (43%) (33%)

Positions were vacant (14%) (33%)

Combination of lack of skills and vacancies (14%) (33%)

The cost of consultants assisting with financial reporting was R114 million (2011-12: R73 million). This includes amounts, as far as could be determined from available information, spent by the national Department of Cooperative Governance and Traditional Affairs on consultants assigned to assist municipalities. The cost of consultants assisting with performance reporting was R1,2 million (2011-12: R0,4 million).


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Figure 11: Audit outcomes of auditees assisted by consultants

Financial reporting Performance information

Figure 11 shows the audit outcomes of 21 auditees (57%) that had been assisted by consultants and also the occurrence of findings on performance information at those auditees assisted by consultants. The reasons why consultants did not have a positive impact on the audit outcomes of some auditees are shown below.

Figure 12: Reasons for material misstatements- Financial reporting

Material misstatements to the financials remained prevalent at four auditees, City of Johannesburg, Westonaria Local Municipality, Jorburg City Power and Johannesburg Development Agency. This was due to the consultants being appointed late, poor project management, ineffective processes and systems within the auditee, a lack of coordination between finance team officials, and a lack of reliable information provided by management to consultants.

Despite the use of consultants for performance reporting, material findings were reported at City of Johannesburg . This is of concern as it is an indication that not all consultants have an adequate understanding of performance information that enables them to effectively assist auditees in achieving clean administration.

We are concerned about the following based on our review of the contracts and arrangements between auditees and consultants:

Consultants were appointed without conducting a proper needs assessment analysis to determine the specifics for which consultants were needed.

Auditees did not identify employees that could be trained by the consultants to ensure that there is a proper transfer of skills.

Clauses relating to the transfer of skills were not included in contracts or service level agreements. Where those clauses were included, they were not monitored.

Measures to monitor contract performance and delivery were not adequately defined in the contract.

The following should be considered to ensure that consultants’ services are used in an effective manner and that management performs greater oversight:

A proper needs assessment analysis should be conducted before a decision to hire consultants is made. This should be done without delay as the late appointment of consultants would limit the contribution that they can make.

Management should also ensure that they have credible information to make available to consultants before appointing them.

Skills should be transferred on a continuous basis and should be part of the service level agreements. Improved audit outcomes and transfer of skills should be significant contributors to the consultants’ measurement tool.

Consultants need to be encouraged to advise management to address the root causes of findings such as inadequate business processes, instead of merely addressing the symptoms.

Unqualified with no findings

Unqualified with findings

Qualified with findingsAdverse or disclaimer

with findings

No finding on performance information

With findings on performance information


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Service level agreements with clearly defined performance clauses should exist and be monitored regularly. Compliance or adherence to the agreements could be reported to the provincial treasury as part of in-year reporting. This could be enhanced by chief financial officers undergoing technical training that will equip them with the requisite skills to adequately review the work performed by consultants. If monitoring is done properly, consultants will be selective of what tasks they undertake and do a proper risk assessment before they accept any assignment.

Way forward

Some municipalities have become dependent on the use of consultants due to a lack of oversight by the administrative leadership. Administrative leadership should ensure that consultants are only appointed when necessary and, if appointed, that there is the necessary transfer of skills and monitoring of their performance as per the terms of the assignment. However, this is not sustainable in the future and management needs to take ownership of their responsibility and perform greater oversight. Collaboration between coordinating institutions will also assist in monitoring and ensure that poor performing consultants are not used again.

Information technology controls

Information technology controls ensure the confidentiality, integrity and availability of state information, enables service delivery and promotes national security. It is thus essential for good governance, effective management and a secure infrastructure for information technology..

Our audit included an assessment of the information technology controls that focus on information technology governance, security management, user account management and service continuity.

Figure 1 shows a reduction in the number of auditees that had audit findings on information technology controls since the previous year. Generally, there was an improvement in the status of information technology controls, except in the case of user access management where there was a regression, when compared to the previous year. The majority of auditees still experience challenges in developing and formalising adequate policies and procedures.

Figure 13: Status of information technology controls

2012-13

MFMA

IT controls embedded and functioning effectively

IT controls designed to be implemented

IT controls to be designed

IT governance – the foundation

for effective IT

Security management

User access management IT service

continuity

1

Figure 13 above indicates the status of the information technology controls in the four key areas we audited and the movement since the previous year. It shows auditees where the information technology controls were either not in place (not designed) or not implemented, as well as those where information technology controls were functioning effectively.

Information technology controls were assessed in four key focus areas: governance, security management, user access management and service continuity. The assessments were done at three metros, nine municipalities and 21 municipal entities in the province. Detailed general control audits were also conducted at three metros, nine municipalities and ten municipal entities.

Effective information technology governance ensures that the auditees’ information technology control environment functions well and enables service delivery. The information technology governance framework developed for government has not yet been implemented. However, all auditees are required to adopt and implement the governance framework and guidelines for local government in phases over the next three financial years. In 2013-14 the implementation of phase 1 should be prioritised. The minister of cooperative governance and traditional affairs established a task team to guide municipalities with, among others, implementing the governance framework.


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Most auditees did not have adequately designed and implemented information technology controls for security management, user access management and service continuity. The most common findings were the following:

Security management:

Some of the policies and procedures were found to be inadequate, not approved, or outdated. Furthermore, the majority of municipalities had developed security policies and procedures, but had not formally implemented them as they were not consistently applied. Security settings were also inadequate.

The non-implementation of information technology controls was a result of staff not being held accountable and previous findings not being addressed. The systems were not owned by auditees, making it difficult to develop policies and procedures for these systems. Further, management was dependent on the application service providers to ensure that password settings were adequately tightened and appropriately configured on each application. Management had neglected to review vendor settings to ensure that these were adequate.

User access management:

Most municipalities and entities had developed policies and procedures, but had not implemented them. Users’ access to the municipalities’ systems was not reviewed to ensure that it remained commensurate with their job functions and the accounts of former users were not promptly removed from the systems to prevent unauthorised access.

Deficiencies in user access management were caused by a shortage of in-house staff to monitor the implementation of policies. In addition, management did not realise the value and importance of implementing the information technology controls due to inadequate risk management practices.

information technology service continuity:

Most municipalities and entities had formalised backup processes and disaster recovery plans, but had not implemented them. Backups were not taken in accordance with the backup policy and procedures, and disaster recovery plans were not tested.

The root cause for inadequate controls over service continuity was that implementation and monitoring of information technology controls were not prioritised. The approval processes for policies coupled with a lack of information technology resources exacerbated this problem.

Way forward

Management should prioritise the design and implementation of the security management, user access management and service continuity controls. This will mitigate the risk of unauthorised access to and unavailability of information technology systems, as well as incomplete data in the event of major system disruptions or data loss.

The audit committees and internal audit units of districts and local municipalities should be adequately capacitated with the skills to assist with actively following up on information technology commitments. Local municipalities should leverage from the information technology policies and procedures developed by district municipalities. Furthermore, city managers, municipal managers and chief executive officers should monitor the implementation of information technology controls and procedures

Financial health

Our audits included a high-level analysis of auditees’ financial health indicators to provide management with an overview of selected aspects of their current financial management and to enable timely corrective action where the auditees’ operations and service delivery may be at risk. We also performed procedures to assess whether there are any events or conditions that may cast significant doubt on auditees’ ability to continue as a going concern.

Figure 1 indicates the number of auditees that had more than two of the indicators shown in figure 14 (with findings). There has been a reduction in the number of auditees that had findings on financial health since the previous year.

The improvement is a result of auditees slowly implementing the required financial disciplines, leading to improvements on the creditors’ payment period and debt collection period. There is still a concern regarding the auditees that realised deficits for the current year due to poor budget controls.


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Figure 14: Areas of financial health concerns

0%

1%

5%

6%

8%

4%

12%

Overspending of operating expenditure budget

Underspending of approved capital budget

Creditor-payment period of more than 90 days

More than 10% of debt irrecoverable

Year-end bank balance in overdraft

Underspending of conditional grants by more than 10%

Debt-collection period of more than 90 days

5% (2)

24%(9)

16% (6)

14% (5)

62% (23)

32% (12)

0% (0)

Net current liability position realised

Deficit realised for the year

30% (11)

38% (14)

2%

11%

Overspending the budgeted operating expenditure

The overspending on budgeted operating expenditure remained stagnant when compared to the previous year. Two auditees, Johannesburg Zoo and Johannesburg Tourism, overspent on budgeted operating expenditure in 2012-13. This overspending related mainly to operational expenditure such as water and electricity, animal costs, leases and exhibition and advertising costs. The budget was overspent as the anticipated restructuring was unexpectedly delayed.

Although not reflected above due to the cut-off threshold used, a few other auditees also overspent due to poor in-year monitoring of budgets, unrealistic budgets and budgets not supported by credible assumptions. This resulted in auditees being unable to ensure that their spending was within the approved budget allocations.

It is essential that budget processes are tightened and that spending only occurs in line with a realistic assessment of the available budget. Most importantly, these auditees should ensure that controls are in place to monitor and competently manage the budget throughout the year..

Underspending of the approved capital budget

Underspending on the capital budget remained stagnant when compared to the previous year. The underspending of capital budgets is mainly attributed to difficulties with planning and executing capital projects. This underspending can also be indicative of cash flow challenges, as some of the cash allocated to capital projects could have been used for operational purposes as outlined above.

A factor that contributed to underspending was overly ambitious capital programmes that, in many instances, were not backed up by funds. This was indicative of inadequate monitoring and poor financial management practices. Weak capital project implementation planning and a shortage of suitably skilled engineers and technicians to implement capital projects within time frames also led to auditees underspending capital budgets.

Capital budgets are also directly linked to service delivery; therefore, where capital budgets are significantly underspent the implication is that service delivery objectives are not being achieved.

Creditors’ payment period

Auditees that had a creditors’ payment period of more than 90 days improved by 10% when compared to the previous year. The improvement was attributable to auditees implementing basic internal control disciplines.

While the improvement is noted, the prevalence was still very high. The indications were that auditees delayed paying creditors because of cash constraints. There was an overreliance on equitable share allocations. This was because the auditees were not able to recover the revenue billed to residents on time. The implication is that auditees have to maintain large cash reserves, which they do not have, to meet creditors’ liabilities.

Underspending of conditional grant by more than 10%

Underspending of the conditional grant regressed when compared to the previous year. The regression was attributable to inadequate budget planning and monitoring.

Similar to the underspending on capital budgets, the high incidence and extent of underspending on specific-purpose conditional grants had a negative impact on the infrastructure roll-out at municipalities and service delivery objectives. As such, underspending is cause for concern.

The underspending was a result of delays in project registration with relevant structures such as the Construction Industry Development Board, absent or inactive project management units, a lack of capacity, and delays with contractors and limited multi-year budgeting processes.


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In addition, some auditees underspent on their conditional grants because the grants were received from the departments late in the financial year. The late remittance of grants to the municipalities leaves little time for the grants to be spent. The resolution of this concern requires engagement between local government auditees and the department as it has the potential to impact negatively on the achievement of targets.

Debtor’s collection period of more than 90 days and more

than 10% of debt irrecoverable

Auditees with a debt collection period of more than 90 days decreased to 14%, and auditees with an impairment provision of more than 10% of debtors remained stagnant at 62% in 2012-13. The improvement is attributable to auditees refining and improving debt-collection strategies. While the improvement was noted, the figures remained very high and posed a threat to the auditees’ financial sustainability.

The extended collection periods may result in cash flow problems, adversely affecting operational management. The excessive write-off of debtors highlighted the culture of non-payment for services among consumers, high levels of non-technical distribution losses and the impact of an economic recession accompanied by rising rates and tariffs. That revenue was not collected, negatively impacted the capital reserves of auditees. With less cash available for reinvestment in capital infrastructure, the result could be a declining level of consistent quality service delivery.

The lack of collection from debtors also impacted the ability of auditees to meet their monthly payments as and when they were due. It is generally accepted that a prudent level of cash coverage is three months of operational expenditure (National Treasury). Monitoring cash coverage by auditees would be enhanced by conducting monthly bank reconciliations and institutionalising monthly financial reporting as a basic discipline.

The collection of rates was also impacted by the affordability of municipal services. The economic environment makes municipal services expensive to residents. This was made worse by inadequate revenue, indigent debtors’ processes and a lack of capacity within revenue collection departments.

The poor debt collection rate affected the service delivery imperatives. This was especially prevalent at metros and local municipalities. The auditees were not able to collect accounts receivable in line with their budgets, which influenced the attainment of planned targets. In some instances, the provision for doubtful debts was not adequately determined and this led to material amendments.

A deficit for the year was realised

Auditees with a deficit for the year increased to 38% in 2012-13 (2011-12: 26%).The increase was mainly due to poor budgeting processes,

which led to unfunded budgets with poor collection of anticipated revenues. Budgeting with regards to operational costs relating to the maintenance of infrastructure assets was inadequate. Poor in-year monitoring of budgets and unrealistic capital projects also contributed to deficits.

A net current liability position was realised

Auditees with a net current liability position remained stagnant at 32% in 2012-13 (2011-12: 34%). The slight decrease is attributable to the improvement in the debtors’ collection period and cash management.

The net current liability position highlights the concerns of liquidity and cash challenges. As indicated above, some auditees spent more than they generated, which resulted in an increase in outstanding creditors. Of concern is that auditees adopted over-optimistic budget estimates in collections and they overspent on their operating expenditure budget, which contributed to ever increasing creditor balances.

Year-end bank balances in overdraft

It is commendable that none of the auditees had a year-end balance in overdraft in 2012-13. This is an improvement of 11% since the previous year, where four auditees had year-end balances in overdraft. The improvement was due to proper cash management processes that were put in place by auditees. To maintain this status, auditees should improve on their cash collection strategies and cash management.

Way forward

The financial health of municipalities in Gauteng depends on their ability to earn revenue and spend effectively and efficiently. It is a requirement of the MFMA that the accounting officer takes all reasonable steps to ensure that revenue management and expenditure management are implemented to maximise the capacity of municipalities to deliver services to citizens in a sustainable manner.

It is also a requirement of the MFMA that management ensures proper funding of expenditure and capital projects. It is evident from the financial analysis that the trend of overspending operational budgets, underspending capital projects and conditional grants, and inadequate debtors and creditors’ management does not guarantee service delivery as determined in the integrated development plans.

Until adequate and modern budget and financial management practices are embedded in the province at local government level, the risks of poor working capital management and poor budget management will be prevalent, threatening a sound governance framework.


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Creditors’ management is a key component of the working capital requirement of local government, as it needs to be monitored and managed holistically together with debtors and inventory management.

Significant deficiencies in internal controls

and root causes should be addressed to

improve audit outcomes

As part of our audits, we assessed internal controls to determine the effectiveness of their design and implementation in ensuring reliable financial and performance reporting and compliance with legislation.

Figure 15: Status of drivers of key controls

Figure 1 and figure 15 (above) show the status of the different areas of control and the overall movement since the previous year.

The overall assessment of internal controls has shown an improvement in the control environment when compared to the previous year. The main areas of control contributing to this improvement were leadership and governance.

Overall, governance structures, especially audit committees, have improved their robustness of the review process. This has assisted in improving the culture of accountability and ownership. The existence and communication of policies indicates good intentions by the leadership. However, the governance structures need to be more persuasive in getting management to implement

action plans and recommendations on time. While audit committees improved their processes, the risk and internal audit units within the auditees remained stagnant. This was mainly due to capacity challenges within internal audit units and the skills required not being at a satisfactory level. Budgetary constraints also hampered the functioning of internal audit units, resulting in them not reviewing or auditing critical processes such as predetermined objectives and compliance with legislation. Despite having fully staffed internal audit units, some auditees outsourced the services of internal audit to compensate for the lack of appropriate skills.

In addition, integrated risk assessment processes and strategies were not adequately aligned to the internal audit units’ initiatives, leading to internal audit activities not responding adequately to critical areas of concern such as compliance and the credibility of financial information.

The auditees’ political leadership have demonstrated their support by taking our messages seriously. The political and administrative leadership continued to avail themselves quarterly to engage with the AGSA leadership, took ownership of the quarterly key control and showed a better understanding of the key control assessment process. Although this has resulted in some improvement in overall audit outcomes, it has not yielded the desired level of improvement in clean audits outcomes. This is due to the political leadership’s inadequate oversight of accounting officers and its failure to hold them accountable for the unsatisfactory implementation of action plans and recommendations, and for not honouring some of their commitments.

Inadequate business process and ineffective operational procedures hindered most auditees from progressing from the stagnant position of financially unqualified opinions with compliance and predetermined objectives findings. While proper record keeping was not a major concern in the province, a majority of auditees struggled with basic control activities such as processing reconciliations and preventing and monitoring non-compliance with legislation. This is evident in the number of auditees with material misstatements and other compliance findings, especially procurement and contract management-related findings.

Based on the assessment above, the key internal control deficiencies identified as limiting progress towards clean audit outcomes were:

Compliance with legislation not reviewed and

monitored

The administrative leadership and senior management did not provide adequate monitoring and effective review of compliance with legislation. Commitments made in the previous year, such as the development and implementation of compliance checklists, preparation of regular financial statements for review by audit committees, filling vacancies, holding accounting officers and senior

Leadership Financial and Performance Management

Governance

Effective leadership Oversight

responsibility HR

management Policies and procedures

Action plans

IT governance

Proper record keeping Processing and

reconciling controls Reporting

Compliance IT

system controls

Risk management Internal audit

Audit committee



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management accountable for key controls and implementing timeous consequences for officials, were not adequately honoured. The unwillingness and inability to implement these commitments resulted in the lack of improvement in the overall audit outcomes. There is a need for a concerted effort by both the political and administrative leadership to implement these commitments aimed at improving audit outcomes.

