general report on the audit outcomes of local …...general report on the audit outcomes of local...

2011-12

General report on the audit outcomes oflocal government GautenG

The Auditor-General has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy

by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

Our reputation promise

The information and insights presented in this fl agship publication of my offi ce are aimed at empowering oversight structures and local government and provincial leaders to focus on those issues that will result in reliable fi nancial statements, credible reporting on service delivery and compliance with laws and regulations. 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

AUDITOR-GENERAL: TERENCE NOMBEMBE

General report on the audit outcomes of Local Government GAUTENG 2011-12

Oew

2

General report on the audit outcomes of LOCAL GOVERNMENT GAUTENG | 2011-12

Pages 7-10

No improvement in reporting on predetermined objectives – Section 2.3.1

Credibility and reliability of submitted fi nancial statements are still not at the appropriate

level – Section 2.2.2

Ninety-fi ve per cent of auditees had fi ndings

on non-compliance with laws and regulations –

Section 2.4.1

Usefulness and reliability of reported performance information remained a

challenge – Section 2.3.2

Signifi cant number of previously qualifi ed auditees unable to successfully address

qualifi cations – Section 2.2.3

Foreword

The provincial audit outcomes remained stagnant – Section

2.1.1

One entity sustained clean audit outcome

and one improved to clean audit

outcome – Section 2.1.1

3


Lack of progress in addressing critical

information technology issues – Section 3.4

The level of assurance provided by key role

players not adequate – Section 4.2

Slow progress in addressing previous prior year pervasive root causes – Section

3.1

Commitments and initiatives of key role players in response to stagnant audit outcomes – Section 4.4

Quality of fi nancial statements and procurement and contract management fi ndings are cause for concern – Section 2.3.2

Signifi cant increase in awards made to employees, councillors, family members and other state

offi cials – Section 2.4.3.2

Unauthorised, irregular as well as fruitless and wasteful expenditure almost doubled –

Section 2.4.4

Overall regression in the drivers of audit outcomes – Section

3.1

Analysis of key fi nancial

health indicators – Section 5.2


3.1 Summary of root causes of poor audit outcomes ............................84

3.2 Signifi cant defi ciencies in auditees’ systems of internal control ........................................89

3.3 Human resource management ......97

3.4 Information technology management as a key driver of audit outcomes ......................106

3.5 Audit committees and internal audit units .................................126

2.1 Summary of audit outcomes ........... 28

2.2 Findings arising from the audit of fi nancial statements .................... 42

2.3 Findings arising from the audit of reporting on predetermined objectives ...................................... 52

2.4 Findings arising from the audit of compliance with laws and regulations .................................... 57

SECTION 1EXECUTIVE SUMMARY ..........12

SECTION 2OVERVIEW OF AUDIT OUTCOMES ..........................28

SECTION 3ROOT CAUSES OF AUDIT OUTCOMES ..........................84

FOREWORD ...........7

TABLE OF CONTENTS


4.1 Assurance providers in local government ......................130

4.2 Oversight by municipal public accounts committees .................139

4.3 Interactions with mayors ............140

4.4 Initiatives and commitments of key role players to improve audit outcomes .........................141

4.5 Auditor-General of South Africa’s initiatives to encourage clean audits .............151

SECTION 4INITIATIVES AND IMPACT OF KEY ROLE PLAYERS ON AUDIT OUTCOMES .........130

5.1 Going concern ............................. 154

5.2 Financial health indicators ............ 155

SECTION 5FINANCIAL HEALTH OF LOCAL GOVERNEMENT.....................154

GLOSSARY 168 ACRONYMS AND ABBREVIATIONS 172ANNEXURES 174

6


CLEAN AUDITS 2011-12

MUNICIPAL ENTITIESNew: Johannesburg Fresh Produce Market

Johannesburg Social Housing Company

7

FOREWORD

8


MANAGEMENT AND LEADERSHIP INTERNAL INDEPENDENT ASSURANCE AND OVERSIGHT EXTERNAL INDEPENDENT ASSURANCE AND OVERSIGHT

Unchanged Regressed

Provides assurance Provides some assurance Not establishedProvides limited/no assurance

Unqualified with no findings

Unqualified with findings

Qualified/adverse/disclaimed with findings

Good Causing concern Intervention required

Good Causing concern Intervention required

Human resource

management

Information technologycontrols

Financialhealth

Supply chain management

Quality of performance

reports

Quality of submitted financial

statements

A root cause at of auditees77%

Key positions vacant or key officialslacking appropriate competencies

Lack of consequences for poorperformance and transgressions


Slow response by political leadership in addressingthe root causes of poor audit outcomes


26%

55%

2009-10

21%

74%

5% 19%5%

2010-11

16%

79%

2011-12

19%

46%

35%

25%

42%

33%

12%

44%

44%

Leadership Financial and performance management

Governance

43%45%

2010-112011-12 2010-112011-12 2010-112011-1213%

42%

18%

39%

24%

15%

61%

Seniormanagement

Municipalmanagement Mayor Internal

auditAudit

committee

Treasury,cooperative governancedepartment,

premier’s office

CouncilMunicipal

public accountscommittee

Legislature and portfoliocommittee

22%

53%

25%

11%

61%

28%

22%

67%

11%

17%

16%

9%

72%

19%

78%

19%

100%

24%

68%

8%

67% 100%

3%

9


It is with pleasure that I present to the Gauteng Provincial Legislature

and municipal councils my 2011-12 general report summarising the

audit outcomes of local government for the fi nancial year ended

30 June 2012.

Most of the audit outcomes remained unchanged, with the exception

of the two auditees that received clean audit opinions. The majority

of auditees (79%) received fi nancially unqualifi ed audit opinions

with reportable matters on their performance information, non-

compliance with legislation, or both these aspects. Material non-

compliance fi ndings were reported at 36 auditees (95%), a regression

from the 33 (87%) in the previous year. Those auditees that achieved

clean audits and improved audit outcomes were infl uenced by their

leadership that successfully implemented and maintained good

internal control environments.

The lack of progress to improve audit outcomes was infl uenced

by the regression in the leadership and fi nancial and performance

management drivers of key controls, and the fact that the

fundamentals of key controls are still not fully embedded as the norm.