Internal control deficiencies identified but not

addressed

While actions plans to address audit findings were developed and discussed with the political and administrative leadership, as in the previous year action plans and recommendations given by governance structures and external auditors were still not implemented adequately and in a timely manner. In addition, basic controls such as regular reconciliations, adequate records management systems and effective and efficient information technology support were still lacking. The administrative leadership did not monitor and review the implementation of action plans, take disciplinary action against nonperforming officials or institute adequate performance management processes, all of which exacerbated this problem.

Lack of regular, credible financial reports

Many auditees did not get a clean audit opinion as their financial statements were of a poor quality and they had high levels of non-compliance with legislation. A majority of them did not prepare complete and regular financial reports supported by adequate documentation, as per their commitment of the previous year. Financial statements submitted for audit were not always credible as many were subject to material misstatements due to the lack of an adequate, efficient and effective review of regular financial statements. The auditees’ inability to produce regular financial and performance reports casts some doubt on the credibility of the in-year reports submitted to treasury. Treasury needs to intensify its quality checks on reports submitted to them.

Strengthening the processes followed when preparing financial statements will ensure that the financial statements and performance information reports are credible. The focus should therefore be on reviewing the adequacy of these processes. The most common root causes of the audit outcomes that need to be addressed, as shown in figure 1, and recommendations to address them are listed below.

Detail of root cause

Slow response by administrative leadership resulting in

inadequate business processes and ineffective operational

plans

The political leadership has shown an improvement in taking our messages to address the root causes of audit outcomes seriously. What continued to hamper progress was the time taken by the administrative leadership and senior management to adequately implement action plans and recommendations to address audit findings. Our messages during the engagement with the political and administrative leadership focused on basic internal controls, which were compromised by inadequate business processes and ineffective operational procedures. The absence of properly defined processes that are understood by all officials and a lack of adequate guidance resulted in a weak control environment and the lack of basic methodology for officials to follow in a given situation.

Recommendations

Implementing the following actions is recommended to address the above root cause:

The administrative leadership should take accountability and ownership of implementing action plans, recommendations and commitments.

The administrative leadership, through internal audit units, should review the business processes and operational plans without delay to ensure an improvement in daily operations and service delivery.

Management should ensure the adequate implementation of business processes and provide guidance to lower level staff.

The political leadership should hold accounting officers accountable for not implementing adequate business processes and basic daily internal control disciplines.


Instability in key positions and key officials lacking

competencies

Instability in key positions has improved when compared to the previous year. The political and administrative leadership’s response to our findings relating to vacant positions, people in acting positions, poor succession planning and new appointments resulted in this improvement. The improvement was, however, not yet at a desirable level. Financial constraints contributed to positions remaining


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vacant at the smaller municipalities, as these municipalities compete with financially resourced municipalities and the private sector for skilled professionals. Where officials met the minimum competency requirements, this did not necessarily translate into better audit outcomes. Officials did not always keep up to date with local government environment reporting and compliance requirements through relevant on-going training. This resulted in officials relying on the services of consultants without monitoring them or ensuring an adequate transfer of skills. Furthermore, inadequate succession planning resulted in the loss of institutional knowledge and a lack of embedded controls. Officials in key positions are the implementers of daily control disciplines. Therefore, instability at this level hampered the implementation of these disciplines due to lack of accountability and the change in administrative leadership.

Recommendations


Where there is change in leadership, for political or other reasons, a process should be followed for a proper transition to ensure the sustainability of the control environment.

Coordinating institutions should assist the administrative leadership with developing standardised succession plans and vacancy management. The progress on this plan should be reported on to treasuries in a timely manner.

Continuous training of existing staff in key positions should be improved and the administrative leadership should start optimising the use of key controls and dashboards by objectively assessing internal control deficiencies.


Lack of consequences for poor performance

Some municipalities and municipal entities have responded well to our messages regarding implementing basic consequence management, especially on matters relating to supply chain management regulations. This resulted in a reduction in the number of findings, especially findings relating to awards to employees in the service of the auditee or other state institutions. The lack of consequences for poor performance is a perpetrator of most internal control deficiencies as it accommodates the non-implementation of action plans and recommendations. A majority of auditees, however, did not implement consequence management and, as a result, we saw repeat audit findings and regressions in specific compliance areas, as shown in figure 15 above.

Recommendations


Leadership should ensure that they are not tolerant of non-adherence to policies and procedures.

Clean audit as an objective should be incorporated into individual performance contracts and not only the overall balance score card or performance plan. Non-achievement should impact bonuses.

Performance management should be robust, holding officials accountable for their actions.

Line managers should be trained to have the confidence to deal with underperformers and transgressors.

Consequences, such as disciplinary procedures should happen without delay.

Way forward

A sustainable and sound control environment is one that is supported by daily, weekly and monthly disciplines such as proper record keeping, adequate review and monitoring and regular reconciliations. Adequate business processes and effective operational procedures are important to every municipality that wants to improve the performance of its daily operational work and quality of service delivery.

Stability within a workforce is important to attract and retain competent, dedicated and effective workers. It ensures that organisational knowledge is retained and leadership’s investment can be seen moving forward. To embed a culture of performance, it is important that there is consistent consequence management. This involves addressing unsatisfactory performance.

Notwithstanding the overall improvement in the key control assessment, oversight bodies, leadership and management should ensure that controls are operating effectively by designing and implementing adequate business processes, monitoring them regularly and holding officials accountable for not complying or deviating from the prescribed legislation.


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The level of assurance provided by key role

players needs to be improved

The management and the leadership of the auditee and those that perform an oversight or governance function should work towards improving the key controls, addressing the root causes and ensuring that there is an improvement in the six key risk areas, thereby providing assurance on the quality of the financial statements and performance reports as well as compliance with legislation.

Based on our assessment as shown in figure 1, these role players are not providing the necessary assurance. Below is an overview of the assurance provided by each of the assurance providers.

Senior management

Senior management, which includes the chief financial officer, chief information officer and head of the supply chain management unit, provides assurance by implementing basic financial and performance controls.

The level of assurance provided by senior management has improved compared to the previous year. This was a result of the commitment to obtain and sustain positive audit outcomes by implementing action plans to address internal control deficiencies. There is, however, still a need for improvement as the current level of assurance provided is not at the appropriate level given that senior management is at the forefront of the organisation. The following recommendations should be implemented to improve the level of assurance provided by senior management:

Controls over daily and monthly processing and reconciling of transactions should be implemented, the reconciliations should be thoroughly reviewed, and discrepancies should be properly followed up.

Regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information, should be prepared.

Appropriate tools, such as compliance checklists, should be developed to facilitate compliance with legislation.

There is a need for assurance provided by management to improve significantly. The improvement will be indicative of senior management’s ability to provide information about the measures that have been put in place to prevent internal control deficiencies from compromising the credibility of information.

Accounting officer or accounting authority

Accounting officers and authorities are responsible for auditees’ internal controls, including leadership, planning, risk management as well as oversight and monitoring. While accounting officers and authorities depend on senior management for designing and implementing the required financial and performance management controls, they should create an environment that helps to improve such controls.

As a result of the stability within this key position, which promoted accountability and improved performance management, the level of assurance provided by accounting officers has improved since the previous year. Accounting officers and authorities should create an environment that helps to improve controls by focusing on the following:

Providing effective and ethical leadership, and exercising oversight of financial and predetermined objectives reporting and compliance with legislation.

Implementing effective human resource management to ensure that adequate and sufficiently skilled staff is employed and that performance is monitored.

Establishing policies and procedures to enable sustainable internal control practices, and monitoring the implementation of action plans to address internal control deficiencies.

The assessment demonstrates that embedded controls were still not implemented in the preparation of financial statements, and non-compliance with legislation. The accounting officer should provide the leadership needed to establish and guide an integrated internal control framework that will ensure clean administration.

Mayor

Mayors have a monitoring and oversight role at both municipalities and municipal entities. They have specific oversight responsibilities in terms of the MFMA and the Municipal Systems Act (MSA), which include reviewing the integrated development plan and budget management as well as ensuring that auditees address the issues raised in audit reports.

Mayors can bring about improvements in the audit outcomes of their auditees by being actively involved in key governance matters and managing the performance of the accounting officers and authorities.

In line with the improved audit outcomes, mayors at some municipalities have provided some assurance. This is evidenced by their responsiveness to our messages. Their assurance is, however, hampered by the pace at which senior management implements recommendations or commitments made during key


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controls discussions. This is exacerbated by the mayor’s inability to hold accounting officers accountable for implementing commitments, action plans and recommendations on time. In addition to these shortcomings, the following recommendations should be implemented to improve the level of assurance provided by mayors.

Intensify on-going monitoring of oversight by insisting, through the accounting officer, that credible financial and performance information is submitted to the mayor regularly.

Promote a good internal control environment and appropriate consequence management to encourage the implementation of agreed commitments and recommendations.

To improve assurance provided at this level, there is still a need for alignment and commitment to clean administration between the mayor, the accounting officer and senior management. This will ultimately result in an improvement in audit outcomes. In addition to mayors taking ownership of the key control processes, they need to effectively monitor these commitments.

Internal audit

Internal audit units assist accounting officers and authorities in the execution of their duties by providing independent assurance on internal controls, financial information, risk management, performance management and compliance with legislation.

The level of assurance provided by internal audit has improved since the previous year. The improvement was a result of auditees having stable and resourced internal audit departments that alerted the accounting officers to risk areas that required the necessary attention. The following recommendations should be implemented to improve the level of assurance provided by internal audit:

Follow up on action plans and commitments to address internal control deficiencies.

Perform an adequate review of quarterly predetermined objectives reports.

Review key internal controls, especially those related to daily financial and performance management, and ensure compliance with legislation.

Review the financial statement preparation processes and enhance these where there is a need.

Internal audit plans need to respond to the core challenges facing auditees including their inability to fully comply with legislation, especially procurement and contract management related compliance. However, given that each local government has its own unique set of circumstances and risks that will affect the

design and implementation of its controls, internal auditors should adequately evaluate the risk assessment process performed by risk officers before basing their internal audit plans on the risk registers. To further improve the impact of the internal audit units on the audit outcomes, accounting officers should ensure that these units are adequately capacitated.

Audit committee

An audit committee is an independent body that advises the council, mayor, accounting officer or authority and senior management on matters such as internal controls, risk management, performance management as well as evaluation and compliance with legislation. The committee is required to provide assurance to the council on the adequacy, reliability and accuracy of financial reporting and information.

The level of assurance provided by audit committees has improved since the previous year. This was a result of the improvement in the review of the annual financial statements and performance information by performance audit committees. There is, however, still a need for improvement in the assurance provided by audit committees. This will be realised when the recommendations of audit committees are fully implemented by the administrative management. The following recommendations should be implemented to improve the level of assurance provided by audit committees:

Audit committee chairpersons should interact with mayors and councils quarterly to confirm the credibility and integrity of financial and performance information.

Management and the political leadership should take the recommendations of audit committees seriously and implement them in a timely manner. The implementation of these recommendations needs to be monitored by the political leadership on a regular basis, with visible consequences for inaction.

Although financial information and performance information was reviewed to a certain extent, audit committees did not place enough focus on compliance reporting. The effectiveness of the audit committees is dependent on management providing accurate and relevant information on time, as well as the effective implementation of audit committee recommendations. Accounting officers holding senior management accountable for the implementation of recommendations is crucial for audit committees to provide the desired level of assurance.


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Provincial treasury, premier’s office and provincial

department of cooperative governance and

traditional affairs

The Constitution stipulates that provincial government must support and strengthen the capacity of municipalities to manage their own affairs, to exercise their powers, and to perform their duties. The MFMA further requires provincial government to assist municipalities in building capacity to support efficient, effective and transparent financial management. Both the MFMA and the MSA define responsibilities to monitor financial and performance management in compliance with these acts.

The provincial departments that have a direct role to play in supporting and monitoring local government, and thereby providing a level of assurance, are the provincial treasury, the department of cooperative governance and the office of the premier. Our assessment of the assurance provided by these departments is based on their initiatives to support and monitor local government and the impact they have had on improving the internal controls of auditees.

Provincial treasury

The provincial treasury continued to implement a number of initiatives to support the Gauteng local government. These included providing support programmes for municipal budgets, financial accounting, auditing, resource management, compliance, asset management, training, monitoring, advisory technical support and inter-governmental forum engagements. These initiatives resulted in some assurance and contributed to the improvement of audit outcomes and reduction in audit findings. Given that the majority of auditees still obtained financially unqualified opinions with compliance and predetermined objectives findings, these programme activities need to be intensely monitored and implemented for them to yield the desired impact on the audit outcomes across all auditees. National Treasury should strengthen the support initiatives that it provides to the metros, specifically support initiatives relating to compliance with legislation and performance information at the City of Johannesburg.

Premier’s office

The premier’s oversight responsibility in the province is enabled through the premier coordinating forum. This platform gave the Gauteng mayors, members of executive council (MECs) for local government, MEC for provincial treasury and the premier’s office the opportunity to come together and discuss local government issues in the province. Operation clean audit is a standing agenda at the premier coordinating forum meetings. Representatives from the Gauteng Department of Cooperative Governance and Traditional Affairs (CoGTA) and provincial treasury are invited to report on the progress of their initiatives in supporting the municipalities in Gauteng. Through these initiatives, the premier

continued to provide some level of oversight and assurance. The success of the forum and its initiatives is dependent on the intensity and robustness of engagements. These initiatives therefore need to be enhanced to achieve the desired improvement in the audit outcomes.

Provincial department of cooperative governance and traditional affairs

Gauteng CoGTA provided noticeable support by holding municipalities accountable for addressing findings in the AGSA’s audit and management reports, and strengthening internal controls by implementing the key controls as assessed by the internal audit units. The department also provided technical support to the municipalities that received qualified audit opinions in the previous year. These initiatives contributed to the improvement of audit outcomes and reduction in findings. However, since the main goal of support initiatives is to ensure support and clean administration in the province, these initiatives need to be intensified and the progress adequately monitored.

Municipal council and municipal public accounts

committee

The council is required to provide assurance through monitoring and oversight. This includes approving or overseeing certain transactions and events, as well as investigating and acting on poor performance and transgressions such as financial misconduct and unauthorised, irregular as well as fruitless and wasteful expenditure.

The MPACs were introduced as a committee of the council to deal specifically with the municipality’s annual report, financial statements and audit outcomes, and to improve governance, transparency and accountability. The MPAC is an important provider of assurance, as it needs to give assurance to the council on the credibility and reliability of financial and performance reports, compliance with legislation as well as internal controls

Municipal council

In all municipalities, the municipal councils established committees for the effective and efficient performance of their oversight role. The assurance provided by the councils in 2012-13 improved when compared to the previous year. However, this assurance was still not at the desired level, as some councils provided limited or no assurance. At some auditees, committees such as MPACs were not adequately supported and empowered to deal decisively with governance matters. These committees reinforce council’s governance function with regard to sound, responsible and effective financial planning, financial administration, financial governance and proper financial and performance reporting. To adequately fulfil this role, the council needs to ensure that these committees are empowered and supported by ensuring that their resolutions are adopted at council meetings. There was still a lack of regular and robust interaction with chairs of audit committees and MPACs to ensure that the


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implementation of action plans were adequately monitored. Since the functions of councils were dependent on these committees, this hampered the effectiveness of councils. The speaker of the council has the right to have credible financial and performance reports tabled at council meetings. Therefore, speakers should insist on the submission and tabling of these reports. The councils’ understanding of the value of predetermined objectives reporting improved. This was evident in the improved reliability and usefulness of their reported targets, which in turn resulted in improved predetermined objectives audit outcomes. The councils’ understanding is essential to the long-term sustainability of auditees, as it underpins the process of democratic accountability.

Municipal public accounts committee

During the 2012-13 financial year the Gauteng MPACs continued to provide some oversight assurance. The majority of MPACs did not have the power to enforce consequence management on senior officials and, as a result, they were not taken seriously at some auditees. Their resolutions were, therefore, not adequately implemented, tracked and monitored. A majority of MPACs in the province did not have adequately documented work programmes to ensure that they functioned optimally. Some MPACs still consist of councillors that do not have adequate skills to perform their oversight function. The process of investigating instances of irregular and fruitless expenditure should be monitored by MPACs and reported back to the council timeously. For MPACs to function optimally they need to be further capacitated and resourced with a solid research section. The research could be done at a central point for the districts.

Provincial legislature and portfolio committee on

local government

In terms of the Constitution, the provincial legislature must maintain oversight of the executive authority responsible for local government. This executive authority includes the member of the executive committee for cooperative governance and other executives involved in local government, such as the member of the executive committee for finance. The mechanism used to conduct oversight is the portfolio committee on local government.

The provincial legislature continued to provide some assurance during 2012-13. The legislature provided limited oversight on the reports submitted by both the MECs for treasury and local government. However, the portfolio committees need to intensify their oversight of these departments. We are therefore encouraged by the implementation of the committee’s oversight and accountability framework (COVAC) by the legislature in the 2013-14 financial year. This is designed to enhance the oversight provided by the Gauteng legislature through its portfolio committees to the departments of treasury and CoGTA in Gauteng.