Concerns remain regarding the increased number of defi ciencies

that are not being addressed. This highlights the lack of progress in

implementing and sustaining the key internal controls required to

ensure the credibility of fi nancial and performance information and

support improvements towards clean administration.

The audit results of local government in Gauteng can be attributed

to the lack of monthly internal processes to verify data and support

reliable fi nancial and performance reporting. This is refl ected in 79% of

the fi nancial statements submitted for auditing that required material

adjustments, with 63% of the auditees receiving unqualifi ed audit

opinions only after relying on the audit process to correct material

misstatements. This was despite the use of consultants to prepare

fi nancial statements, at a cost of R16 million.

Supply chain management fi ndings were prevalent at 71% of the

auditees, due to the leadership not eff ectively implementing action

plans, including compliance checklists and deviation frameworks,

as well as internal audit units and audit committees not providing

adequate assurance on compliance with supply chain management

legislation. The outcome of a weak control environment is refl ected

in the upward trend in unauthorised, irregular as well as fruitless and

wasteful expenditure from R1,500 million in the previous year to

R2,715 million in the current year.

FOREWORD

We will monitor and assess political

leadership’s accountability for control and

oversight of municipalities through the premier’s

coordinating forum. In addition,

we will have a standard agenda item at premier’s

coordinating forum that will evaluate progress made by the province

in the drive towards clean

administration – Premier Nomvula

Mokonyane

10


While we report fi ndings on the usefulness and reliability of performance

information at 50% of the auditees this year, compared to 46% in the previous

year, it is encouraging that half of the auditees in the province have mastered the

basic discipline of reporting on predetermined objectives. These practices need

to be embraced and replicated across local government. There has been minimal

movement in the status of information technology controls across local government,

as the leadership does not view information technology as a strategic enabler that

will improve service delivery and support clean administration.

In order to address the stagnant audit outcomes, the leadership and those charged

with governance must design, implement and maintain internal control disciplines

that will ensure reliable fi nancial reporting, guarantee compliance with laws and

regulations, and provide reasonable assurance about the achievement of service

delivery objectives. This, in turn, should lead to the implementation of eff ective

processes that will hold managers accountable for their actions, or lack thereof,

in discharging their responsibilities and utilising the public resources entrusted to

them.

A robust and coordinated eff ort to deal decisively with challenges faced by local

government is required provincially from the Department of Local Government,

in particular the operation clean audit committee, and the Gauteng Provincial

Treasury and nationally from the National Treasury, the Department of Cooperative

Governance and Traditional Aff airs and the South African Local Government

Association. This eff ort must be supported by fully resourced, capacitated and trained

oversight structures, such as councils and municipal public accounts committees,

that must eff ectively discharge their oversight responsibilities.

In response to the audit outcomes and to build momentum in the drive towards

clean administration, the political leaders have committed to reinforce an appropriate

leadership tone that supports a control environment conducive to the enforcement

of consequences and compliance with laws and regulations. The leadership also

committed to take ownership of the preparation of key control assessments and to

meet us each quarter to monitor the implementation and eff ectiveness of action

plans to address key control defi ciencies. The legislature committed to engage

with the speaker’s forum to address the reliability and credibility of fi nancial and

performance information, and to ensure that the portfolio committees on fi nance

and local government monitor and evaluate the reports of the coordinating

departments and refer concerns to the provincial public accounts committee.

The provincial executives committed to monitor and assess the accountability

of local government’s political leadership relating to the control and oversight of

municipalities through the premier’s coordinating forum and to review and improve

the eff ectiveness of the coordinating departments.

We remain fi rmly committed to making a positive contribution to the challenges of

clean administration in the province and we will continue to encourage meaningful

stakeholder engagements between the auditees, the oversight authorities and

ourselves.

I wish to thank the audit teams from my offi ce and the audit fi rms that assisted

with the audit of local government for their diligent eff orts towards fulfi lling our

constitutional mandate and the manner in which they continue to strengthen

cooperation with the leadership of the province.

Auditor-General of South Africa

Pretoria

11

SECTION 1EXECUTIVE SUMMARY

12


Local government in the Gauteng province comprises three metropolitan

municipalities, two district municipalities, seven local municipalities and

26 municipal entities. A total of 37 (97%) of the 38 auditees in the province

had submitted fi nancial statements by 31 August 2012, or by 30 September

2012 in the case of consolidated fi nancial statements. At the date of this

report, all 38 audits have been completed and tabled in the councils as

legislated.

The table below summarises the signifi cant aspects of the 2011-12 audit

outcomes of the Gauteng local government and root causes.

SECTION 1 Executive summary

Table 1

Signifi cant aspects of the audit outcomes and root causes

Aspect IndicatorKey outcomes

and trendsGood Concerning Poor

Overall audit outcomes

Stagnation in audit outcomes of the province

Overall analysisThe audit outcomes show a year-on-year

stagnation, with 95% (2011: 95%) of auditees

receiving either qualifi ed audit opinions with other

matters or fi nancially unqualifi ed audit opinions

with other matters. In total, 79% of the auditees

fall into the latter category. Consistent with the

prior year, two (5%) municipal entities received

the desired audit outcome of unqualifi ed with no

fi ndings, also known as a clean audit opinion.

It is concerning that over a number of years

no municipality has received a clean audit

opinion. It is clear that achieving the 2014 clean

administration target remains a challenge for

the province.

Metropolitan municipalitiesThe audit outcomes remained unchanged

with the Ekurhuleni Metropolitan Municipality

(Ekurhuleni Metro) and City of Tshwane sustaining

their unqualifi ed audit opinions with other

matters. Regrettably, the City of Johannesburg did

not improve from the qualifi ed audit opinion it

received in the 2011-2012 fi nancial year.

13





Stagnation in audit outcomes of the province

District and local municipalities

Overall, the audit opinions have been stagnant

with fi ve (71%) local municipalities and two

district municipalities receiving unqualifi ed audit

opinions with other matters as in prior year.

Westonaria Local Municipality regressed from an

unqualifi ed audit opinion with other matters to a

qualifi ed audit opinion, while Randfontein Local

Municipality remained with a qualifi ed audit

opinion.

Municipal entities

The overall audit outcomes of municipal entities

remained largely unchanged with two (5%)

auditees, namely Johannesburg Social Housing

Company and Johannesburg Fresh Produce

Market receiving clean audit opinions. A total of

21 (81%) municipal entities received fi nancially

unqualifi ed opinions and three (12%) received

qualifi ed opinions.

While commitments were made by key role

players, it is evident from the 2011-12 audit

outcomes that these commitments were neither

successfully implemented nor monitored or

were implemented too late to have an impact

on the audit outcomes. Similarly, quarterly

meetings with the leadership, which were aimed

at driving clean administration, produced limited

improvement in audit outcomes.

In order to reverse the position of stagnant

audit outcomes, the political and administrative

leadership needs to build momentum in the

drive towards clean administration.



Opinions on fi nancial statements

Clean audits achieved

Johannesburg Social Housing Company was

able to sustain its clean audit opinion through its

leadership being committed towards disciplined

fi nancial reporting and the oversight committees

being proactive in implementing, monitoring

and addressing internal control defi ciencies. The

leadership took ownership of the quarterly key

control evaluation process and used it as a tool to

sustain clean administration.

Johannesburg Fresh Produce Market improved

to a clean audit opinion by addressing prior year

fi ndings on compliance with laws and regulations.

The leadership created a control environment

that was conducive to drive accountability and

ownership of the required improvements within

the auditee.

These good practices should be embraced and

replicated throughout the province so that clean

administration can be attained.

Improvement from fi nancial

qualifi ed to fi nancial

unqualifi ed with fi ndings

A total of two auditees (5%), Emfuleni Local

Municipality and Mogale City Local Municipality,

improved from a fi nancially qualifi ed opinion to

a fi nancially unqualifi ed opinion with fi ndings.

These municipalities were able to resolve audit

qualifi cations on property, plant and equipment

through continuous leadership involvement in

implementing and monitoring corrective actions.

The oversight committees at these municipalities

played a crucial role in monitoring the action

plans and holding management accountable for

commitments made.

14





Stagnant metro audit outcomes

Metro audit outcomes of which two were

unqualifi ed with fi ndings and one was qualifi ed

remained unchanged from the prior year.

However, there was an increase in the number of

compliance fi ndings reported at Ekurhuleni Metro,

City of Tshwane and City of Johannesburg.

Metro audit outcomes were also infl uenced by the

lack of adequate oversight over their municipal

entities, which resulted in the lapse of fi nancial

and performance management disciplines.

It is clear that practices that promote clean

administration were not entrenched within the

daily, weekly and monthly activities of the metros

and municipal entities.

Internal audit plans were not designed and

aligned to address the fundamental weaknesses

in the internal control environment; as a result,

the audit work performed had minimal impact on

improving audit outcomes.

Although the political leadership took full

ownership of key controls, it did not successfully

infl uence the actions of the administrative

leadership to avoid regression in fi nancial and

performance management drivers of internal

controls. It is however encouraging that

Ekurhuleni Metro submitted fi nancial statements

that did not contain material misstatements.

Stagnant district audit outcomes

The Sedibeng and West Rand district

municipalities did not improve their audit

outcomes due to inadequate review of fi nancial

statements, resulting in material misstatements.

Daily or monthly reconciliations should be

enhanced in order to improve the credibility of

fi nancial reporting.

Despite the districts’ audit outcomes having

remained stagnant, there are indications that

signifi cant progress has been made towards

attaining clean administration.




Stagnant local municipalities’

audit outcomes

Local municipalities’ audit outcomes remained

mainly unchanged from the prior year. These

municipalities have become complacent, as

many of them have, for several years, remained

in the category of fi nancially unqualifi ed

opinion with reportable matters on their

performance information and/or non-

compliance with legislation.

Due to lack of appropriate skills at the fi nance

units and review of fi nancial statements,

material misstatements were corrected during

the audit process. The absence of eff ective

internal controls promotes over-reliance on the

audit process to verify credibility of fi nancial

information.

The reality is that the leadership has not

demonstrated its commitment to attaining

clean administration, as evidenced by

weaknesses in control environments, failure

to address or avoid material fi ndings on

predetermined objectives as well as non-

compliance with all laws and regulations.

Signifi cant eff ort is required to move the

province out of this category, which entails

taking ownership of the key controls

that relate to fi nancial management,

compliance with laws and regulations, and

service delivery reporting.

15




Qualifi ed opinions on

fi nancial statements

We reported qualified audit outcomes at six (16%)

auditees, compared to 10 (24%) in the prior year. The City

of Johannesburg, City Power, Johannesburg Water and

Randfontein again received a qualified opinion in the current

year. Westonaria regressed into a qualified category. It is

concerning that Joburg Theatre was not able to sustain the

clean audit opinion it received in the prior year.

Repeat qualifi cation

at City of Johannesburg

and its municipal

entities

The City of Johannesburg, City Power

and Johannesburg Water remained with

financially qualified opinion with findings

for two consecutive years. This repeat

qualification can be attributed to the lack of

an embedded culture of preparing regular

financial statements, minimal impact of

interventions designed to address the

billing system concerns, high vacancies in

critical positions, inadequate monitoring

of the work of consultants and ineffective

oversight by governance structures, such as

internal audit units and audit committees.

The culture at the metro and the entities

was not always conducive to ownership of

actions and accountability for driving and

implementing action plans as a result

of key positions that were assumed by

employees in acting capacity. This, coupled

with the use of consultants, contributed to

repeat findings.



Qualifi ed opinions on


Sustained qualifi cation

at Randfontein Local

Municipality

The Randfontein Local Municipality did not

improve from a qualifi ed audit opinion due to

slow response to our messages and inadequate

monitoring of the work of consultants.

The council did not fulfi l its oversight

responsibility to the level where sound,

responsible and transparent accountability

is enforced. The council should promote an

environment where political oversight supports

administrative functions in the delivery of

services, and political and administrative

leadership actively takes ownership of the need

for improvement.

Regression from fi nancially unqualifi ed to

qualifi ed

Westonaria Local Municipality regressed from

a fi nancially unqualifi ed opinion with fi ndings

to a fi nancially qualifi ed opinion as a result of

fi ndings on non-current assets and current

assets. The root cause of the regression was

the auditee’s failure to institute eff ective and

sustainable internal controls over fi nancial and

performance reporting.