The speakers, as the chairpersons of the councils, should be kept abreast of the good governance matters that will enable them to facilitate the achievement of good governance and service delivery excellence. This is therefore an opportunity for the public audit office and the speakers to formalise engagement initiatives that will assist them in executing their governance responsibilities in the legislative arm of the councils.

District municipalities

We do not assess the assurance provided by district municipalities, but we are convinced that the support provided by these municipalities can assist in improving audit outcomes. During 2011-12, district municipalities committed to assisting municipalities through the initiatives listed below. Some progress has been made in implementing these commitments and they have had some impact on the audit outcomes of some municipalities:

To provide centralised services such as information technology, engineering and financial support

To align the integrated development plan of all municipalities in the districts and regularly monitor service delivery objectives

To support local municipalities that have capacity and skills constraints.

Going forward, the district municipalities should intensify the implementation of these commitments so that their impact can be fully realised by municipalities. To better understand the current status of each local municipality within the district, an in-depth analysis should be performed on the respective audit reports and support be provided to these municipalities to improve audit outcomes and service delivery.

Way forward

The current audit outcomes in the province are a true reflection of the pace at which the previous year’s commitments were honoured by the key role players. It is important that different role players play their part in providing the requisite assurance. When combined assurance is entrenched, the municipality can reduce spending on other external assurance providers such as the consultants engaged to review financial and performance information. This enhances the credibility of financial information reported internally to council and council committees. An effective combined assurance process demonstrates that the political and administrative leadership have established the necessary steps to enhance their internal controls.

We remain encouraged by the 2012-13 commitments as made by the various role players above. We believe that if these commitments can be implemented in time and continually tracked, there can be significant improvements in the audit outcomes.


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The initiatives and commitments of all role

players should have a positive impact on

future audit outcomes

We have shared our key message on the actions needed to improve audit outcomes with accounting officers and authorities, mayors, councils and municipal public accounts committees through our reports and interactions with them.

Figure 16: Interactions with mayors

Significant impact –improvement in

outcome, 17% (2)

Number of meetings

One or two meetings, 17% (2)

Three or more meetings, 83% (10)

Assessed impact on audit outcomes

Some impact –improvement in key

controls, 75% (9)

Minimal impact – improvement expected in next financial year, 8% (1)

Figure 16 shows the number of meetings we had with mayors during 2012-13 and our assessment of the impact of these interactions. It is commendable that the majority of mayors were available to meet with us. This further supports the assertion that the political leadership has responded well to our messages. However, the positive impact of these commitments on audit outcomes will only be realised when the administrative management increases the pace at which these commitments, action plans and recommendations are implemented.

Throughout the year, we obtain and monitor the commitments of mayors, councils and MPACs to implement initiatives that can improve audit outcomes. The progress of such commitments in response to the previous year’s audit outcomes and new commitments are included in the section on the results of municipalities. Although a number of commitments were made, the progress in implementation is not at an ideal level. Our engagements with these structures show that there are good intentions, but those intentions did not translate into

honouring commitments. These structures, especially mayors, need to lead by example and hold accounting officers responsible where there is no action.

During our road show on audit outcomes, we also shared this message with the provincial legislature, the premier, the provincial treasury and the provincial CoGTA. We confirmed the progress of the commitments made by these role players in response to the previous year’s audit outcomes.

Provincial treasury had committed to providing support programmes for municipal budgets, financial accounting, auditing, resource management, compliance, asset management, training, monitoring, advisory technical support and inter-governmental forum engagements.

The premier’s office had committed to driving operation clean audit within the province through the establishment of premier coordinating forums. The premier enhanced her executive authority to oversee the municipalities’ effective performance of their duties. This is evidenced by the premier honouring a majority of the previous year’s commitments.

COGTA had committed to holding municipalities accountable for addressing findings in the AGSA’s audit, and to providing technical support to the municipalities that received qualified audit opinions in the previous year

The MEC for Gauteng CoGTA and treasury had committed to tracking, reviewing and monitoring progress made by municipalities and entities in preparing and reporting on monthly financial statements. They implemented the majority of their initiatives through the Gauteng operation clean audit process. However, the MEC for provincial treasury needs to intensify the examination and use of regulations 36 (deviations), 44 and 45 (conflict of interest) through a circular and monitoring by the administrative leadership.

Municipal councils and MPACs have committed to tracking progress on the implementation of MPAC resolutions by municipal officials and insisting that credible financial and performance information is submitted to council meetings. This commitment is critical to ensure that clean audit administration and better service delivery is attained. Progress in implementing the previous year’s commitments by both the municipal councils and MPACs has been slow

It is also encouraging that the speaker of the legislature has responded positively to the AGSA’s messages, as some of the previous year’s commitments have been honoured during 2012-13. However the progress is very slow: only one of the three commitments were implemented. In addition to insisting on credible information, the speaker needs to promote the active involvement of portfolio committees in the oversight of municipalities and ensure that reports submitted by provincial treasury and Gauteng CoGTA are adequately considered.

It is imperative that the speaker of the legislature and the MECs of provincial treasury and CoGTA collaborate to ensure that portfolio committees work together to provide oversight of local government.


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The provision of water and sanitation services

and road infrastructure should receive urgent

attention

The state of municipal infrastructure in South Africa is a crucial element to ensure service delivery to all communities. In support of this, we reviewed key aspects of the provision of water and sanitation services and roads infrastructure by municipalities, and reported the findings in the management reports.

Water and sanitation

According to the Constitution, every person has the right to clean water. Government thus set a target to provide access to basic water and sanitation to all the people in South Africa by 2014. More than 5% of people countrywide are currently still without clean water.

As local government is responsible for providing water and sanitation services, this function lies with municipalities that have been classified as water services authorities. There are 10 water services authorities in the province.

The lack of both these services increases the risk of poor health and premature deaths, while the lack of proper sanitation can pollute rivers and dams, thus negatively affecting the environment.

We identified some warning signs that could have a serious impact on municipalities' ability to provide a large portion of the province's population with clean water and proper sanitation. The following needs urgent attention to ensure that governments’ objectives relating to water and sanitation are achieved:

Municipalities did not report access to basic sanitation as a key performance indicator.

The backlog in the provision of water and sanitation may not be eradicated, which is not in line with the national target to achieve 100% access to basic water and sanitation by 2014.

One of the municipalities did not set the eradication of all basic water and sanitation backlogs as its target for the 2013-14 financial year, to be in line with the national targets to achieve 100% access to basic water by 2014.

Roads infrastructure

In terms of the Constitution, the functions and powers relating to roads lie with those municipalities classified as roads authorities. There are 10 roads authorities in the province.

The condition of roads impacts on all citizens and, as such, poor road conditions create challenges for many with unnecessary time delays, increased transportation costs, and reduced access to education, health care and social services.

We identified warning signs that could have a serious impact on municipalities' ability to provide people with proper roads. The following needs urgent attention to ensure that governments’ objectives relating to roads are achieved:

Municipalities do not have an approved policy for the planning, management and reporting of road infrastructure.

Municipalities underspent funding from the municipal infrastructure grants on roads infrastructure.

Municipalities have not achieved their target for upgrading or maintaining roads.

Way forward

To contribute towards the national target of providing access to water to all South African’s residents by the end of 2014; municipalities should monitor their progress in providing clean water regularly. This should be achieved by including a target to provide water services to all South African’s residents in the annual performance plan, and the progress should be reported quarterly.

Approved policies on planning, management and reporting of road infrastructure should be in place. The spending of municipal infrastructure grants should be monitored regularly to ensure that those funds are spent appropriately and within time frames on road infrastructure


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41

AUDIT OUTCOMES OF INDIVIDUAL MUNICIPALITIES


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Audit outcomes and demographics of

mayoral portfolios

This section of the report includes two municipal graphics.

The first graphic is an individual municipal demographic illustration that summarises the population and basic services of the specific municipality. It is based on information in the 2011 Gauteng census municipal report prepared by Statistics South Africa.

According to that report, the first census was conducted in 1996, the second in 2001, and the last in 2011. The graphic depicts the status of the population, basic services, education and the employment rate over this period. The general statistics should be read with the report, which points out concerns and limitations encountered when gathering the statistics. We have not audited this information, but included it to provide context and an understanding of the environment in which each municipality operates.

The second graphic depicts the audit outcomes of mayoral portfolios. It analyses information that we have audited and gives an overview of the following:

Movement in audit outcomes

Drivers of key controls

Assurance level provided by different role players

Progress made in addressing risk areas

Root causes to be addressed

Status of key commitments by the mayor

The narrative following the graphics puts the information provided in the second graphic into context by summarising the status of the municipality’s audit outcome and providing the way forward.

We have also included a consolidated graphic of the general statistics for the province as part of the annexures. As is the case with the individual municipal demographic illustration, this graphic analyses similar information for the province as a whole.


43

Of the households have access to piped water

75% 75% 81%

1% 1%

24% 24% 19%

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services

Of the households have access to electricity

EducationLabour

10% 9%4%

23%28%

34%

10%12%

18%

20011996 2011

87%7 73

0 28

5

9 38

8 85

4

12 2

72 2

63

Population status Age Male/Female

20011996 2011

26% 24% 24%

70% 72% 72%

4% 4% 4%

20011996 2011

51% 50% 50%

49% 50% 50%

20011996 2011

29%37%

26%

71%63%

74%

20011996 2011

3.6

3.2

3.0

78 5

41

156

222

2001 2011

21%

20%

13%

79%

80%

87%

3%

3%

2%

13%

14%

9%

84%

83%

89%

Of the households have access to toilet facilities

2%

4%

1%

16%

15%

12%

82%

81%

87%

Higher

educationGR12 No schooling

Employed Unemployed

In house Communal No access

Flush/ Chemical Pit/ Bucket No access

0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

98%

2001

1996

2011

2001

1996

2011

The statistics above do not reflect partial primary or secondary schooling. The sum of the statistics therefore does not equal 100%

Formal dwelling Traditional dwelling Informal dwelling

GAUTENG

PROVINCE

The statistics reflected in these graphics were sourced from the 2011 census (STATS SA) and are not information collated or audited by the 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.

99%

Electricity No electricity


44

Unqualified with no findings


Qualified with findings

Adverse or disclaimer with findings

Audits outstanding

Improved

Regressed

Stagnant or little progress

Municipal audit outcomes per district

32

1

3

West Rand

Sedibeng

1

City of Johannesburg

(Metro)1

Tshwane (Metro)

1

Ekurhuleni (Metro)


45

Metros


46

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

10% 9%4%

22%

28%

36%

8% 10%15%

20011996 2011

89%2 00

1 15

7

2 48

1 76

2

3 17

8 47

0


20011996 2011

26% 25% 24%

70% 72% 72%

4% 3% 4%

20011996 2011

51% 51% 51%

49% 49% 49%

20011996 2011

32% 40%29%

68% 60%71%

20011996 2011

3.6

3.2

3.0

70% 78% 84%

1%30% 21% 16%

67 6

05

125

688

2001 2011

23%

20%

11%

77%

80%

89%


2%

2%

1%

13%

16%

12%

85%

82%

87%


4%

5%

1%

12%

12%

10%

84%

83%

88%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

99%

2001

1996

2011

2001

1996

2011



EKURHULENI

METRO

The statistics reflected in these graphics were sourced from the 2011 census (STATS SA) and are not information collated or audited by the 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.


47

Ekurhuleni Metropolitan Municipality and its entities

Unqualified

with findings

Stagnation in audit outcome


Drivers of key controls improving slightly


Implemented

Assurance levels should be improved

100% 100% 100%

2012-13 2011-12 2010-11

100%

14%

29%

100%

100%

86%

100%

57%

100%

14%

MPAC

Municipal council

Audit committee

Internal audit

Mayor

Municipal manager

Senior management

New

LeadershipFinancial and performance management

Governance


Provides assurance Provides some assurance Provides limited/no assurance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and

reconciling controls

Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

Committed to ensuring that CEOs and CFOs of all municipal entities attend OPCA committee meetings and give feedback on action plans addressing audit findings

Obtain regular feedback on the progress made by the office of governance and compliance in addressing and preventing audit findings on compliance with laws and regulations, particularly SCM regulation 36 (deviations) and 44 (conflict of interest)



Information technology controls Financial health


Quality of performance reports



Instability in key positions and lack of

succession planning

A major challenge at of the auditees14%

Lack of consequences for repeat findings on SCM and ineffective monitoring of action

plans to address the findings.

A major challenge at of the auditees

43%

14%

43%

100%

14%

14%

72%

43%43%

100

%14%

14%

14%

72% Through regular engagements with accounting officers, enhance oversight of municipal entities and the restructuring process

Inadequate checks and balances (transaction controls) and compliance with

laws and regulations not reviewed and monitored

A major challenge at of the auditees

43%

57%


48

Ekurhuleni Metropolitan Municipality and its

entities

■ Ekurhuleni Metropolitan Municipality (EMM)

■ Brakpan Bus Company SOC Limited (BBC)

■ East Rand Water Care Company NPC (ERWAT)

■ Ekurhuleni Development Company (SOC) Limited (EDC)

■ Germiston Phase II Housing Company (SOC) Limited

■ Lethabong Housing Institute NPC (LHI)

■ Pharoe Park Housing Company (SOC) Limited (Pharoe Park)

Movement in audit outcome

There was no movement in the audit outcomes of EMM and its entities towards clean audit outcomes. However, there have been notable improvements on the quality of performance reports and the quality of financial statements submitted for audit. The challenge in moving towards a clean audit outcome was the inadequate checks and balances, exacerbated by instability in key positions. Stability in key positions is difficult to maintain as there is no succession planning. The municipality and its entities have the potential to achieve a clean audit outcome if they focus on addressing these root causes.

The services of consultants were again engaged for financial preparation and reporting at a cost of R45 240 530 (2012: R32 225 590). Audit findings relating to consultants included the absence of the following:

A formal policy on the use of consultants

Conditions or clauses in the contracts relating to transfer of skills

Measures to monitor contract performance and delivery.

It is commendable that the group has no findings on predetermined objectives. Consistent with previous years, EMM maintained clean outcomes on predetermined objectives. This demonstrates that leadership is committed to achieving clean audit outcomes. A similar approach is required to address recurring audit findings, especially relating to supply chain management and human resource management.

Six key risk areas

Although the municipality and its entities have not moved towards clean audit outcomes in 2012-13, some progress has been made in addressing key risk areas. This is attributable to the continued commitment of the leadership to meet with the AGSA and use these opportunities to reflect on challenges and possible solutions.

Quality of the annual performance report

The municipality has not had findings in this area for the past five consecutive years. This exemplary achievement is attributable to the controls that have been implemented to ensure accurate and complete reporting on predetermined objectives. The municipality should continue to prepare quarterly performance reports, which contributed positively to maintaining these outcomes.


Supply chain management remains an area that requires attention, primarily as a result of non-compliance with legislative requirements. The most significant findings were:

Awards made to providers whose principal shareholders were persons in the service of the municipality

Persons in the service of the municipality who had a private or business interests in contracts awarded by the municipality, and failed to disclose such interests

• Goods procured without inviting competitive bids.

To address the supply chain management challenges, administrative leadership should ensure that senior management enforces and monitors compliance with applicable legislation. Consequence management for transgressors should be implemented.

Human resources management

The municipality and its entities’ human resource management regressed as a result of vacancies in key positions. During the current year, various people acted in the position of chief financial officer of the municipality. This resulted in an audit report finding, as the legislated maximum acting period was exceeded. The municipality and its entities should implement succession planning to ensure that competent and experienced staff are appointed and retained.


49

Information technology

The overall status of information technology has remained the same. Although the entities’ senior management maintained their commitment to ensuring that information technology controls were implemented, implementing adequate controls still posed a challenge. Examples of inadequate controls were that some information technology policies were not approved. This was because administrative leadership did not fully understand the importance of organisation-wide information security. There was also no approved disaster recovery plan and, consequently, no tests were performed. These were caused by executive management delays in finalising the plan and a lack of succession planning for the changes in chief information officer leadership.

While the municipality had begun initiatives to align the governance of their information technology environment to this framework, progress was minimal as the design phase of individual components required by the framework had not yet been completed.


Consistent with the previous year, the quality of the financial statements submitted for audit purposes did not contain material misstatements. The municipality is commended for this achievement. The municipality and its entities produced appropriate financial statements as a result of preparing adequate financial statements on a quarterly basis.

Financial health

The municipality remains solvent and a surplus for the 2012-13 financial year was realised. Two entities in the group, BBC and LHI, have indicators that cast doubt on their ability to operate as a going concern.

BBC experienced financial difficulties due to recurring losses incurred as a result of strikes. LHI is a dormant company and therefore does not generate any income.

The financial difficulties experienced by BBC are not a concern as the municipality is in a financially solvent position. The entity is implementing the strategic objectives of EMM. The municipality will assist the entity where financial assistance is required.

Key controls and root causes

The stagnation in leadership controls was caused by the lack of implementing consequence management at a senior management level. Key controls relating to financial and performance management improved due to an increased recognition of the importance of a strong internal control environment. Governance structures improved as a result of an increasingly robust audit committee.

The following controls must be strengthened to create a control environment that supports compliance with legislation.

Checks and balances and business processes to ensure compliance with the supply chain management regulations

Implementation of basic internal controls and consequence management to avoid repeat findings and ensure effective monitoring of action plans.