There was inadequate monitoring and

oversight over fi nancial and performance

reporting, and early warnings generated

through our quarterly key control interventions

were not addressed.

Lost clean audit status

Johannesburg Theatre regressed from a clean

audit opinion to a fi nancially unqualifi ed

opinion with fi ndings because the controls

implemented over fi nancial reporting were

not appropriate in sustaining a clean audit.

Management should ensure that it enhances

controls and review over the fi nancial

statements preparation process, including

oversight by the audit committee.

16




Submission of fi nancial

statements for auditing

One hundred per cent

compliance on the submission

of fi nancial statements

All auditees submitted their annual fi nancial

statements and performance reports for

auditing within the legislated deadline. This is

an indication that the leadership in the province

was supportive of the audit process.

Reporting on predetermined

objectives

Fifty per cent of auditees

with material fi ndings on

predetermined objectives

There were material fi ndings on the

performance reports of 19 (50%) auditees

[2011-12: 22 (48%)] regarding their usefulness

and reliability. Half of the auditees in the

province mastered the basic discipline of

reporting on predetermined objectives and

these practices need to be embraced and

replicated across local government by:

• setting up of measureable and specifi c

strategic objectives

• performance reports that are supported by

evidence

• robust oversight over reporting on

predetermined objectives by internal audit

units and audit committees.

Planned service delivery targets

not achieved

The annual performance reports of 13 (34%)

auditees showed that more than 20% of

planned service delivery targets were not

achieved due to poor planning, poor project

management as well as lack of monitoring and

oversight.

The City of Tshwane and Westonaria Local

Municipality made changes to performance

objectives without communicating them to the

public and without approval by the councils, as

required by the legislation.



Reporting on predetermined

objectives

The most common material fi ndings on usefulness of reported

information were that performance targets were not specifi c and/

or measurable to ensure that the extent of performance reported

is meaningfully measured. Findings on reliability of annual

performance reports mostly related to the accuracy and validity

of the performance information.

The fi ndings on predetermined objectives were as a result of:

• offi cials not fully understanding the requirements of the

performance reporting framework

• lack of adequate information technology systems to report on


• insuffi cient review and interrogation by independent offi cial(s)

at an appropriate level

• internal audit plans not covering predetermined objective

formulation and reporting processes

• performance reports submitted to the councils on a quarterly

basis were not adequately verifi ed for credibility and accuracy.

Auditees need to prioritise addressing these fi ndings as

predetermined objectives are a social contract with the

citizens, which are determined through an extensive public

participation process and are included in the integrated

development plans, and progress thereof is monitored through

service delivery and budget implementation plans. The annual

performance reports serve as a mechanism whereby political and

administrative leadership reports on the performance against the

predetermined objectives, therefore the credibility and reliability

of this information is of critical importance.

17




Findings on non-

compliance with laws and

regulations

Regression of auditees

with material fi ndings on compliance

with laws and regulations

We reported material fi ndings on compliance

with laws and regulations at 36 auditees

(95%) in the current year, a regression from 33

auditees (79%) in the previous year.

The continued upward trend of non-

compliance with laws and regulations remains

a challenge for the province. The root causes

of these repeat fi ndings are due to lack of

processes that facilitate the implementation

of a compliance checklist and a deviation

framework that would prevent and detect

non-compliance with laws and regulations.

The repeat fi ndings and upward trend in these

areas are an indication that there is inadequate

monitoring and oversight performed by

governance structures. Lack of enforcing

consequences for transgression of laws and

regulations was a contributing factor to the

year-on-year increase on reported irregular

expenditure.

Auditees avoid qualifi cations by correcting

material misstatements

during the audit

A total of 24 (63%) auditees [2011-12: 28 (67%)]

achieved a fi nancially unqualifi ed audit

opinion because they corrected all material

misstatements identifi ed during the audit

process.

Auditees’ failure to implement their

commitment of preparing monthly fi nancial

statements with supporting reconciliations,

the lack of institutionalisation of daily, weekly

and monthly fi nancial disciplines, the absence

of processes to ensure the credibility of

fi nancial information, as well as over-reliance

on the audit process to address reporting

shortcomings resulted in material adjustments

to the majority of fi nancial statements

submitted for audit.



Findings on non-


regulations

The top three areas of non-compliance with laws and regulations

related to:

• submission of annual fi nancial statements for audit that did

not meet the requirements of the accounting framework and

incurrence of unauthorised, irregular as well as fruitless and

wasteful expenditure as a result of non-compliance with supply

chain management prescripts

• non-declaration or false declaration of interest in contracts by

both suppliers and offi cials/employees.

Almost all the chief fi nancial offi cers posses the relevant skills and

expertise to prepare fi nancial statements, however, they lacked

the discipline and diligence to prepare fi nancial statements on a

regular basis. Lack of appropriate skills at the lower levels within

the fi nance units was also a weakness and serious attention

should be given to appointing adequately skilled staff and

enforcing performance management systems.

Auditor-General of

South Africa’s focus area – supply chain

management

Overall increase in fi ndings on

supply chain management

We reported fi ndings on supply chain

management at 24 (63%) auditees, an increase

from the prior year. All metros, eight (89%) of

the district and local municipalities and 15

(58%) of the municipal entities had material

fi ndings on supply chain management.

The political and administrative leadership

should adopt a zero-tolerance approach to the

blatant disregard for laws and regulations by

transgressors.

18




Auditor-General of


management

Awards to employees, councillors

and other state offi cials

A total of three auditees awarded contracts to

the value of R7,9 million to suppliers in which

close family members of employees of the

auditee had an interest. The other common

fi nding related to awards to employees,

councillors and other state offi cials.

This revealed a lack of internal controls to detect

or prevent awards to employees, councillors,

other state offi cials and close family members

of employees.

The City of Tshwane ran computer-assisted

audit techniques to detect and prevent

awards to employees, close family members of

employees and councillors. However, awards

made to offi cials of other organs of state,

who made false declarations on their tender

documents, were diffi cult to detect due to a

lack of adequate systems to identify instances of

false declarations.

Unfair and uncompetitive procurement

practices

We raised 59 fi ndings on unfair and

uncompetitive procurement practices in the

current year, an increase from 44 fi ndings in

the prior year. This refl ects on weaknesses in

the internal controls that should prevent and

detect non-compliance with supply chain

management regulations.

Declarations of interests

We identifi ed and reported irregular awards

where suppliers did not declare their confl ict

of interest in 60 instances (2010-11: 50) and

employees did not declare their confl ict of

interest in 40 instances (2010-11: 61). Where

suppliers failed to make declarations or made

false declarations the punitive steps provided in

supply chain management regulations should

be followed.



Auditor-General of


management

Contracts and quotations not audited due to

poor records management

We could not audit contracts and quotations to

the value of R4,2 million (2010-11: R15 million)

due to auditees not making the required

information or documentation available.

This is the result of poor records management

at auditees, which resulted in a limitation of

scope, and no audit evaluation was conducted

on these contracts. With this limitation, no

assurance can be provided on the value

received and performance reported cannot

be supported by audit trail and supporting

information.

Increase in contracts

awarded to suppliers in which

employees and councillors had

an interest

Auditees awarded contracts to the value of

R280 million to suppliers in which employees

and councillors of the auditees had an interest.

This was a signifi cant increase from R89,4

million in the prior year.

This trend indicates that auditees did not

make progress in the screening of tenders to

employees and councillors. Adequate controls

should be implemented to eliminate this

practice.

Unauthorised, irregular as

well as fruitless and wasteful expenditure

High percentage of auditees with

unauthorised, irregular as

well as fruitless expenditure

Findings on compliance relating to

unauthorised, irregular as well as fruitless and

wasteful expenditure remained at the same

high prevalence as in the previous fi nancial

year at 27 (71%) auditees. The upward trend of

reported amounts of unauthorised, irregular

as well as fruitless and wasteful expenditure

is continuing and has become a norm within

the province, signifi cant from R1,500 million to

R2,715 million in the current year.

19






Increase in auditees

which incurred unauthorised expenditure

A total of two (16%) auditees incurred

unauthorised expenditure of R740 million, two

more than in the 2010-11 fi nancial year. This

represents an increase from the R252 million

identifi ed in the previous year at four auditees.

The expenditure related to overspending of

votes due to the inadequate monitoring of

compliance to approved budgets.

High value and high percentage

of auditees incurring irregular

expenditure

Irregular expenditure increased from R1,197

million to R1,833 million and was incurred by 26

auditees (68%), a regression from the 21 (50%)

in the previous year. The nature of the irregular

expenditure related to:

• expending of budgets through uncompetitive

or unfair procurement processes

• procurement through deviations not in line

with supply chain management regulations

regarding emergencies, impracticality of

obtaining quotations and use of sole suppliers.

The root cause of the increase in irregular

expenditure was a lack of consequences for non-

adherence to the supply chain management laws

and regulations.

Weaknesses in the internal control environment

in municipal environments and lack of

consequence management create opportunities

for transgression and non-compliance with

supply chain management prescripts. The

councils have a role to play in reducing the use of

deviations and ensuring strict compliance with

laws and regulations. The National Treasury and

Gauteng Provincial Treasury should enforce and

monitor compliance with issued guidance and

practice notes on supply chain management

relating to procurement activities.





Increase in the value of fruitless

and wasteful expenditure

In total, 19 (50%) auditees incurred fruitless

and wasteful expenditure of R142 million

(2010-11: R52 million). Although the number

of auditees incurring fruitless and wasteful

expenditure decreased from 22 auditees (52%)

in the previous year, the rand value increased

signifi cantly. The nature of the expenditure

related to interest incurred due to late

payments to suppliers.

Fundamental root causes of the increase in unauthorised,

irregular as well as fruitless


The fundamental root causes of the continued increase in reported unauthorised, irregular as well as fruitless and wasteful expenditure were:

• a blatant disregard for laws and regulations by transgressors

• lack of implementation and monitoring of action plans with clear time frames by management, such as compliance checklists that were to be rolled out to all municipalities by the provincial treasury

• lack of contract register management processes that provide early warnings on the expiration of contracts, which led to supply chain management deviations and contract extensions

• failure by internal audit units to adequately monitor and review compliance with laws and regulations

• the level of assurance provided on supply chain management and related laws and regulations by leadership, governance structures, and councils through their exercise of oversight responsibilities, remained low.

An appropriate leadership tone creating a control environment that is conducive to enforcement of, and compliance with, laws and regulations is necessary to address this prevalent norm.

20




Auditor-General of

South Africa’s focus area – human resource

management

Vacancies in key positions

(chief fi nancial offi cers) at

municipalities

As at 30 June 2012, 25% of the municipalities

had vacancies at the position of the chief

financial officer. Although most of the chief

financial officers in the province had the

necessary skills and expertise to discharge

their responsibilities of financial management

and reporting, what was evidently lacking

was the diligence and discipline to prepare

financial statements on a regular basis.

Chief financial officers and finance officials

did not stay abreast of the changes in the

requirements of the financial reporting

framework and compliance environments

through ongoing training and development.

At five (42%) municipalities key officials

lacked the minimum competencies and

skills required by the National Treasury’s

competency frameworks. Other factors

contributing to findings in human

resource management were the delays in

implementing performance contracts of

senior officials at municipalities. Without

these approved contracts in place, coupled

with robust performance management,

the leadership will not be able to promote

accountability and enforce consequences for

transgression of laws and regulations.



Financial reporting assistance

provided by consultants

Use of consultants did not necessarily

result in improved audit

outcomes

Of the 20 auditees that used consultants, 16

auditees appointed consultants as a result of

a lack of skills, and four auditees appointed

consultants as a result of vacancies.

The consultants were mainly used to do the

work of the chief fi nancial offi cers and other

offi cials within the fi nance units. Chief fi nancial

offi cers were not adequately involved in the

monitoring of the work that the consultants

were doing. In some instances, there was

a lack of understanding of the service level

agreements that were signed with the

consultants. The use of consultants did not

necessarily result in improved outcomes as their

work was often hampered by the credibility of

the information that management provided.