The accounting officer should address the root causes of stagnant audit outcomes and inadequate controls as follows:

Implement effective human resource management to ensure continuity in key senior management positions

Implement consequence management at a middle management level.

Impact of key role players on audit outcomes

We met with the mayor three times during the financial year. These interactions had a minimal impact on the audit outcomes improving to clean audit outcomes. However, these have resulted in some key risk areas improving.

The level of assurance provided by senior management has remained stagnant at a level of providing some assurance. This was mainly due to a lack of adequate processes that defined the checks and balances for compliance with legislation.

The level of assurance by senior management was made worse by the chief financial officer position being vacant and by inefficient operational plans to regulate the daily and monthly responsibilities of senior management and officials reporting to them. In certain instances the assurance was negatively affected by some senior management positions being vacant and/or officials being appointed in an acting capacity. Long periods of vacancies and acting in positions impairs internal controls and the implementation of action plans, and do not allow for effective accountability and performance management.


50

The audit committee assurance had significantly improved. In the previous period some reports were not submitted to council as required. The committee’s functions have been improved to ensure that all required reports are tabled and the chair of the committee has engaged with the mayor quarterly.

Although some assurance is provided by MPAC and the municipal council, their recommendations were not adequately implemented by management and no or limited impact can be seen on the actual audit outcomes.

The assurance provided through the oversight of the municipal council and MPAC should be improved. Although these oversight bodies do strive towards a clean audit outcome, sufficient focus is not placed on the implementation of audit recommendations to obtain a clean audit opinion.

Although internal audit made significant progress in addressing existing backlogs, there is still room for improvement. Internal audit should assist management by ensuring significant audit findings are covered as part of their scope and action plans are monitored quarterly to give management an opportunity to rectify errors in a timely manner.

It was encouraging to note that the mayor implemented the previous year’s commitment, which was to ensure that the chief executive officers and chief financial officers of all municipal entities attended operation clean audit committee meetings and gave feedback on actions plans to address the AGSA’s findings.

Way forward

Supply chain management findings, especially the findings relating to conflicts of interest, awards made to providers in the service of the municipality and competitive bidding, are key barriers to EMM attaining a clean audit outcome. To improve to a clean audit outcome, auditees’ administrative leadership needs to ensure that there is a robust internal control environment where compliance with legislation is prioritised. Detailed monthly compliance reports should be prepared and reviewed for completeness, relevance and accuracy. Executive leadership should ensure that senior management enforces and monitors compliance with applicable legislation to prevent supply chain management findings.


51


52

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

8% 7%3%

24%29%

35%

10%14%

19%

20011996 2011

91%

2 59

7 28

1

3 22

6 05

4

4 43

4 82

7


20011996 2011

25% 23% 23%

71% 73% 73%

4% 4% 4%

20011996 2011

50% 50% 50%

50% 50% 50%

20011996 2011

29% 37%25%

71% 63%75%

20011996 2011

3.5

3.1

2.9 78% 78% 82%

22% 22% 18%

89 7

28

183

247

2001 2011

15%

15%

9%

85%

85%

91%


1%

3%

1%

12%

13%

7%

87%

84%

92%


2%

3%

1%

12%

11%

8%

87%

87%

91%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

99%

2001

1996

2011

2001

1996

2011



CITY OF

JOHANNESBURG

METRO



53

City of Johannesburg Metropolitan Municipality

Unqualified with

no findings

Unqualified

with findingsQualified with findings

Improvement in audit outcome


Drivers of key controls improving




Governance


Provides assurance Provides some assurance Provides limited/ no assurance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

Quarterly monitoring of the progress made in attaining clean audits as set out in the IPD and performance plan








Inadequate processes and operational

plans


Internal control deficiencies are not

adequately addressed due to ineffective

governance structures and vacancies in key

positions


Compliance with legislation is not reviewed

and monitored due to the lack of

consequences for transgressions

A major challenge at of the auditees63%New

Strengthen the tone at the leadership level and hold the accounting officer accountable for strengthening document management processes to prevent and detect non-compliance with laws and regulations

Enhance risk management and internal control processes regarding the preparation of financial statements, compliance with laws and regulations and performance reporting

31%19%

50%


54

City of Johannesburg Metropolitan Municipality and

its entities

■ City of Johannesburg Metro(CoJ) ■ Johannesburg Fresh Produce Market (SOC) Ltd (JFPM) ■ Johannesburg Social Housing Company (SOC) Ltd (JOSHCO) ■ City Power Johannesburg (SOC) Ltd (City Power) ■ Joburg City Theatres (SOC) Ltd (City Theatres) ■ Johannesburg City Parks (NPC) Ltd (City Parks) ■ Johannesburg Development Agency (SOC) Ltd (JDA) ■ Joburg Property Company (SOC) Ltd (JPC) ■ Johannesburg Metropolitan Bus Services (SOC) Ltd (Metrobus) ■ Johannesburg Roads Agency (SOC) Ltd (JRA) ■ Johannesburg Tourism Company( NPC) Ltd (JTC) ■ Johannesburg Water (SOC) Ltd (JWater) ■ Johannesburg Zoo( NPC) Ltd (Zoo) ■ Metropolitan Trading Company (SOC) Ltd (MTC) ■ Pikitup Johannesburg (SOC) Ltd and (Pikitup) ■ Roodepoort Civic Theatre ( NPC) Ltd.(RCT)

Movement in audit outcomes and status of the key

risk areas

The portfolio has improved its overall audit outcome as there were no qualified opinions among the auditees in the group for the 2012-13 financial year.

The overall improvement was because CoJ, City Power and J Water addressed previous qualifications on revenue and assets .This was due to the effective implementation of action plans and improved oversight by the leadership.

Two of the city’s entities (13%), JOSHCO and JFPM were able to sustain their clean audit status for the year under review while the rest of the portfolio entities continued to receive unqualified opinions with findings on compliance and/or predetermined objectives.

The sustained clean audits were due to the leadership’s active involvement in the auditing process and improved oversight of the daily operations of the entities. This is complemented by thorough review processes by governance structures.

The municipality and its entities incurred R209 millions in irregular expenditure, which is 45% of the total amount incurred in the province.

Quality of submitted financial and performance

reports

The quality and the reliability of the AFS remained stagnant; however, the reported performance information improved compared to the previous year. It is commendable that only 19% of the entities had findings on performance reports, while the quality of the AFS is of concern as 75% of entities had material misstatements. Although the quality of the reported performance information and AFS has improved at the portfolio level, the review of annual performance plans and AFS should be strengthened to increase the credibility of the reports. The overall effectiveness of the governance structures is negatively affected by internal audit’s inadequate review of the performance and financial information. The internal audit and risk management units need to ensure that their audit plans cover the review of compliance by entities with the National Treasury framework governing performance Information (FMPPI) and the financial reporting framework.

Financial health

The financial health of the portfolio has improved as evidenced by the strong net surplus and the improved net asset position; however the following challenges remain:

• The creditor’s payment period is longer than 90 days.

• The debtor’s collection period is longer than 30 days.

• Debtors impairment provision as a percentage of accounts receivable/ receivables for departmental revenue is greater than 10%

While JRA, Pikitup and Metrobus’ liabilities exceed their assets, this is not of concern as it is due to the funding model adopted by the parent entity CoJ regarding the provision of services by these entities. Significant proportions of the loans are owed to the parent municipality due to the capitalisation support provided to the entities over the years and are not payable in the foreseeable future.


The status of supply chain management remains unsatisfactory, primarily as a result of non-compliance with the legislative requirements relating to supply chain management processes and the MFMA. Consistent with the previous period, the most significant findings were of awards made to providers whose principal shareholders were persons in the service of the municipality or the state, goods procured without inviting competitive bids and the effect of multi-year contracts on


55

irregular expenditure. There is a need to improve processes around investigations of irregular expenditure.

Although the city has implemented the deviation framework to regulate non-compliance with supply chain management, there are still challenges as the deviations are not supported by adequate documentation and an audit trail.

Non-compliance relating to non-payment within 30 days was due to a lack of discipline in reconciling the supplier accounts monthly.

Improving consequence management, controls, compliance checks and document management pertaining to compliance with applicable legislation should result in a significant reduction in findings on supply chain management and irregular expenditure.


The status of information technology remained the same at the municipality; there is still a concern about the lack of progress in implementing the information technology governance framework as approved by the Cabinet. This delay is a result of CoGTA not finalising the dates of deliverables.


The findings on human resource management were on the management of key vacancies and the lack of performance management for employees other than senior managers, as evidenced by CoJ and City Power (12%) having vacant positions at the chief financial officer level. In addition, the absence of leadership resulted in adequate performance management not being implemented at lower levels.

While the majority of officials possessed the minimum competencies as prescribed by the National Treasury, it is of concern that this has not led to a reduction in findings on supply chain management and misstatements in submitted AFS and performance reports.


The overall improvement in the key controls was a result of active involvement by leadership to ensure that qualification areas at CoJ, City Power and J Water were adequately resolved.

The following internal control deficiencies must still be addressed to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

• Inadequate processes and operational plans to gain assurance on controls implemented by management. This is further impacted by vacancies in key positions, which have an impact on internal controls and the implementation of action plans, and does not allow for effective accountability, performance and consequence management.

• Inadequate systems and processes to record and report credible financial and performance information. This also leads to a reliance on consultants for basic functions, with minimal monitoring and transfer of skills.

• The records supporting the compliance with applicable legislation are not properly documented, filed and easily retrievable.

• Internal audit and risk management units are not adequately capacitated. This leads to inadequate reviews and action plans on information technology, predetermined objectives and financial reporting. The overall effectiveness of the audit committee is compromised due to the above governance structures.


The level of assurance provided by senior management has improved compared to the previous year. This was due to their commitment to sustain and improve audit outcomes. Although the level of assurance has improved, it was still not at the required level due to inadequate business processes and inefficient operational plans to regulate the daily and monthly responsibilities of senior management and officials reporting to them. In certain instances, the assurance was negatively affected by some senior management positions being vacant and/or officials being appointed in an acting capacity. Long periods of vacancies and acting positions impair internal controls and the implementation of action plans, and do not allow for effective accountability and performance management.

The level of assurance provided by the accounting officer has improved compared to the previous year. The accounting officer actively participated in the auditing process and daily operation of the entities. However, the level of assurance can be enhanced by ensuring that senior management positions are filled and action plans are monitored regularly.

At the level of the mayor, the assurance provided increased compared to the previous year. The mayor was actively involved in addressing the qualification items as well as holding the officials accountable for improving the overall audit results. The mayor honoured his previous commitments to address the revenue and assets qualifications. While the status of predetermined objectives has improved for the portfolio, the mayor’s commitment to eliminate all material findings was not fully met. We met with the mayor three times during the financial year and these interactions had a significant impact on the audit outcomes.


56

The level of assurance provided by the governance structures improved compared to the previous year. However, the assurance was still not at the required level due to ineffective risk and internal audit units.

While MPAC has been established and was able to recommend and adopt an oversight report with regards to the 2011-12 period, monitoring was a challenge. The assurance was not at the required level as the MPAC did not have sufficient capacity to ensure that the oversight report and actions plans were monitored diligently. This was exacerbated by limited interaction between the audit committee and MPAC.

The overall effectiveness of the council was compromised by the ineffectiveness of other assurance providers such as MPAC, internal audit and the audit committee. The council exercises its oversight through reports submitted by the MPAC, internal audit and audit committees and challenges faced by these assurance providers compromise the effectiveness of oversight by the council.

The role of the council can be enhanced by the role that the speaker can play in ensuring that a clean audit opinion is made a standing agenda item during council meetings. This will set the right tone and ensure that the administrative leadership is held accountable.

The overall impact of the role players will also be enhanced by us collaborating and partnering with our key stakeholders in any manner possible. We will continue to engage with co coordinating institutions such as National Treasury to address concerns regarding compliance and predetermined objectives reporting.

Way forward

Supply chain management and material amendments to the financial statements, especially the findings relating to conflicts of interest, deviations and competitive bidding are the only barriers to CoJ and its entities attaining a clean audit. Achieveing a clean audit outcome will require the municipality to implement proper risk, financial and document management processes. The political leadership needs to ensure that complete and accurate financial statements are prepared and adequately reviewed. Internal controls and document management processes need to be improved to prevent supply chain management findings.


57


58

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

10% 9%4%

26%30%

34%

14%17%

24%

20011996 2011

89%

1 77

0 33

1

2 14

2 32

2

2 92

1 48

8


20011996 2011

27% 25% 23%

68% 71% 72%

5% 4% 5%

20011996 2011

50% 50% 50%

50% 50% 50%

20011996 2011

24% 32% 24%

76% 68% 76%

20011996 2011

3.7

3.4

3.0 78% 75% 81%

2% 2%

20% 23% 19%

94 9

08

182

822

2001 2011

23%

20%

11%

77%

80%

89%


5%

5%

3%

15%

16%

8%

80%

80%

89%


1%

3%

1%

25%

25%

19%

74%

72%

80%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

97%

2001

1996

2011

2001

1996

2011



CITY OF TSHWANE

METRO

The statistics reflected in these graphics were sourced from the 2011 census (STATS SA) and are not information collated or

audited by the 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.


59

City of Tshwane Metropolitan Municipality and its entities

Unqualified

with findingsQualified with findings

Improvement in audit outcome



Little progress made in addressing risk areas


New In progress


Governance


Provides assurance Provides some assurance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

The mayor will ensure that the quarterly key controls are effective and that the audit committee enhances their oversight of compliance, PDOs and IT governance

The mayor will ensure that the financial reporting department is adequately skilled to ensure a stringent review process of monthly and quarterly financial reporting reports








Key officials lack appropriate competencies


Lack of consequence for poor performance


Inadequate business processes and

ineffective operational plans


The mayor will improve oversight at accounting officer level, follow up on action plans and commitments made to improve audit outcomes on SCM compliance and set the right tone at the leadership level for consequence management.


60

City of Tshwane Metropolitan Municipality and

its entities

■ City of Tshwane Metropolitan Municipality (CoT)

■ Housing Company Tshwane (HCT)

■ Sandspruit Works Association (SWA)

■ Tshwane Economic Devlopment Agency (TEDA)


Although the CoT’s audit outcome remained stagnant from the previous year’s unqualified opinion with findings on compliance with legislation, there was an improvement in audit outcomes. This was because the previous year’s findings on predetermined objectives were addressed when the city performed an internal verification of performance information to enhance the reliability of its performance reports, and its leadership performed greater oversight.

The SWA received a similarly unchanged unqualified opinion with findings (compliance with legislation). There was also an improvement noted as the previous year’s findings on the usefulness of predetermined objectives and supply chain management were addressed. This was done by management implementing action plans and up-skilling the finance department of the entity.

HCT’s unqualified opinion with findings (predetermined objectives) remained unchanged. However, the entity did address the previous year’s findings on the reliability of predetermined objectives.

TEDA‘s unqualified audit opinion with findings (compliance with legislation) also remained unchanged. Additional compliance findings on supply chain management were identified because the previously dormant entity only became operational in 2012-13 and adequate controls were not in place.

The CoT group can be commended for preparing financial statements internally and not making use of consultants.

The CoT group has shown a general improvement in predetermined objectives and a reduction in irregular expenditure, proving that the municipality and its entities are moving in the right direction. Leadership has committed to achieving a clean audit outcome in the near future; however, this will depend on the implementation of action plans to completely address the previous year’s audit findings.

Six key risk areas

Progress has been made in addressing some key risk areas, most notably in the areas of predetermined objectives, supply chain management and information technology. The quality of submitted financial statements for the group, as well as the financial health of the municipality, remains a concern.

Quality of the annual performance report

There was an improvement in reporting against predetermined objectives, as the municipality and HCT addressed the previous year’s findings on reliability and SWA improved on the usefulness of performance information. The challenge remains the material amendments to the annual performance report (APR) as the quality of the APR submitted for audit purposes is not at the appropriate level.


Although irregular expenditure decreased from R114 025 224 to R28 848 139 for the municipality, the status of supply chain management remains unsatisfactory, primarily as a result of the many instances in which the municipality did not comply with legislative requirements. Consistent with the previous period, the most significant findings were of bidders who did not submit declaration forms and awards made to providers who were in the service of the municipality or other state institutions.

The municipality’s use of CAATs to identify conflicts of interest prior to awarding contracts was not fully effective as awards of less than R30 000 were not included. There were also no controls to identify awards made to close family members. Improving consequence management and controls pertaining to compliance with applicable legislation should result in a significant reduction in findings on supply chain management and irregular expenditure.


The status of information technology has improved compared to previous years. CoT executive management was committed to ensuring that the information technology controls were implemented. This resulted in most policies and procedures being developed and approved. The challenge that CoT still faces is the implementation of these policies. CoT took an initiative to develop their own


61

information technology governance framework, which was approved by their mayoral committee. The framework details the processes that ensure the effective and efficient use of information technology in enabling an organisation to achieve its goals. Furthermore, controls to ensure that CoT is able to recover its operations after disasters have been developed and approved by the mayoral committee.


Consistent with previous years, the quality of the financial statements submitted for audit purposes is not at the appropriate level. The auditees (CoT, HCT and SWA) received a financially unqualified audit opinion only because they corrected all the misstatements that were identified during the audit. Material amendments were made on revenue, accounts receivables and property, plant and equipment for the municipality. These were due to the lack of basic controls over the preparation and review of financial statements and supporting schedules.