21




Auditor-General of

South Africa’s focus area – fi nancial

health

Indicators of poor fi nancial sustainability

The fi nancial health of municipalities in Gauteng depends on their ability to earn revenue and manage their spending economically, eff ectively and effi ciently.

The results of the high-level analysis of auditees’ fi nancial health indicators demonstrated that there are various risks that management, oversight and monitoring structures, treasuries and executive authorities should consider as they may have a negative impact on service delivery objectives:

• Two municipalities overspent their budgets by an average of 6%.

• Seven municipalities underspent their capital budgets by an average of 28%.

• Nine municipalities underspent their conditional grants by an average of 8%.

• The average debt-collection period after impairments was 75 days (2.5 months).

• The average debt-collection before impairment was 230 days (7.7 months).

• Five municipalities incurred defi cits during the year under review due to their expenditure exceeding income generated.

• Eight municipalities had their current liabilities exceeding current assets at year-end.

Gauteng local government needs to address poor planning, resource capacity constrains to deliver on infrastructure projects, and improve on debt collections to ensure achievement of local government objectives with regard to service delivery.



Material uncertainties

regarding the ability to continue as a

going concern

The fi nancial statements of nine (24%) auditees

disclosed material uncertainties regarding

the ability to continue as a going concern. Of

these nine auditees, Westonaria was the only

municipality to report a material uncertainty,

with the others being municipal entities. This is

refl ected on in section 5.

Due to the funding arrangements of municipal

entities at metros, net liability positions

are common but these are covered by the

subordination agreements of the parent

municipality. Therefore, the issue of going

concern is not prevalent at these entities.

Auditor-General of

South Africa’s focus area – information technology

management

Service level agreements in place with information technology consultants at municipal

entities

The information technology general

control environment at municipal entities

is generally better and is supported by the

use of consultants. The audit of information

technology management at local government

revealed that information technology

consultants were an integral part of the

information technology control environment.

In total, 83% of municipal entities had approved

service level agreements with consultants that

were being monitored. This is one of the good

information technology governance principles

to be adopted in dealing with general control

information technology weaknesses prevalent

in the municipal environments.

In total, 75% of municipal entities had adequate

backup management processes in place, which

could be attributed to information technology

managers understanding the importance of

backing up data to ensure its availability in the

event of a disaster.

22




Auditor-

General of

South Africa’s

focus area –

information

technology

management

Minimal

improvement

in the status

of information

technology at

municipalities

There has been minimal movement in the

status of information technology across all

municipalities as information technology was

not viewed as a strategic enabler that would

ensure service delivery and attainment of

clean administration. The majority of auditees

experienced challenges with the design of

general information technology controls and

had not begun to deal with the implementation

of governance framework controls.

All three metros and the district municipalities

did not have approved information technology

governance frameworks. Furthermore, the

Ekurhuleni Metro and the City of Tshwane did

not have approved disaster recovery plans in

place. In total, 83% of municipalities, including

the metros, did not have adequate and

approved service level agreements with their

consultants.

Although some measures had been initiated

to address IT fi ndings, auditees were not

adequately supported by the provincial treasury

and the Department of Local Government

(coordinating institutions). In addition, councils

did not prioritise the information technology

control defi ciencies, resulting in information

technology governance frameworks and

policies not being passed by council resolutions

timeously.



Auditees’

systems of

internal

control

Key drivers

of internal

controls not at

the appropriate

level

The fundamentals of internal control were not

at an appropriate level to enable improved

and sustained clean audit outcomes. The

controls around leadership as well as fi nancial

and performance management regressed as

refl ected in the overall stagnation of the audit

outcomes in the province.

We have handed over the responsibility for

the preparation of key control assessments

to management of the auditees. We continue

to have quarterly stakeholder interactions on

the evaluation done by management on key

controls, with the leadership and governance

structures.

Where the leadership took full ownership of

the drivers on internal control, there were

noticeable improvements in fi nancial and

performance management drivers of internal

control. This was evident at the Ekurhuleni

Metro as well as at Sedibeng, Mogale City and

Emfuleni municipalities.

Without the strong support of the leadership

in implementing and maintaining the key

controls, the progress to clean administration

will remain slow and not sustainable.

23




Audit

committees

and internal

audit units

Governance

structures in

place, however,

insignifi cant

impact on audit

outcomes

Audit committees and internal audit units were

in place at more than 95% of the auditees, but

there was little impact on the overall audit

outcomes.

Although there are fewer areas of concern

under governance as the drivers of internal

control improved slightly, there is still a need for

improvement as these structures should give

more attention in tracking and monitoring of

action plans to improve audit outcomes and

quality of fi nancial and performance reporting.

Internal audit units and audit committees

must ensure that their plans cover information

technology risk areas and fi ndings reported

by external auditors. Not all audit committee

chairpersons met with the mayors and the

Auditor-General of South Africa for quarterly key

control discussions, as previously committed.

Audit committees should assist in capacitating

municipal public accounts committees in

obtaining an understanding of key issues

facing auditees. Where the chairpersons of

municipal public accounts committees for

some municipalities attended audit committee

meetings, improvement in the oversight

process was noted.



Assurance provided

by key role players

Limited assurance

provided by key role players

The assurance and oversight provided by key role

players was not at an appropriate level to support

clean administration, as evidenced by commitments

that were made but not implemented and monitored.

Despite the initiatives of the coordinating

departments, namely the Gauteng Provincial Treasury

and the Department of Local Government, there has

been no improvement in the overall audit outcomes.

Provincial coordinating institutions need to work with

the National Treasury, Department of Cooperative

Governance and Traditional Aff airs and South African

Local Government Association to coordinate impactful

activities across the spheres of government.

The portfolio committee on fi nance and the

Department of Local Government are required to

consider the quarterly reports of the respective

departments submitted to the Gauteng Provincial

Legislature in order to infl uence audit outcomes

positively through eff ective oversight.

There were promising signs of cooperation between

the oversight committee on the premier and the

legislature and councils in the province. This should be

encouraged and developed into practical and visible

actions to improve audit outcomes.

The provincial public accounts committee has

contributed to the training and development of

municipal public accounts committees and best

practices were shared in this environment. The speaker

of the legislature has resolved to include the Auditor-

General of South Africa at regular meetings of the

speaker’s forum in the province in order to emphasise

the key messages of clean administration.

While all key role players have reconfi rmed their

understanding of the required level of assurance

to drive clean administration, the true impact will

only be measured in the next fi nancial year and is

dependent on the extent to which all key role players

are disciplined in executing the appropriate level of

assurance.

24




Assurance provided

by key role players

No improvement

in overall audit outcomes

despite functioning operation

clean audit committees

Metropolitan and district municipalities did not

improve their overall audit outcomes. This was

in spite of their municipal operation clean audit

committees, which were aimed at resolving

issues of clean administration by 2014.

Provincial operation clean audit and municipal

operation clean audit committees were not able

to coordinate activities to build momentum

to drive clean administration, as evidenced

by lack of implementation and monitoring of

decisive action plans and commitments to

improve audit outcomes. These uncoordinated

eff orts hinder the eff ectiveness of the initiatives

and also lead to uncertainties regarding the

responsibilities of the provincial operation

clean audit committee versus the municipal

operation clean audit committees.

Councils and municipal

public accounts

committees

Councillors provided

some level of assurance

The councils provided some level of assurance;

however, their responsibility for oversight over

credible and reliable fi nancial and performance

reporting, driving transparent accountability,

including enforcing consequence

management, can be enhanced.

Information technology is an important enabler

of the councils’ service delivery objectives, as

it supports credible fi nancial and performance

management reporting. Councils should

focus on addressing defi ciencies such as non-

approval of IT governance frameworks and

related policies. Performance reporting also

needs to be a focus area of council oversight as

it directly addresses the implementation and

monitoring of service delivery objectives.



Councils and municipal

public accounts

committees

Less than desired level of assurance provided by

the municipal public accounts

committees

Although the municipal public accounts

committees had been established at every

municipality in the province, the impact on

audit outcomes was still not evident. Fully

resourced and capacitated municipal public

accounts committees are essential and will be

one of the most critical role players in municipal

oversight and governance that will have a

positive impact on audit outcomes.

Coordinated eff orts by councillors to

capacitate and support the municipal public

accounts committees were required from the

coordinating institutions and the South African

Local Government Association.

25




Status of commitments from key role

players

Ineff ective implementation of commitments made to improve audit outcomes

The commitments made by key role players were not

adequately monitored and implemented, which led

to a stagnation of the audit outcomes.

The lack of implementation of a commitment

to prepare monthly reconciliations and fi nancial

statements has led to the increased number

of auditees with material amendments to the

fi nancial statements and qualifi ed audit opinions.

The practice of using compliance checklists and

exception reporting as controlled tools to detect

non-compliance fi ndings was not applied, leading

to an increase in the number of fi ndings on non-

compliance with laws and regulations.

Governance structures did not adequately fulfi l their

commitment of reviewing fi nancial statements,

compliance with laws and regulations, reporting

on predetermined objectives and key controls to

provide assurance to councils.

The lack of implementation of commitments by the

coordinating institutions hampered their ability to

provide the required support and interventions to

local government.

Local government requires coordinated eff ort and

initiatives by the coordinating institutions, the

legislature and its portfolio committees, Offi ce of the

Premier and the South African Local Government

Association to eff ectively address local government

challenges.



Root causes of audit

outcomes

LeadershipFinancial and performance management

Governance

• Culture of non-

performance,

malicious compliance

and leadership’s lack of

action.

• Lack of ownership

of key controls

and monitoring of

action plans aimed

at addressing audit

fi ndings and internal

control defi ciencies.

• Human resource

management policies

and procedures were

not strictly enforced to

ensure that corrective

action was taken for

poor performance and

lack of accountability.

• The lack of

accountability

implies that human

resource practices

were ineff ective in

meeting the service

delivery objectives of

the municipalities and

municipal entities.

• Competencies and

skills of key offi cials

were not at the

appropriate level.

• Over-reliance on

consultants to

perform work of

employees.

• Credible monthly


supported by

reconciliations and

independent review

were not produced.

• Lack of collaboration

with coordinating

departments on

complex fi nancial

and performance

reporting issues.

• Risk assessments

were not conducted

eff ectively.

• Lack of capacity and

appropriate skills at

internal audit units.

• Lack of monitoring

of implementation

of action plans

by internal audit

units and audit

committees.

• Some audit

committees were

not fully functional

throughout the

fi nancial year.

• Some audit

committees were not

eff ective in ensuring

management took

corrective action and

implemented their

recommendations.

26


27

SECTION 2OVERVIEW OF AUDIT

OUTCOMES

2.1 SUMMARY OF AUDIT OUTCOMES ...............................28

2.2 FINDINGS ARISING FROM THE AUDIT OF FINANCIAL STATEMENTS ..............................42

2.3 FINDINGS ARISING FROM THE AUDIT OF REPORTING ON PREDETERMINED OBJECTIVES .....52

2.4 FINDINGS ARISING FROM THE AUDIT OF COMPLIANCE WITH LAWS AND REGULATIONS ..........57

28


SECTION 2 Overview of audit outcomes

This section provides the summary of 2011-12 local government audit

outcomes (section 2.1), followed by further details on fi ndings arising from

the audit of the fi nancial statements (section 2.2), reporting by auditees

against their predetermined objectives (PDOs) (section 2.3) and compliance

by auditees with key laws and regulations (section 2.4). Section 3 presents

the root causes of audit fi ndings and recommended best practices, while

sections 4 and 5 deal with initiatives and the impact of key role players on

audit outcomes and the fi nancial health of local government, respectively.

2.1 SUMMARY OF AUDIT OUTCOMES

2.1.1 Summary of overall audit outcomes

Local government in the province comprises three metropolitan

municipalities, two district municipalities, seven local municipalities and

26 municipal entities. The results, where possible, are segmented into

three main categories, metropolitan councils, districts together with local

municipalities, and municipal entities.

The three metros are the City of Johannesburg, City of Tshwane and

Ekurhuleni Metro; the two district municipalities are Sedibeng and West

Rand; and the seven local municipalities are Emfuleni, Lesedi, Merafong,

Midvaal, Mogale City, Randfontein and Westonaria. Consolidated results are

presented for the following audits: City of Johannesburg, City of Tshwane,

Ekurhuleni Metro and West Rand District Municipality.