The quality of financial statements can be significantly improved by strengthening basic monthly internal processes to verify data and support reliable financial and performance reporting. Executive leadership should insist on accurate half yearly financial statements from the accounting officers, as these are critical to decision-making.

Financial health

The municipality has maintained a net current liability position, but remains solvent and a surplus for the 2012-13 financial year was realised. An area of concern is that, on average, the municipality takes 154 days to collect debt, a regression compared to the previous year. Creditors were paid on average within 69 days. There were no findings on non-compliance with the required time frames, as this was due to isolated incidents of significantly large payments that were paid late. There were significant increases in long-term debt due to the issue of municipal bonds. Underspending on the capital budget improved from 8,5% in the previous year to only 1,2 % in 2012-13. A concern for the municipality is that unauthorised expenditure to the amount of R598 394 771 was incurred due to insufficient budget monitoring. The assessment did not cast doubt on their ability to render uninterrupted services to citizens in the foreseeable future.

SWA incurred a net deficit, which resulted in total liabilities exceeding its total assets. These conditions indicate the existence of a material uncertainty that may cast significant doubt on the municipal entity’s ability to operate as a going concern.


The overall stagnation in drivers of key controls was caused by management not providing an adequate review and monitoring of previous commitments, which resulted in a number of repeat findings.

The following controls must be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation.

• Administrative leadership of both the municipality and its entities must implement effective control in preparing regular, credible financial and performance reports, and ensure adequate review by senior officials.

• Identify weaknesses within the supply chain management process and implement basic internal controls and consequence management to avoid repeat findings as mentioned earlier.

The accounting officer should address the root causes of stagnant audit outcomes and inadequate controls as follows:

• The municipality can use checklists to ensure compliance with supply chain management and predetermined objectives, and monitor these regularly.

• Prepare a complete set of interim financial statements, which will be reviewed by the relevant levels of oversight authority.


We are encouraged by the continued availability and efforts of the mayor and city manager’s office to attend to audit concerns. Various engagements were held with the city manager while the audit team met with the mayor four times during the financial year. Despite those interactions, the previous year’s commitments and action plans, such as preparing a complete set of interim financial statements and compliance with supply chain management regulations, were not sufficiently monitored. This resulted in repeat audit findings and, ultimately, in stagnant audit outcomes.

Internal audit should assist management by ensuring significant audit findings are covered as part of their scope and action plans are monitored quarterly to give management an opportunity to rectify errors in a timely manner.

Although some assurance was provided by the audit committee and MPAC, recommendations were not adequately implemented by management and no or limited impact could be seen on the actual audit outcomes. These committees


62

should also consider engaging skilled information technology professionals to ensure that they discharge their responsibilities effectively and efficiently.

A coordinated effort by the key role players is required to achieve clean audit administration.

Way forward

Material amendments to the financial statements and supply chain management findings, especially those relating to conflicts of interest and declaration forms not obtained, are the only barriers to the City of Tshwane attaining a clean audit outcome. The achievement of a clean audit outcome will require commitment and action plans on the previous year’s findings to be prioritised as a matter of urgency. The political/executive leadership need to ensure that accurate financial statements are prepared regularly and that CAATs is run effectively prior to awarding contracts to prevent supply chain management findings.


63

Sedibeng District


64

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


Education Labour

12%10%

4%

20%24%

32%

7% 8%

13%

20011996 2011

91%

709

626

794

088

916

484


20011996 2011

28% 26% 25%

68% 70% 70%

4% 4% 5%

20011996 2011

50% 49% 50%

50% 51% 50%

20011996 2011

35%44%

32%

65%56%

68%

20011996 2011

4.0

3.5

3.2 76% 82% 85%

2%2%

22% 16% 15%

45 7

88

94 7

73

2001 2011

21%

14%

9%

79%

86%

91%


4%

2%

1%

10%

10%

6%

85%

88%

93%


2%

3%

1%

23%

14%

9%

75%

84%

90%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

99%

2001

1996

2011

2001

1996

2011



SEDIBENG

DISTRICT



65

Sedibeng District Municipality

The district provided centralised IT services to the local municipalities

Support local municipalities that have capacity and skill constraints


Factors contributing to a clean audit



Implemented

Assurance levels should be maintained

In progress New

Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health

2012-13Unqualified with no findings

2011-12Unqualified with findings

Senior management Provides assurance

Municipal manager Provides assurance

Mayor Provides assurance

Internal audit Provides assurance

Audit committee Provides assurance

Municipal council Provides assurance



Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

The accounting officer was held accountable for implementing controls to prevent and detect non-compliance with laws and regulations

MPAC Provides assuranceGood Concerning Intervention required



The political and executive leadership is stable within the municipality. This stability over the years contributes to effective oversight of financial and performance reporting as well as compliance with laws and regulations.

The audit committee in particular provides effective oversight of the internal control environment including financial and performance reporting and compliance with laws and regulations.

Maintain a clean audit and address all IT findings from the 2012-13 financial audit

Adequate consequence management was applied and this helped to ensure that material findings were addressed by the leadership

The effectiveness of key controls was discussed on a quarterly basis

Assist in aligning all IDPs and SDBIPs for the local municipalities within the district and monitor service delivery objectives and their related targets


66

Sedibeng District Municipality

Sedibeng District Municipality (SDM)


SDM achieved a clean audit opinion in 2012-13. This can be attributed to the political leadership embracing the concept when it was first introduced. A sound control environment was visualised and the executive leadership were tasked with achieving this goal within the required time frame.

The internal controls over the preparation of financial statements and the reliability of the performance information were improved. This resulted in findings from the previous financial year being adequately addressed. The municipality engaged the services of consultants to assist with the review of financial statements at a cost of R16 000 (2012: R 0). The impact was positive as the municipality did not have any material corrections made to the financial statements.

Key risk areas

The municipality has implemented robust controls over the preparation of the financial statements and the reporting on predetermined objectives, as well as the compliance with legislation governing procurement and contract management, human resources management and consequence management. The controls have worked effectively during the year of assessment and served as an early warning signal to the leadership and senior management of the municipality.

The information technology control environment still has some shortcomings. Most policies and procedures have been formalised and approved. However, some of these policies and procedures are outdated as they do not include the current systems being used within the municipality. Other findings relate to the implementation of these policies.

Key controls and good practises

The overall improvement was caused by the stability of the political and administrative leadership. This contributed to the effective oversight of basic disciplines of internal control activities relating to the credibility of the financial statements, performance information reporting and compliance with legislation.

Our quarterly engagements over the years with the municipality reflect that our messages were taken seriously by the leadership of the municipality.

This stability also enabled SDM to develop, implement and monitor a decisive action plan to address weaknesses in internal controls.

The audit committee in particular provided effective oversight of the internal control environment and provided implementable recommendations that management took seriously. Their review of the financial statements was comprehensive and effective.

Now that SDM has achieved a clean audit, the municipality will have to work on aligning the integrated development plan and service delivery and budget implementation plan of the local municipalities within the region, and monitoring the service delivery objectives. This should assist local municipalities to reduce findings on the usefulness and reliability of performance information and will ensure that SDM fulfils its mandate as a district municipality.


We met with the mayor four times during the financial year and these interactions had a significant impact on the audit outcomes. The mayor held the accounting officer accountable in ensuring that all previous commitments were addressed. This attitude of accountability was filtered through all levels of the municipality.

The municipal council and MPAC provided assurance and were committed to working together to sustain a clean audit opinion. Clean audit opinion is a focus of the SDM council. This was evidenced by those responsible for the robust control environment receiving the acknowledgement of the speaker and council when the audit report was tabled.

The MPAC was proactive during the financial year and arranged district meetings to address risky areas affecting both the district and local municipalities.

Way forward

The attention of political and executive leadership has proactively shifted towards improving the control environment further to ensure that the clean audit opinion is sustained. This will ensure that SDM leads by example within the district, compelling the local municipalities to achieve the same audit opinion.


67


68

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

12%

6% 4%

19%16%

33%

7% 5%

13%

20011996 2011

592

018

657

949

721

663


20011996 2011

29% 26% 26%

67% 70% 70%

4% 4% 4%

20011996 2011

49% 49% 49%

51% 51% 51%

20011996 2011

38%47%

35%

62%53%

65%

20011996 2011

4.0

3.5

3.2 75% 82% 86%

1%1%

24% 17% 14%

42 5

81

86 8

95

2001 2011

18%

10%

8%

82%

90%

92%


2%

1%

1%

10%

8%

5%

88%

91%

94%


2%

2%

1%

21%

11%

8%

77%

87%

91%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

99%

2001

1996

2011

2001

1996

2011



EMFULENI

MUNICIPALITY


92%


69

Emfuleni Local Municipality



Drivers of key controls not improving



New

Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health

2012-13


2011-12


Senior management Provides some assurance

Municipal manager Provides some assurance




Municipal council Provides some assurance

Key commitments by the mayor


Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

Risk

management

Internal audit

Audit committee

MPAC Provides some assurance



A lack of consequences for poor performance and transgressions.

Key officials lacked the correct competencies, which resulted in repeat audit findings.

2010-11


Set the tone at the top to ensure adequate consequence management.

The political leadership was slow to respond in addressing the root causes of poor audit outcomes.

A definitive action plan to address all repeat findings will be drafted immediately. The mayor will hold the accounting officer responsible for ensuring that the action plan is monitored quarterly and that progress is being made

The mayor will hold the accounting officer accountable for implementing controls to prevent and detect non-compliance with laws and regulations. This includes ensuring that the competencies of key officials are at the required levels.

IT

system controls


70

Emfuleni Local Municipality

Emfuleni Local Municipality (ELM)


The stagnation in the audit outcomes was a result of repeat findings on compliance with legislation and on the usefulness and reliability of performance information. The findings relating to compliance with legislation were caused by the quality of the financial statements submitted for audit purposes and expenditure management.

The municipality continued to rely on the services of consultants to prepare and maintain the infrastructure fixed asset register at a cost of R6,88 million (2012: R5,71 million). No material findings were identified from the audit of property, plant and equipment.

Although the status of the outcome has remained unchanged when compared to the previous year, there has been an improvement in the number of findings reported, most notably in the area of supply chain management. This is a positive sign for the municipality. An improved audit outcome is within reach provided that the internal controls over the quality of the financial statements, expenditure management and performance information are addressed adequately.

Key risk areas

The drivers of the key controls of leadership, financial and performance management and governance regressed due to the findings on the predetermined objectives. This was a result of the following:

The quality of the annual financial statements and performance reports had not improved as multiple material misstatements were noted. Controls over the usefulness and reliability of the reported indicators and targets were not improved adequately to address material findings.

The municipality had a poor debtor’s collection rate, which is partly due to the failure to implement an effective debt collection strategy. This resulted in cash flow challenges for the municipality and culminated in recurring findings on expenditure management, as well as having an effect on the amount of services that can be delivered through the financial year.

Minimal progress was made with regards to information technology controls. Recurring findings have been reported with regards to security management, user access management and information technology service continuity.


The personnel that prepared the financial statements and the performance information lacked the correct competencies to produce quality reports. In addition, there was inadequate oversight by the accounting officer and senior management, which meant that deficiencies in the reported information were not detected and addressed before the documents were submitted for audit.


We met with the executive mayor four times during the financial year and these interactions had a significant impact on the audit outcomes. She has ensured that through her commitments over the financial years, the municipality has progressed from a qualified opinion to an environment that is now conducive to achieving a clean audit.

Oversight role players such as council and MPAC had minimal impact on improving the audit outcomes. The role of council can be enhanced by the role that the speaker can play in ensuring that the achievement of a clean audit opinion appears as a standing agenda item at council meetings. This will set the right tone and ensure that the administrative leadership is held accountable. There should also be improved collaboration between the speaker, MPAC and the audit committee.

Way forward

For the clean audit opinion to materialise, the following controls must be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

The mayor should hold the accounting officer accountable for strengthening the control environment of all key areas relating to the audit.

The accounting officer must exercise oversight of financial management by the municipality with regards to the preparation of quarterly financial statements.

In addition, sufficient monitoring controls should be implemented to ensure that performance reports comply with the prescribed legislation and are supported by complete, relevant and accurate information. Recommendations from internal audit and the audit committee are to be acknowledged and implemented.


71


72

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

19%16%

7%

17%20%

28%

7% 6%

11%

20011996 2011

90%65 6

77

71 8

68

99 5

20


20011996 2011

29%4%

26%

66%95%

69%

5% 1% 5%

20011996 2011

51% 50% 52%

49% 50% 48%

20011996 2011

27% 35%26%

73% 65%74%

20011996 2011

4.0

3.7

3.2 82%

95%

37%

8% 4%

29%

10% 1%

34%

50

17

1

102

317

2001 2011

48%

27%

10%

52%

73%

90%


9%

4%

1%

20%

22%

7%

70%

75%

92%


3%

7%

1%

36%

20%

9%

61%

73%

90%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

99%

2001

1996

2011

2001

1996

2011



LESEDI

MUNICIPALITY



73

Lesedi Local Municipality

Stagnation in audit outcomes



No progress made in addressing risk areas

Implemented


New

Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health

2012-13


2011-12


2010-11




Mayor Provides some assurance

Internal audit Provides some assurance

Audit committee Provides some assurance




Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

Meet quarterly with the chairperson of the audit committee to discuss internal audit, the assurance that it provides on the effectiveness of internal controls, the quality and credibility of financial reports and progress made on implementing commitments

Hold the accounting officer accountable for monitoring the implementation of basic controls around financial reporting, compliance and reporting on predetermined objectives.

Quarterly meetings with the AGSA on the effectiveness of the internal controls over the quality of the financial statements and PDOs

Provide MPAC with credible information on a quarterly basis to enable it to perform its responsibilities by providing effective oversight

MPAC Provides limited/no assuranceGood ConcerningIntervention

required


Slow response by administrative leadership resulting in inadequate business processes and ineffective operational plans

Key officials lacking competencies

Lack of adequate consequences for poor performers


74

Lesedi Local Municipality

■ Lesedi Local Municipality

No change in audit outcome

The audit opinion remained an unqualified opinion with findings. This lack of improvement was caused by material amendments being needed to the financial statements submitted for audit to avoid a qualification, which resulted in non-compliance. In addition, the previous year’s material findings on the predetermined objectives were not addressed adequately and promptly, which resulted in material findings. The municipality still experienced challenges within their information technology control environment.

Six key risk areas

Overall, limited progress has been made by the municipality in addressing the key risk areas. Information technology has regressed due to the increased findings reported on security management, user access management and information technology service continuity. The quality of the annual financial statements and performance reports has not improved, as material misstatements were noted. In addition, the usefulness of performance information was inconsistent. The financial health of the municipality has not improved due to its net current liability position and negative cash flows. Although the area of supply chain management has improved, the municipality should focus on filling vacancies within the supply chain management unit, training supply chain management officials and implementing basic monitoring controls to effectively manage deviations and ultimately eliminate findings. The municipality engaged consultants to assist with their assets and VAT.

The cost of the consultants was R1 654 725 (2011-12: R858 988). Our review of the consultants’ contracts revealed that there was a lack of transfer of skills and a lack of performance management and monitoring.


There was a lack of improvement in the key controls. Although an action plan to address the previous year’s audit findings was developed, the implementation process was slow and had a limited impact on improved audit outcomes. The lack of regular, credible financial and performance reports was as a result of vacancies and a lack of competencies at management and lower staff levels. The municipality partly addressed

governance issues by re-establishing the audit committee and finalising their terms of reference.

The following control deficiencies should be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

Council committees such as MPACs and audit committees should monitor the implementation of internal and external audit recommendation regularly.

Financial and performance reports by management, internal audit and the audit committee should be reviewed effectively and in a timely manner.

Basic processes to address internal control deficiencies should be designed and implemented.

The executive mayor and the accounting officer should address the root causes by ensuring that the following controls are improved.

Implement action plans without delay and provide regular oversight and monitoring of the implementation.

Review policies and procedures, ensure basic processes are in place, and ensure understanding of processes through communication and training.

Appoint competent people and up-skill existing staff through training. Performance management should be robust, holding officials

accountable for poor performance.


The assurance levels should be improved by all levels of assurance providers. We met with the mayor four times in the past year and these interactions had some impact on the audit outcomes. The mayor was fully aware of the status of the key control assessments and made some progress in implementing the previous year’s commitments. One of the contributing factors to the slow progress was that the administrative leadership was not held accountable for not implementing action plans and recommendations. In response to the 2012-13 audit outcomes, the executive mayor committed to fully implementing the previous year’s commitments and the new commitments. The assurance provided through the oversight of the municipal council and the MPAC had limited/no impact on the audit outcomes and should be improved. MPAC should request credible financial and performance reports from the political leadership to enable them to execute their function, and council should improve the empowerment of MPAC.


75

Way forward

The administrative leadership needs to ensure that vacancies are filled by competent people that are continuously trained to overcome inaccurate and incomplete financial and performance reporting. These remain barriers to the municipality attaining a clean audit. We are encouraged by the continued

efforts of leadership to address these matters and drive the attainment of clean audit.


76

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

13% 12%

5%

24% 25%

32%

11% 9%

15%

20011996 2011

79%

51 9

30

64 2

70

95 3

01


20011996 2011

24% 24% 23%

71% 71% 70%

5% 5% 6%

20011996 2011

53% 51% 52%

47% 49% 48%

20011996 2011

8%23% 19%

92%77% 81%

20011996 2011

3.0

3.1

3.0

88% 81% 81%

5%2% 1%

7%17% 18%

72 4

24

145

180

2001 2011

26%

37%

21%

74%

63%

79%


19%

5%

4%

1%

18%

13%

80%

77%

83%


3%

4%

2%

25%

29%

14%

72%

67%

84%

98%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

96%

2001

1996

2011

2001

1996

2011



MIDVAAL

MUNICIPALITY



77

Midvaal Local Municipality

Stagnation in audit outcomes





New

Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health

2012-13


2011-12







Municipal council Provides assurance



Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

Risk

management

Internal audit

Audit committee

MPAC Provides assuranceGood Concerning Intervention required


Key officials lacked the correct competencies, which resulted in findings on the usefulness of predetermined objectives

Poor record keeping and inadequate policies and procedures to compile the annual performance report led to findings on the reliability of predetermined objectives

2010-11


Set the tone at the top to ensure adequate consequence management. The mayor will hold the accounting officer accountable for implementing controls to prevent and detect non-compliance with laws and regulations. This includes ensuring that the competencies of key officials are at the required levels

The internal audit plan did not sufficiently address the risks relating to the usefulness and reliability of the predetermined objectives

IT

system controls

Internal audit will amend the internal audit plans to ensure that the quarterly audits address the usefulness and reliability of the quarterly performance reports. The methodology used by the internal auditors should address the requirements of the MSA and the FMPPI.

The audit committee will review the predetermined objectives in line with the requirements of the MSA and the FMPPI. .

The audit committee did not review the predetermined objectives in line with the applicable laws and regulations


78

Midvaal Local Municipality

Midvaal Local Municipality (MLM)


The audit opinion remained an unchanged financially unqualified with findings on pre-determined objectives and no findings on compliance with legislation. The financial statements submitted for audit did not require any material amendments, which was an improvement on the previous year. This was the priority item defined in the action plan. MLM used consultants to assist with the preparation and review of the financial statements at a cost of R293 816 (2012: R0). The improvement to no material findings can be attributed to both the attitude of the accounting officer in dealing with repeat findings as well as consultants being used in an effective manner.

Sound internal controls over compliance with legislation were maintained. MLM did not have any material findings on procurement and contract management findings for the second successive financial year. There were material findings on the usefulness and reliability of the performance information.

Key risk areas

Control deficiencies over the usefulness and reliability of the performance information were noted, as the requirements of the MSA and FMPPI were not adhered to.

With regards to the information technology policies and procedures, there was a slight improvement, as the policies and procedures were formalised and approved. However, the municipality still experiences challenges within their information technology control environment, as repetitive findings on the information technology environment were reported.


The drivers of the key controls of leadership, financial and performance management and governance regressed. This was due to the findings on the predetermined objectives as a result of the following:

Key officials lacked the correct competencies. This resulted in the municipality’s policies and procedures not being aligned to the requirements of the FMPPI, which led to findings on the usefulness of the predetermined objectives. The municipality did not have a proper system

of record management that provided for the maintenance of information to support the reported predetermined objectives.

Both the audit committee and internal audit units did not provide the required level of assurance with regards to the predetermined objectives.


We engaged with the mayor four times during the financial year. In response to the current audit outcomes, the mayor committed to fully implement the new commitments applicable to the predetermined objectives. The mayor did provide assurance and had a positive impact on the audit outcomes. The overall effectiveness of council is compromised by the effectiveness of the internal audit and audit committee as assurance providers. The role of council can be enhanced by the role that the speaker can play in ensuring that the achievement of a clean audit opinion appears as a standing agenda item at council meetings.

Way forward

A clean audit opinion is possible in 2013-14, provided that findings on the usefulness and reliability of performance information are addressed. Internal control disciplines must be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation.

The mayor should set the tone to ensure adequate consequence management. He should hold the accounting officer accountable for implementing controls to comply with all legislation. The mayor should insist on holistic feedback from all assurance providers of the municipality, to ensure that regression in other key areas does not take place.

The audit committee should review the predetermined objectives in line with the legislative requirements and ensure that internal audit provides the required assurance in this regard. The audit committee should engage quarterly with the council and mayor.

Internal audit should amend their internal audit methodology and audit process to ensure that the quarterly reports address the requirements of the MSA and FMPPI.


79

West Rand District


80

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

13% 11%

5%

17%21%

30%

6% 7%11%

20011996 2011

82%

651

891

744

627

820

995


20011996 2011

23% 23% 24%

74% 74% 72%

3% 3% 4%

20011996 2011

58% 54% 52%

42% 46% 48%

20011996 2011

21%32% 26%

79%68% 74%

20011996 2011

3.5

3.2

2.9

67% 67% 74%

1% 1%

32% 32% 26%

51

29

2

100

812

2001 2011

32%

30%

18%

68%

70%

82%


7%

3%

2%

13%

18%

15%

80%

79%

83%

Of the households haven access to toilet facilities

4%

4%

2%

19%

22%

15%

77%

74%

83%

88%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

2011

1996

98%

2001

1996

2011

2001

1996

2011



WEST RAND

DISTRICT



81

West Rand District Municipality and its entity

Unqualified

with findings



Drivers of key controls mproving




Governance


Provides assurance Provides some assurance Provides limited/ no assurance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

Request monthly feedback from the accounting officer on the progress of

the action plan to address external and internal audit findings








Lack of regular and credible financial and

performance reports


Compliance with legislation not reviewed

and monitored


Inadequate policies and procedures


Monitor whether the preparation and review of financial and performance

information is done quarterly

Engage quarterly with the audit committee chairpersons on the

effectiveness of internal controls and the credibility of financial statements.

New


82

West Rand District Municipality and its entity

■ West Rand Development Agency (WRDA) ■ West Rand Distict Municipality (WRDM)


The audit opinions for WRDM and WRDA remained unqualified opinions with findings on compliance with legislation and predetermined objectives. The reasons for the stagnation were mainly material amendments to the financial statements and findings on the usefulness of performance information.

Six key risk areas

There was a mixture of improvement and regression in the key risk areas. The services of consultants were again engaged in connection with financial reporting at WRDM and WRDA at a total cost of R830 897 (2012: R549 799). Our concerns relating to the continued assistance sought from consultants include consultants being appointed for requirements that can be addressed by internal resources. The financial statements of WRDM and WRDA submitted for audit contained material misstatements that were corrected by management. These misstatements occurred because management did not maintain financial disciplines such as the preparation and review of monthly financial statements during the financial period. There were no material findings on financial health, human resource management and supply chain management at WRDM and WRDA due to the implementation of audit recommendations. The quality of the annual performance report has regressed due to targets not being properly defined. The municipality and entity should both focus on improving the measurability of predetermined objectives. Deficiencies in compliance with legislation governing performance reporting and the quality of financial statements need to be improved. The information technology control environment has improved. However, deficiencies were still being addressed in the areas of information technology governance, security management, programme change management, user access management and information technology service continuity.


The drivers of the key controls of leadership, financial and performance management and governance have all regressed.

The following controls should be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

The accounting officer must exercise oversight regarding financial and performance management by the municipality and its entity.

Regular, credible financial and performance reports should be prepared and reviewed by senior officials of the municipality and its entity. Administrative leadership of both the municipality and its entity must monitor compliance with legislation monthly.

Administrative leadership and senior management should address the root causes as follows:

Ensure that the action plan to address control deficiencies is monitored monthly.

Apply consequence management for breach of policies and procedures. Prepare credible financial and performance reports regularly.


The assurance levels of key role players should be improved by implementing the recommendations of the internal audit unit. We met with the mayor only once during the financial year. This interaction had no impact on the audit outcomes. The mayor’s lack of impact on the status and impact of the commitments contributed to our assessment of the assurance provided by the mayor. Although internal audit units and audit committees were in place, they did not provide sufficient assurance in the areas they are required by legislation to audit and report on. The assurance provided through the oversight of the municipal council and the MPAC also needs improvement to improve audit outcomes.

In working towards sustainable clean administration, the municipal leadership should enhance the ability of management to provide first-level assurance (management assurance) about the validity, accuracy and completeness of financial and performance information and compliance with legislation.

Way forward

Material amendments to the financial statements and predetermined objectives findings, especially the findings that relate to the measurability of the targets, are the only barriers to Westrand district municipality attaining a clean audit. The achievement of a clean audit outcome will require rigorous review of the performance information reports and financial statements as a matter of urgency. The executive leadership needs to ensure that complete and accurate financial statements are prepared regularly and personnel responsible for the performance information should be trained.


83


84

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

14% 13%

7%

14%17%

26%

5% 4%7%

20011996 2011

83%206

602

210

481

197

520


20011996 2011

20% 23% 24%

78% 75% 73%

2% 2% 3%

20011996 2011

65% 57% 54%

35% 43% 46%

20011996 2011

17%28% 27%

83%72% 73%

20011996 2011

3.6

3.1

2.7

61% 68%78%

1%1%

38% 31%22%

42 8

13

78 6

86

2001 2011

42%

35%

17%

58%

65%

83%


2%

3%

1%

23%

23%

16%

76%

74%

83%


3%

4%

1%

27%

22%

14%

70%

74%

85%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

99%

2001

1996

2011

2001

1996

2011



MERAFONG

MUNICIPALITY



85

Merafong City Local Municipality




Progress/ no progress made in addressing risk areas


New

Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health






Mayor Provides limited/ no assurance






Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

The mayor will honour her commitment to meet the AGSA and chair of the audit committee quarterly with regard to the effectiveness of internal

controls

MPAC Provides some assuranceGood Concerning Intervention required


Instability or vacancies in key positions


Inadequate policies and procedures for supply chain management.

The mayor will appoint a full time municipal manager to stabilise the administrative leadership

The mayor will insist on monthly progress in implementing action plans developed to address compliance and performance information findings


86

Merafong City Local Municipality ■ Merafong Local Municipality


The audit outcomes have remained unchanged from the previous year because measures implemented to address the audit findings of the previous year were inadequate. The municipality is stagnant, but on its way towards a clean audit. Management still needs to ensure stability in the key positions such as chief financial officer and senior management, and should also ensure that action plans to address audit findings are developed and implemented.

Merafong Local Municipality incurred R28 million in irregular expenditure, which is 6% of the total amount incurred in the province. The majority of this irregular expenditure resulted from non-compliance with supply chain management regulation prescripts.

Six key risk areas

There has been no improvement in the municipality addressing the key risk areas. Management has not implemented action plans to address the previous year’s findings. This resulted in repeat findings for performance reports, supply chain management and information technology. Irregular expenditure amounting to R28,4 million (2012:R11 million) arose from non-compliance to supply chain management regulations. This was regarding obtaining quotations and tax clearance certificates, awards to employees, non-advertisement of bids, non-adherence to preference point system and the non-availability of procurement documents for audit. The non-compliance is mainly due to lack of checks and balances to ensure that supply chain management prescripts are complied with prior to finalising awards to service providers.

The municipality has not improved on the risks relating to information technology controls. Similar findings relating to information technology security and change management had been raised in the previous year. In addition, the financial sustainability of the municipality remains at risk due to the poor collection of outstanding debts.

Human resource management regressed when compared to the previous year. The contracts of senior management expired at year end, with no indication of who would take over, and the manager was acting in the position for over 12 months. This posed a risk to the municipality’s stability.

Management again engaged a consultant to assist with financial reporting due to instability in senior management positions. The cost of the consultant was

R993 101 (2011-12: R100 000). The work of the consultant improved the quality of financial statements as the auditee did not have findings relating to material adjustments. Despite the impact of the consultant on financial statements, the lack of skills transfer to the employees of the municipality remained a challenge.


The stagnation in the key controls was caused by the inadequate implementation of controls to address the previous year’s audit findings, a lack of consequence management, inadequate oversight by the accounting officer and MPAC, and instability in key positions such as accounting officer and chief financial officer. The following controls should be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

Internal control deficiencies identified should be addressed in time.

Regular and credible financial and performance reports should be prepared.

Business processes, policies and procedures for supply chain management should be enhanced.

The political and administrative leadership should address the root causes of poor audit outcomes and inadequate controls as follows:

The municipality’s leadership should ensure that adequate and sufficiently skilled officials are in place and their performance in implementing key control disciplines is being monitored.

Council should address the stagnant audit outcomes and inadequate controls by appointing a capable accounting officer who will oversee the implementation of recommendations and action plans.

The accounting officer should address the root causes of stagnant audit outcomes and inadequate controls by implementing measures to ensure an adequate review of monthly performance and financial reports before submitting these to AGSA.

Management should monitor the implementation of action plans to correct the previous year’s audit findings relating to supply chain management . The audit committee and internal audit should review compliance with supply chain management regulations and advise the mayor and MPAC to take relevant corrective measures.


87


We met with the mayor once during the financial year and this interaction had minimum impact on the audit outcomes. The reason for our assessment is the lack of impact the mayor had on the controls of the auditees, as well as the lack of impact on the commitments previously given. Internal audit should perform compliance checks on supply chain management processes, especially the deviations submitted by management for ratification by council, to prevent repeat findings on supply chain management .

The mayor should improve the assurance levels by ensuring stability at the level of accounting officer and senior management, and by filling all key positions.

Way forward

Supply chain management, predetermined objectives and information technology management are the main challenges to achieving a clean audit status. The achievement of a clean audit outcome will require management to prioritise resolving findings relating to conflicts of interest, improving the reliability of performance reporting, implementing regular in-year reporting and realising the value of information technology as a tool to enable good reporting. The political leadership needs to ensure that the audit committee adequately assesses the status of the municipality control environment.


88

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

10% 9%5%

23%25%

33%

8% 9%

14%

20011996 2011

86%224

142

295

505

362

422


20011996 2011

26% 24% 24%

70% 72% 72%

4% 4% 4%

20011996 2011

51% 51% 51%

49% 49% 49%

20011996 2011

27% 34%25%

73% 66%75%

20011996 2011

3.5

3.2

2.9 75% 70% 75%

1%2%

24% 28% 25%

61 6

67

123

591

2001 2011

18%

20%

14%

82%

80%

86%


7%

2%

3%

5%

13%

10%

88%

85%

87%


3%

4%

2%

10%

17%

10%

87%

79%

88%

98%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

97%

2001

1996

2011

2001

1996

2011



MOGALE

MUNICIPALITY



89

Mogale City Local Municipality





New


Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health





Municipal manager Provides assurance

Mayor Provides some assurance



Municipal council Provides limited/no assurance



Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee




Inadequate business processes and ineffective operational plans

Inadequate risk management activities

The mayor will request monthly feedback on the progress of implementing action plans developed to address compliance findings

The mayor will insist on confirmation that financial statements are prepared by management and reviewed quarterly by the audit committee

The mayor will hold the accounting officer accountable for implementing basic internal control activities

Regular political oversight of the implementation of AGSA recommendations

A business model will be developed to ensure that the cash flow position of the municipality is improved

A compliance checklist will be developed and implemented


90

Mogale City Local Municipality

■ Mogale Local Municipality (MCLM)


The lack of improvement in the audit outcome was caused by non-compliance with legislation, which remains a challenge for the municipality. The overall findings of non-compliance were a result of material adjustments to the financial statements and non-compliance with supply chain management regulations, which resulted in irregular expenditure.

Six key risk areas

Progress has been made in addressing the key risk areas, most notably in the areas of the quality of performance reports and human resource management. The improvement on the quality of performance reports was a result of the municipality honouring its commitment of addressing the previous year’s audit findings. The financial health status has remained stagnant as the municipality continued to experience financial difficulties. This was evident from it not being able to adequately fund other operations due to repayment commitments relating to a loan taken to fund the capital projects. In addition, there is a need to ensure that the turnaround strategy developed by the administrative leadership is adequately implemented to reverse financial distress challenges.

The status of supply chain management remained stagnant when compared to the previous year, as there are still some contraventions of the supply chain management regulations relating to awarding a tender on points that differed from the original bid invitation. Oversight by leadership regarding compliance with supply chain management must be exercised.

The municipality again engaged a consultant to assist with financial reporting to review the annual financial statements. The cost of the consultant was R193 800 (2011-12: R184 809). The work done by the consultant did not help to prevent the material finding on the annual financial statements, as material misstatements were identified.


The improvement in the key controls was caused by improving the leadership controls and addressing governance weaknesses. The following controls should be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

Leadership must exercise oversight regarding financial reporting and ensure that consultants meet the objective for which they have been appointed.

The legal department must monitor compliance with legislation monthly. The chief financial officer must monitor the controls around the preparation of financial

statements.

The chief financial officer and chief operations officer should address the root causes and inadequate controls as follows:

Financial and performance reporting processes should be amended to include a requirement of monthly reports submitted to the chief financial officer and chief operations officer for review.

A checklist of all applicable legislation including supply chain management should be developed and compliance with the checklist should be monitored.

Financial statements and performance reports should be prepared monthly and reviewed by an appropriate level of authority.


The assurance levels should be improved by implementing the recommendations of the internal audit unit and directing the work of the audit committee towards evaluating compliance with legislation.

We met with the mayor two times in the past year and these interactions had some impact on the audit outcomes. The reason for our assessment is the mayor’s will to achieve a clean audit and honouring the commitment to address the previous year’s audit findings on predetermined objectives. This assessment, the impact of the mayor on the controls of the auditee, as well as the status and impact of the commitments contributed to our assessment of the assurance provided by the mayor.

The assurance provided through the oversight of the municipal council and the MPAC should be improved. The council and committee committed to fully implementing the previous year’s commitments to monitor controls over assets. The following new commitments were also made and should address the stagnation challenge at the municipality

Regular political oversight of the implementation of AGSA’s recommendations. Developing a business model that will ensure the improvement of the cash flow position

of the municipality. Developing and implementing a compliance checklist.

Way forward

Supply chain management, especially the findings relating to competitive bidding and material amendments to the financial statements, are the only barriers to Mogale Local Municipality attaining a clean audit. The achievement of a clean audit outcome will require oversight by administrative leadership and consequence management will need to be prioritised as a matter of urgency. The political and executive leadership need to ensure that complete and accurate in-year financial statements are prepared regularly and effective senior management oversight is implemented to prevent supply chain management findings.


91


92

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

9% 10%

4%

20%

25%

32%

8% 7%12%

20011996 2011

85%106

583

128

842

149

286


20011996 2011

25% 25% 25%

70% 71% 70%

5% 4% 5%

20011996 2011

51% 50% 50%

49% 50% 50%

20011996 2011

26%36%

28%

74%64%

72%

20011996 2011

3.6

3.3

3.2

80% 79% 80%

1% 1%

19% 20% 20%

52

30

1

107

185

2001 2011

25%

24%

15%

75%

76%

85%


12%

1%

2%

2%

12%

9%

85%

86%

89%


3%

3%

1%

10%

14%

13%

87%

83%

85%

99%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

98%

2001

1996

2011

2001

1996

2011



RANDFONTEIN

MUNICIPALITY



93

Randfontein Local Municipality




Progress/ no progress made in addressing risk areas


Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health

2012-13


2011-12


2010-11


Senior management Provides limited assurance

Municipal manager Provides limited assurance

Mayor Provides limited assurance






Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee

Finalise the appointment of the municipal manager and chief financial officer



Instability in key positions and key officials lacking competencies

Inadequate business processes and ineffective operational plans

Lack of consequences for poor performance

New

Monitor the progress of preparing the financial statements on a quarterly basis.

Request monthly feedback from the accounting officer on the progress of the

action plan to address external and internal audit findings


94

Randfontein Local Municipality

■ Randfontein Local Municipality (RLM)


The audit opinion has remained unchanged for three years as a qualified opinion with findings on compliance with legislation and predetermined objectives. The reason for the lack of improvement was inadequate monitoring of the action plan to address audit findings and instability in the key positions of chief financial officer and municipal manager, resulting in daily financial disciplines not being implemented.

The qualification in 2012-13 was in relation to the completeness of cash and cash equivalents, which is the same as the previous year. RLM incurred R8,6 million in fruitless and wasteful expenditure, which is 13% of the total amount incurred in the province. This was a result of interest incurred on late payments to creditors due to cash flow challenges.

Six key risk areas

There has been a lack of improvement in addressing the key risk areas. The extent of material findings on human resource management increased due inappropriate systems to measure staff performance and a lack of skills. The services of consultants were again engaged in connection with financial reporting at a cost of R2 140 089 (2012: R2 700 000), but there were still material misstatements in the financial statements submitted for audit. Predetermined objectives reported were not consistent with planned information. Indicators were also not measurable as they were not well defined. Some of the planned targets were not achieved. The status of supply chain management remains unsatisfactory as irregular expenditure amounting to R36 million was reported, which is 7,7% of the total amount incurred in the province. This was primarily a result of the municipality dealing with suppliers in the service of other state institutions and not adhering to supply chain management prescripts. Furthermore, officials were not conversant with supply chain management regulations and this, coupled with the lack of consequences for transgressions, resulted in these findings. The financial health of the municipality is still a concern as it incurred a deficit for the year and was in a net current liability position. Conditional grants were also underspent and revenue management practices were poor. Information technology control deficiencies were still being addressed in the areas of information technology service continuity, information technology security and user access management.


There has been a lack of improvement in the key controls at the municipality. The following controls must be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

Action plans to address external and internal audit findings should be monitored monthly for implementation.

Controls should be implemented over reconciliations, including bank and asset reconciliations, to support the financial statements.

Regular, credible financial and performance reports should be prepared and reviewed.

Leadership should address the root causes of poor audit outcomes and inadequate controls as follows:

Finalise the appointment of the municipal manager and chief financial officer at the municipality as soon as possible.

Request monthly feedback from the accounting officer about the progress made on the action plan to address external and internal audit findings.

A skills transfer from consultants involved in the preparation of financial statements should be ensured.


The assurance levels of key role players should be improved by ensuring stability at the level of accounting officer and senior management. Although engagements were held with the mayor during the financial year, they had minimal impact on the audit outcome as controls did not improve at the municipality. Internal audit, audit committees, municipal council and the MPAC did not provide sufficient assurance in the required areas.

Until root causes are adequately addressed by leadership, audit outcomes will not improve and the objective of clean administration will not be achieved.

Way forward

Findings on supply chain management, predetermined objectives, human resource management and material amendments to the financial statements are the barriers preventing Randfontein from attaining a clean audit outcome. The achievement of a clean audit outcome will require internal controls to be designed around supply chain and human resource management and the preparation and review of in-year financial and performance reporting to be prioritised as a matter of urgency. The political leadership should ensure that consequence management is implemented for poor performers and transgressors.


95


96

Population

Households

Average

household size

Average dwelling

type per nr of

households

Average

household

income

Basic services


EducationLabour

18%

14%

6%9%

15%

26%

2%4% 5%

20011996 2011

64%

114

565

109

799

111

767


20011996 2011

15% 13%

89%65%

44%

5%20%43%

6%

20011996 2011

67%57% 55%

33%43% 45%

20011996 2011

19%32% 30%

81%68% 70%

20011996 2011

3.2

3.0

2.6

40% 43%

93%1% 2%

59% 55%

7%

36 7

54

63 9

45

2001 2011

61%

57%

36%

39%

43%

64%


8%

4%

1%

29%

32%

34%

62%

64%

65%


10%

6%

3%

43%

49%

33%

47%

45%

64%

97%

Higher


Employed Unemployed




0-14 15-64 65+ Male Female

20011996 2011 20011996 2011

2001

1996

2011

99%

2001

1996

2011

2001

1996

2011



WESTONARIA

MUNICIPALITY



97

Westonaria Local Municipality




No progress made in addressing risk areas


Supply chain

management

Quality of

performance

reports

Human resource

management

Quality of

submitted

financial

statements

Information

technology

controls

Financial

health

2012-13Qualified with findings

2011-12Qualified with findings


Senior management Provides limited / no assurance

Municipal manager Provides limited / no assurance

Mayor Provides limited / no assurance

Internal audit Provides limited / no assurance


Municipal council Provides limited / no assurance



Governance

Effective

leadership

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governance

Proper

record keeping

Processing and


Reporting

Compliance

IT

system controls

Risk

management

Internal audit

Audit committee



Instability in key positions

Consequence management not implemented for transgressors

Slow response to implementing external audit recommendations

Set the correct tone at the top and hold the municipal manager accountable for chairing the OPCA and providing regular feedback on implementing action plans

to improve the control environment

Support the accounting officer in ensuring that key vacancies, particularly the chief financial officer position, are filled with suitably qualified personnel and

ensure stability at senior management level

Use support structures such as MPAC and audit committees to drive the

improvement in the control environment of the municipality.

New

Meet with the AGSA and the chair of the audit committee to discuss risk and the

adequacy of internal controls


98

Westonaria Local Municipality

■ Westonaria Local Municipality (WLM)


The audit opinion remained unchanged, with a qualification on assets and cash and cash equivalents as well as findings on compliance with legislation and predetermined objectives. The reason for the stagnation is inadequate monitoring of the action plan to address the previous year’s audit findings, instability in key positions such as chief financial officer within the municipality, and a lack of daily financial disciplines being implemented.

WLM appointed a consultant at a cost of R18 million (2011-12: R9 million). The work done by the consultant on assets and the annual financial statements did not help to prevent the qualification. This was a result of a lack of skills transfer and the inadequate review of the consultant’s work by management. Management did not take ownership of work performed by external consultants on behalf of the municipality.

Six key risk areas

There was no improvement in key risk areas within the municipality. The financial statements submitted for audit contained material misstatements which resulted in the modified audit opinion.

The status of supply chain management remains unsatisfactory as irregular expenditure amounting to R17,2 million was reported, which is 3,4% of the total amount incurred in the province. This arose from non-compliance with supply chain management regulations regarding obtaining quotations and tax clearance certificates; non-adherence to the preference point system; awards to employees of the state; and procurement documents being unavailable for audit. Many of these issues stemmed from capacity constraints, which in turn resulted in inadequate systems and processes to ensure that supply chain management unit functions as intended.

There were audit issues that could have been avoided had simple checks been performed. However, due to capacity constraints this was not adequately done. In addition, the municipality had issues with document archiving and storage space. This posed a challenge for record keeping in the supply chain management unit.

The measurability and verifiability of performance measures on the annual performance reports is still a concern. This was mainly due to lack of appropriate skills to design relevant targets and indicators that would allow the council to accurately measure and report on progress. In addition, the municipality lacked basic business processes and controls to ensure that reported performance is verified for accuracy.

Financial health indicators have not improved compared to the previous year. Significant risks relating to debtors’ collection delays, the high percentage of debt impaired and the creditors’ payment period continue to threaten the financial sustainability of the municipality. The material findings on human resource management related to the lack of a human resource plan within the municipality. The municipality experienced instability in key positions.

The overall status of information technology has remained the same. This was because administrative leadership did not fully understand the importance of organisation-wide information security. Some of the challenges were caused by administrative leadership and senior management delays in finalising the plan and a lack of succession planning. While the municipality had begun initiatives to align the governance of their information technology environment to this framework, progress was minimal as the design phase of individual components required by the framework had not yet been completed.

Progress on information technology controls was hampered by the lack of progress in implementing the information technology governance framework developed by CoGTA. The slow progress in implementing the Bekkersdal Urban Renewal Programme resulted in political unrest in the municipality. This matter, and the above risk areas, impacted negatively on the 2014 clean audit administration target.


There has been a regression across all the drivers of key controls at the municipality. The following controls must be strengthened to create a control environment that supports reliable financial and performance reporting and compliance with legislation:

The mayor should hold the accounting office accountable for improving oversight of financial and performance reporting, compliance and related internal controls.


99

The municipal manager should correct the deficiencies in the basic control environment by reviewing the effectiveness of the daily and monthly processing and reconciliation controls.

The mayor must lead by example and demand monthly feedback on the progress of plans to address external and internal audit findings.

Leadership and management should address the root causes as follows:

The mayor must hold the municipal manager accountable to ensure that the vacancy of the chief financial officer and other key positions are filled and remain stable over the financial period.

The collapse in the basic controls within the municipality should be addressed by elevating the role and effectiveness of MPAC, the audit committee and internal audit.

The mayor must set the correct tone by not tolerating non-adherence to policies and procedures.


The assurance levels should be improved by ensuring stability at the level of senior management and fully functional internal audit unit.

Previous interactions with the mayor had no impact on the audit outcome. The mayor’s lack of impact on the controls of the municipality, as well as the slow response in honouring commitments, contributed to our assessment of poor assurance provided by the mayor.

Inadequate oversight by the audit committee, internal audit and MPAC contributed to the stagnation of the audit outcomes. Oversight should be improved to attain clean administration

Way forward

Supply chain management, material amendments to the financial statements and predetermined objectives are hindering the Westonaria Local Municipality from progressing towards a clean audit. This is especially true of findings relating to obtaining quotations, adherence to the preferential points system as well as the usefulness and reliability of performance information. Achieveing a clean audit outcome will require stability in the position of chief financial officer, monitoring compliance and prioritising regular in-year financial and performance as a matter of urgency. The political and executive leadership need to ensure that the audit committee and MPAC are functional and report regularly on the progress of the municipality. The

accounting officer should investigate and implement consequence management to prevent recurring supply chain management findings.


100


101

ANNEXURES


102

Annexure 1 Auditees' audit outcomes, areas qualified, findings on predetermined objectives, non-compliance and specific focus areas


103


104

Annexure 2 Assessment of auditees’ key controls at the time of the audit

Auditee

F P C F P C F P C F P C F P C F P C F P C F P C F P C F P C F P C F P C F P F P C F P C F P C F P CMetropolitan MunicipalitiesCity of Johannesburg Metro h h h 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 h h h 2 2 3 2 2 3 2 3 3 2 2 3 2 2 n n n 2 2 2 3 3 3 2 2 2Ekurhuleni Metro n i n 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 i i n 3 2 2 2 2 2 3 3 3 2 3 3 3 3 h h h 1 1 1 2 2 2 1 1 1Tshw ane Metropolitan Municipality i i i 1 1 1 3 2 2 2 2 2 1 1 1 2 2 2 1 1 2 i i n 2 2 1 2 1 2 3 2 2 3 2 3 2 1 n n n 1 1 1 2 2 2 1 1 1District MunicipalitiesSedibeng District Municipality h h h 1 1 1 1 1 1 2 2 1 1 1 1 1 2 2 2 2 2 h h h 1 1 1 1 1 1 1 1 1 1 1 1 2 2 n i h 2 2 2 1 2 1 1 2 1West Rand District h n h 1 1 1 2 2 2 1 1 1 2 1 2 1 1 2 2 1 1 h h h 2 1 1 3 1 1 3 1 2 2 2 2 2 1 h n n 1 1 1 2 2 2 2 2 2Local MunicipalitiesEmfuleni Local Municipality h h h 1 1 1 3 3 3 1 1 1 1 1 1 2 3 2 2 2 2 n n n 2 2 2 2 3 3 3 3 3 3 3 3 3 3 h h h 1 1 1 1 1 1 1 1 1Lesedi n n n 2 2 2 2 2 2 2 2 2 2 2 2 2 3 2 2 2 2 n i n 2 2 2 2 3 2 2 3 2 2 2 2 3 2 h h h 2 2 2 2 2 2 2 2 2Merafong City i i i 1 1 1 2 2 2 2 2 2 2 2 1 2 1 1 2 1 1 n i i 2 2 2 2 1 1 2 3 3 2 2 3 2 1 i n i 3 1 1 2 2 2 2 1 3Midvaal Local Municipality n n i 1 3 1 1 3 2 2 3 2 1 3 1 2 2 2 2 3 2 i i n 1 3 2 2 2 2 2 3 2 2 3 2 3 3 i n n 3 3 1 2 3 2 2 3 2Mogale City h h h 2 1 2 2 2 2 1 2 1 2 1 1 1 2 2 2 1 1 h h h 1 2 1 2 1 1 2 2 2 2 1 2 2 1 h h h 2 2 2 1 1 2 1 1 1Randfontein Local Municipality h h h 1 1 1 3 3 3 3 3 3 2 2 2 2 2 2 2 2 2 i n n 2 2 2 3 3 3 3 3 3 3 3 3 2 2 h n n 2 2 2 3 3 3 3 3 3Westonaria Local Municipality n n n 1 1 1 3 3 3 3 3 3 3 3 3 3 3 3 2 3 3 3 3 3 3 3 3 3 3 3 2 3 3 3 3 h h h 3 3 3 2 3 3 3 3 3Municipal EntitiesBrakpan Bus Company (Pty) Ltd h h n 2 2 2 1 1 2 2 2 1 2 1 1 2 2 2 2 2 2 h h n 1 1 1 1 1 1 1 1 2 2 2 3 2 2 h h h 2 1 1 2 2 2 1 1 1City Pow er Johannesburg (Soc) Ltd n n n 1 1 2 3 2 3 3 3 3 1 1 1 2 1 2 2 1 1 i i i 3 3 3 3 1 2 3 3 3 3 2 3 3 1 n i n 1 1 1 2 2 2 2 2 2

East Rand Water Care Company NPC h i h 2 2 2 2 3 3 1 1 1 1 1 2 2 2 2 2 2 2 n n n 3 2 3 1 1 1 3 2 2 2 1 3 2 2 h h h 1 1 1 2 2 2 1 1 1

Ekurhuleni Development Company SOC Ltd i h n 2 2 2 3 1 3 2 1 2 1 1 1 2 1 2 2 2 2 h h h 2 2 2 1 1 1 2 2 2 2 2 3 1 1 h h h 1 1 1 2 2 2 1 1 1

Germiston Phase II Housing Company SOC Ltd h n h 2 2 2 3 2 3 1 1 1 1 1 1 2 1 2 2 2 2 h h h 2 2 2 1 1 1 2 2 2 3 2 3 2 2 h h h 1 1 1 2 2 2 1 1 1

Housing Company Tshw ane n h h 1 1 1 2 2 2 1 1 1 2 3 2 2 3 3 1 1 1 h h h 1 1 1 2 2 2 2 2 2 2 2 2 2 1 h h h 3 3 1 2 2 2 1 1 1Joburg Property Company h h h 1 1 1 2 1 1 1 1 1 1 1 1 1 1 1 2 1 1 h h h 1 1 1 1 1 2 2 1 1 2 1 1 1 1 n n n 1 1 1 1 1 1 1 1 1Johannesburg City Parks i h i 1 1 1 2 1 2 2 1 2 1 1 2 1 1 1 2 1 1 i i i 1 1 1 2 1 1 2 1 1 2 1 2 2 1 n n n 1 1 1 1 1 1 1 1 1Joburg City Theatres (SOC) Ltd h h h 1 1 1 2 2 2 1 1 1 1 2 2 1 1 1 1 1 1 h h h 2 1 2 1 1 1 2 2 2 2 2 2 1 1 n n n 1 1 1 2 2 2 1 1 1Johannesburg Development Agency (Soc) Ltd i n n 2 2 2 3 3 2 1 1 1 2 1 1 2 2 2 2 2 2 i i n 2 2 2 2 1 1 3 3 2 2 2 2 3 2 n n n 1 1 1 1 1 1 1 1 1

Johannesburg Fresh Produce Market h h h 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 n h n 1 1 1 1 1 1 2 1 1 1 1 2 2 1 h h h 1 1 1 1 1 1 1 1 1

Johannesburg Metropolitan Bus Services n n n 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 n n n 2 2 2 2 2 2 2 2 1 2 2 2 3 1 n n n 1 1 1 2 2 2 2 2 2

Johannesburg Roads Agency h h h 1 1 1 2 1 3 2 1 1 1 1 1 1 1 1 2 2 2 h h h 2 1 2 1 1 1 2 1 3 1 1 2 2 2 h h h 1 1 1 2 1 1 1 1 1Johannesburg Social Housing Company n n n 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 i n n 1 1 2 1 1 1 2 1 1 2 1 1 2 1 n n n 1 1 1 1 1 1 1 1 1

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Auditee

F P C F P C F P C F P C F P C F P C F P C F P C F P C F P C F P C F P C F P F P C F P C F P C F P CMunicipal Entities (continued)Johannesburg Tourism Company i i i 1 1 1 2 2 2 1 1 1 1 1 1 2 1 1 2 2 2 i i i 1 1 1 2 2 1 2 2 1 2 2 1 2 2 n n n 1 1 1 2 2 2 1 1 1Johannesburg Water h n n 1 1 1 2 1 1 1 1 1 1 1 1 2 1 1 1 1 1 h i i 2 2 2 2 2 2 3 2 2 1 2 3 2 1 h n h 1 1 1 1 1 1 1 1 1Johannesburg Zoo h h h 1 1 1 2 1 2 2 2 2 1 1 2 2 1 2 1 1 1 h h h 1 1 1 2 1 2 2 1 2 2 1 2 1 1 n n n 1 1 1 1 1 1 1 1 1Lethabong Housing Institute NPC h h h 2 2 2 3 1 3 1 1 1 1 1 1 2 2 2 2 2 2 n h h 1 1 1 1 1 1 2 2 1 3 2 3 2 2 h h h 1 1 1 1 1 1 1 1 1Metropolitan Trading Company h h h 1 1 1 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 h h h 2 1 2 1 1 1 2 1 1 2 1 1 1 1 h h h 1 1 1 2 2 2 1 1 1Pharoe Park Housing Company SOC Ltd i i h 2 2 2 3 2 3 1 1 1 1 1 1 2 1 2 2 2 2 h i i 2 1 2 1 1 1 2 2 2 3 2 3 2 2 h h h 1 1 1 2 2 2 1 1 1

Pikitup Johannesburg h n h 1 1 1 1 2 2 1 1 2 1 1 1 1 2 2 1 1 1 i n n 1 1 1 2 2 1 2 2 1 1 2 3 2 1 n n n 1 1 1 1 1 1 1 1 1Roodepoort Civic Theatre h h n 2 2 2 1 1 2 1 1 1 2 2 2 2 2 2 1 1 1 n h n 2 2 2 2 2 2 2 1 1 1 1 2 1 1 h h h 2 2 2 2 2 2 1 1 1Sandspruit Works Association h h h 1 1 1 1 1 1 1 1 1 1 2 1 1 1 1 1 1 1 h h h 2 1 1 2 1 1 2 1 1 2 2 2 2 2 h h h 1 1 1 2 2 2 1 1 1Tshw ane Economic Development Agency (TEDA) n n n 1 1 1 1 3 3 2 1 1 1 2 2 1 1 1 1 1 1 n n n 1 1 1 1 1 1 1 3 3 1 1 1 1 1 n n n 1 1 1 2 2 2 1 1 1

West Rand Development Agency h h h 2 2 2 2 2 2 3 3 3 1 1 1 2 2 2 2 2 2 h h h 2 2 2 2 2 2 2 2 2 2 2 2 2 2 h h h 2 2 2 2 3 3 2 2 2

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Annexure 3 Comparison of five-year audit outcome

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Financial AuditsMetropolitan Municipalities

649 City o f Johannesburg M etro GP Unqualified with findings 1 1 Qualified 1 1 Qualified 1 1 Qualified 1 0Unqualified with no

findings0 0

650 Ekurhuleni M etro GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1

807 Tshwane M etropolitan M unicipality GP Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 1 1 Qualified 1 1

District Municipalities

659 Sedibeng District M unicipality GPUnqualified with no

findings0 0 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1

660 West Rand District GP Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 1 1

Local Municipalities651 Emfuleni Local M unicipality GP Unqualified with findings 1 1 Unqualified with findings 1 1 Qualified 1 1 Qualified 1 1 Qualified 1 0

653 Lesedi GP Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 0

821 M erafong City GP Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Qualified 1 1

655 M idvaal Local M unicipality GP Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 1 1

656 M ogale City GP Unqualified with findings 0 1 Unqualified with findings 1 1 Qualified 1 1 Qualified 1 1 Unqualified with findings 0 1

658 Randfontein Local M unicipality GP Qualified 1 1 Qualified 1 1 Qualified 1 1 Unqualified with findings 0 1 Unqualified with findings 1 1

661 Westonaria Local M unicipality GP Qualified 1 1 Qualified 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1

Municipal Entities

662 Brakpan Bus Company (Pty) Ltd GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1Unqualified with no

findings0 0 Unqualified with findings 0 1

664 City Power Johannesburg (Soc) Ltd GP Unqualified with findings 0 1 Qualified 0 1 Qualified 0 1 Qualified 0 1 Unqualified with findings 0 1

668 East Rand Water Care Company NPC GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1Unqualified with no


666Ekurhuleni Development Company SOC Ltd

GP Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 1 1

681Germiston Phase II Housing Company SOC Ltd


804 Housing Company Tshwane GP Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Disclaimer 1 1 Disclaimer 1 1

671 Joburg Property Company GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 1 1Unqualified with no


663 Johannesburg City Parks GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 1 0 Unqualified with findings 0 1 Unqualified with findings 0 1

Findings

Audit outcome 2011-12 Audit outcome 2008-09

FindingsFindings

Audit outcome 2010-11

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665 Joburg City Theatres (SOC) Ltd GP Unqualified with findings 0 1 Unqualified with findings 0 1Unqualified with no

findings 0 0Unqualified with no

findings 0 0 Unqualified with findings 0 1

669 Johannesburg Development Agency (Soc) Ltd


670 Johannesburg Fresh Produce M arket GPUnqualified with no


findings 0 0 Unqualified with findings 1 1 Unqualified with findings 1 1Unqualified with no

findings 0 0

678 Johannesburg M etropolitan Bus Services GP Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1

672 Johannesburg Roads Agency GP Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1

673 Johannesburg Social Housing Company GPUnqualified with no





674 Johannesburg Tourism Company GP Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1

675 Johannesburg Water GP Unqualified with findings 0 1 Qualified 0 1 Qualified 0 1 Qualified 0 0 Unqualified with findings 1 0

676 Johannesburg Zoo GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 0 1

677 Lethabong Housing Institute NPC GP Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 1 0Unqualified with no


679 M etropolitan Trading Company GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 0 1

680 Pharoe Park Housing Company SOC Ltd GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 1 1

682 Pikitup Johannesburg GP Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 0 1

683 Roodepoort Civic Theatre GP Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with no findings 0 0 Unqualified with findings 0 1

806 Sandspruit Works Association GP Unqualified with findings 0 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 1 1 Unqualified with findings 0 1

1255Tshwane Economic Development Agency (TEDA) GP Unqualified with findings 0 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Qualified 0 1 Qualified 0 1

1211 West Rand Development Agency GP Unqualified with findings 1 1 Unqualified with findings 0 1 Unqualified with findings 0 1 Qualified 1 1 New auditee 0 0

Findings Findings Findings Findings Findings

Audit outcome 2012-13 Audit outcome 2011-12 Audit outcome 2010-11 Audit outcome 2009-10 Audit outcome 2008-09


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GLOSSARY OF TERMS, ACRONYMS AND ABBREVIATIONS


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Glossary of terms of key terminology used in this report

Adverse audit opinion (on financial statements) The financial statements contain misstatements (see ‘misstatement’) that are not confined to specific amounts, or the misstatements represent a substantial portion of the financial statements.

Asset (in financial statements) Any item belonging to the auditee, including property, infrastructure, equipment, cash as well as debt due to the auditee.

Assurance / assurance provider As used in this report, a positive declaration that is intended to give confidence in the credibility of financial and performance reports tabled by auditees as well as confidence in the extent to which auditees have adhered to applicable legislation. Through the audit report, we provide assurance on the credibility of auditees’ financial and performance information as well as their compliance with legislation. There are role players in local government, other than the external auditors, that are also required to contribute to assurance and confidence by ensuring that adequate internal controls are implemented to achieve auditees’ financial, service delivery and compliance objectives. Such assurance providers include senior auditee officials, various committees (for example, municipal public accounts, performance and audit committees) and internal audit units. Other role players that should provide assurance further include oversight structures and coordinating or monitoring departments (which are defined elsewhere in this glossary).

Capital budget The estimated amount planned to be spent by auditees on capital items in a particular financial period; for example, fixed assets such as property, infrastructure and equipment with long expected lives and that are required to provide services, produce income or support operations.

Cash flow (in financial statements) The flow of money from operations: incoming funds are revenue (cash inflow) and outgoing funds are expenses (cash outflow).

Clean audit The financial statements receive a financially unqualified audit opinion and there are no material findings on the quality of the annual performance report or non-compliance with legislation.


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Commitments from role players Initiatives and courses of action communicated to us by role players in local government aimed at improving the audit outcomes.

Conditional grants Money transferred from national government to auditees, subject to certain services being delivered or on compliance with specified requirements.

Consolidated financial statements Financial statements that reflect the combined financial position and results of a municipality and those of the municipal entities under its control.

Creditors Persons, companies or organisations that the auditee owes money to for goods and services procured from them.

Current assets (in financial statements) These assets are made up of cash and other assets, such as inventory or debt for credit extended, which will be traded, used or converted into cash in less than 12 months. All other assets are classified as non-current, and typically include property, plant and equipment as well as long-term investments.

Disclaimer of opinion (on financial statements) The auditee provided insufficient evidence in the form of documentation on which we could base an audit opinion. The lack of sufficient evidence is not confined to specific amounts, or represents a substantial portion of the information contained in the financial statements.

Financial and performance management (as one of the drivers of internal control) The performance of internal control and monitoring-related tasks by management and other employees to achieve the financial management, reporting and service delivery objectives of the auditee. These controls include the basic daily and monthly controls for processing and reconciling transactions, preparing regular and credible financial and performance reports as well as reviewing and monitoring compliance with legislation.

Financially unqualified audit opinion (on financial statements) The financial statements contain no material misstatements (see ‘material misstatement’). Unless we express a clean audit opinion, findings have been raised on either the annual performance report or non-compliance with legislation, or both these aspects.

Fruitless and wasteful expenditure Expenditure that was made in vain and could have been avoided had reasonable care been taken. This includes penalties and interest on the


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late payment of creditors or statutory obligations as well as payments made for services not utilised or goods not received.

Going concern The presumption that an auditee will continue to operate in the near future, and will not go out of business and liquidate its assets. For the going concern presumption to be reasonable, the auditee must have the capacity and prospect to raise enough financial resources to stay operational.

Governance (as one of the drivers of internal control) The governance structures (audit committees) and processes (internal audit and risk management) of an auditee.

Human resource (HR) management The management of an auditee’s employees, or human resources, which involves adequate and sufficiently skilled people as well as the adequate management of their performance and productivity.

Information technology (IT) The computer systems used for capturing and reporting financial and non-financial transactions.

IT controls Computer-related controls ensure the confidentiality, integrity and availability of state information, enable service delivery and promote national security.

IT governance The leadership, organisational structures and processes which ensure that the auditee’s IT resources will sustain its strategies and objectives.

IT security management The controls preventing unauthorised access to auditee networks, operating systems and application systems that generate financial information.

IT service continuity The processes managing the availability of hardware, system software, application software and data to enable auditees to recover or re-establish information system services in the event of a disaster.

IT user access management The procedures through which auditees ensure that only valid, authorised users are allowed segregated access to initiate and approve transactions on the information systems.

Internal control / key controls The process designed and implemented by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the auditee’s objectives with regard to the reliability of financial reporting, the effectiveness and efficiency of operations, and compliance with applicable legislation.


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It consists of all the policies and procedures implemented by auditee management to assist in achieving the orderly and efficient conduct of business, including adhering to policies, safeguarding assets, preventing and detecting fraud and error, ensuring the accuracy and completeness of accounting records, and timeously preparing reliable financial and service delivery information.

Irregular expenditure Expenditure incurred without complying with applicable legislation.

Key drivers of internal control The three components of internal control that should be addressed to improve audit outcomes, namely leadership, financial and performance management, and governance (which are defined elsewhere in this glossary.)

Leadership (as one of the drivers of internal control) The administrative leaders of an auditee, such as municipal managers and senior management. It can also refer to the political leadership (including the mayor and the council) or the leadership in the province (such as the premier).

Material finding (from the audit) An audit finding on the quality of the annual performance report or non-compliance with legislation that is significant enough in terms of either its amount or its nature, or both these aspects, to be reported in the audit report.

Material misstatement (in financial statements or annual performance reports) An error or omission that is significant enough to influence the opinions or decisions of users of the reported information. Materiality is considered in terms of either its rand value or the nature and cause of the misstatement, or both these aspects.

Misstatement (in financial statements or annual performance reports) Incorrect or omitted information in the financial statements or annual performance report.

Net current liability The amount by which the sum of all money owed by an auditee and due within one year exceeds the amounts due to the auditee within the same year.

Net deficit (incurred by auditee) The amount by which an auditee’s spending exceeds its income during a period or financial year.


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Operational budget / operating budget A short-term budget, usually prepared annually, based on estimates of income and expenses associated with the auditee’s operations, such as service delivery costs, administration and salaries.

Oversight structures as well as coordinating and monitoring departments Oversight structures consist of the provincial legislatures, the portfolio committees on local government and the National Council of Provinces. Coordinating or monitoring departments include the Department of Performance Monitoring and Evaluation, the National Treasury and provincial treasuries, the national and provincial departments of cooperative governance as well as the offices of the premiers.

Property, infrastructure and equipment (in financial statements) Assets that physically exist and are expected to be used for more than one year, including land, buildings, leasehold improvements, equipment, furniture, fixtures and vehicles.

Qualified audit opinion (on financial statements) The financial statements contain material misstatements in specific amounts, or there is insufficient evidence for us to conclude that specific amounts included in the financial statements are not materially misstated.

Receivables / debtors (in financial statements) Money owed to the auditee by persons, companies or organisations that have procured goods or services from the auditee.

Reconciliation (of accounting records) The process of matching one set of data to another; for example, the bank statement to the cheque register, or the accounts payable journal to the general ledger.

Root causes (of audit outcomes) The underlying causes or drivers of audit findings; in other words, why the problem occurred. Addressing the root cause helps ensure that the actions address the real issue, thus preventing or reducing the incidents of recurrence, rather than simply providing a one-time or short-term solution.

Supply chain management (SCM) Procuring goods and services through a tender or quotation process and monitoring the quality and timeliness of the goods and services provided.

Unauthorised expenditure Expenditure that was in excess of the amount budgeted or allocated by government to the auditee, or that was not incurred in accordance with the purpose for which it was intended.


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Acronyms and abbreviations

AFS annual financial statements

AG auditor-general (the person)

AGSA Auditor-General of South Africa (the institution)

APAC Association of Public Accounts Committees

APP annual performance plan

BCP business continuity plan

CEO chief executive officer

CFO chief financial officer

CGICTPF corporate governance of information and communication technology policy framework

CoGTA Department of Cooperative Governance and Traditional Affairs

CWP community works programme

DBSA Development Bank of Southern Africa

DM district municipality

DoRA Division of Revenue Act

DPME Department of Performance Monitoring and Evaluation

DPSA Department of Public Service and Administration

DRP disaster recovery plan

FMPPI framework for managing programme performance information

GITO government information technology officer

GRAP Generally Recognised Accounting Practice

HR human resources

ICT information and communication technology


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IDP integrated development plan

IGR inter-governmental relations

IT information technology

LGTAS local government turnaround strategy

LM local municipality

MAT municipal assessment tool

ME municipal entity

MEC member of the executive council

metro metropolitan municipality

MFMA Municipal Finance Management Act, 2003 (Act No. 56 of 2003)

MIG municipal infrastructure grant

MIS management information system

MISA Municipal Infrastructure Support Agent

MPAC municipal public accounts committee

MPAT management performance assessment tool

MSA Municipal Systems Act, 2000 (Act No. 32 of 2000)

MSIG municipal systems improvement grant

MTEF medium-term expenditure framework

MTREF medium-term revenue and expenditure framework

NCOP National Council of Provinces

OCA Operation clean audit

PAC public accounts committee

PDO predetermined objective


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PFMA Public Finance Management Act, 1999 (Act No. 1 of 1999)

PMS performance management system

Rxx b billions of rand

Rxx k thousands of rand

Rxx m millions of rand

SALGA South African Local Government Association

SCM supply chain management

SCOA standard chart of accounts

SDBIP service delivery and budget implementation plan

SLA service level agreement


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