In the prior year, municipal audits included three municipalities that have

now been incorporated into the City of Tshwane. Those municipalities are

Metsweding District, Kungwini and Nokeng Tsa Taemane. The decrease

from 27 municipal entities to 26 municipal entities in 2011-12 was a result

of the disestablishment of the Tshwane Centre for Business Information

and Support.

We completed the audits of 37 (97%) of the 38 auditees that had submitted

fi nancial statements by 31 August 2012, or by 30 September 2012 in the

case of consolidated fi nancial statements, within the legislated time frame

of three months from receipt of the fi nancial statements.

We did not complete the audit of West Rand Development Agency within

the legislated time frame of three months from receipt of the fi nancial

statements. This was due to delays regarding the submission of information

that supports the fi nancial statements. At the date of this report, all 38

audits had been completed and tabled in the councils as legislated. This

general report therefore covers all 38 auditees.

The table below summarises the audit outcomes of the 2011-12 fi nancial

year for audits completed by 31 March 2013 and the audit outcomes of the

previous year. Where applicable, audit opinions relate to the consolidated

fi nancial statements of auditees.

Clean audits, the ultimate goal of sound administration, are achieved

when the fi nancial statements are unqualifi ed and there are no reported

audit fi ndings in respect of either reporting on PDOs or compliance with

laws and regulations. ‘With fi ndings’ denotes fi ndings on PDOs and/or


29


Table 2:

Summary of audit outcomes for current and prior years

Audit outcomes

TotalMetropolitan

munucipalitiesDistrict and local

municipalitiesMunicipal entities

2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11

Unqualifi ed with no fi ndings (clean audits) 2 2 0 0 0 0 2 2

Unqualifi ed with fi ndings 30 29 2 2 7 7 21 21

Merged auditees* 1

Unqualifi ed fi nancial statements 84% 79% 67% 67% 78% 55% 88% 85%

Qualifi ed opinion, with fi ndings 6 8 1 1 2 5 3 4

Merged auditees* 2

Qualifi ed fi nancial statements 16% 21% 33% 33% 22% 33% 12% 15%

Total number of audits 38 39 3 3 9 12 26 27

Findings on reporting on predetermined objectives (PDO) only 0 2 0 0 0 0 0 2

Findings on compliance with laws and regulations only 17 16 2 0 1 2 16 14

Findings on both PDO and compliance 19 15 1 3 8 7 8 5

Total number of audits “with fi ndings” 36 33 3 3 9 9 24 21

*Auditees merged into the City of Tshwane are Metsweding District, Kungwini and Nokeng Tsa Taemane and these auditees have been excluded from the analysis of the audit outcomes.

30


A total of 24 (63%) auditees avoided qualifi ed opinions on fi nancial statements by correcting the material misstatements identifi ed during the audit

process. Had the misstatements not been corrected, only eight (21%) of the 38 auditees would have received unqualifi ed opinions on fi nancial statements.

The breakdown of the 24 (63%) auditees that avoided qualifi ed opinions on fi nancial statements is as follows:

Percentage of unqualifi ed fi nancial statements prior to correction

TotalMetropolitan municipalities


Municipal entities

Unqualifi ed fi nancial statements 63% 33% 19% 11%

Section 2.2.1 discusses the quality of fi nancial statements and material misstatements. Annexure 1 lists all auditees with their current and prior year audit

outcomes.

Figure 1 highlights the detail of improvement and regression that caused the net change, while table 2 shows the net change in audit outcomes from

the previous year.

31


Figure 1

Improvement and regression in the audit outcomes

Clean audit

Clean audit

Summary of improvements Summary of regressions

Unqualified – with findings Qualified – with findings

(Unchanged= 1)

(New auditees = 1)

Unqualified – with findings

(Unchanged = 27)

(New auditees = 3)

Qualified – with findings

(Unchanged = 4)

(New auditees = 2*)

Imp

rov

em

en

ts =

3

Re

gre

ssio

ns

= 2

1

Munics = 1

2

Munics = 2

Ne

t re

gre

ssio

ns

= 1

1

ME 1

Metro = Metropolitan Munics = Municipalities ME = Municipal entities

1

ME = 1

* Metsweding Economic Development Agency (MEDA) is a new entity included in the category of ‘qualifi ed with fi ndings’.

The audit outcomes of the majority of the auditees remained in the category of unqualifi ed with material fi ndings on their reporting on PDOs and/or

compliance. The following table shows the improvement and regression of the auditees in these areas.

32


Table 3

Improvement and regression in fi ndings on predetermined objectives and compliance with laws and regulations

Movement in audit outcomes from 2010-11 fi nancial year

Audit opinion ImprovementUnchanged with

fi ndings Regressed

Unchanged without fi ndings (clean)

Total auditees reported on

11-12

Reporting on predetermined objectives 7 13 6 12 38

Compliance with laws and regulations 1 32 4 1 38

Movement in audit outcomes from 2009-10 fi nancial year

Audit opinion ImprovementUnchanged with

fi ndings Regressed

Unchanged without fi ndings (clean)

Total auditees reported on

10-11

Reporting on predetermined objectives 4 15 7 13 39

Compliance with laws and regulations 1 32 6 3 42

ImprovementUnchanged with

fi ndingsRegression

Unchanged without fi ndings

33


The main concern has always been the large number of audit outcomes

within the category “with fi ndings” and this has become a norm in the

province. Table 4 below highlights key outcomes and trends per category

of auditees.

Table 4

Signifi cant aspects of the 2011-12 audit outcomes

Category IndicatorKey outcomes


All

auditees

Overall audit

outcomes

As shown in fi gure 1 and table 3 above, it is

concerning that the provincial audit outcomes

remained stagnant over the 2011-12 fi nancial

period. Most of the auditees (79%) remained

in the category of fi nancially unqualifi ed with

fi ndings while 19% received qualifi ed audit

opinions. Had it not been for the number of

material misstatements corrected during the

audit process, only eight (21%) auditees would

have received unqualifi ed audit opinions.

Only two entities received clean audit outcomes

and those are Johannesburg Social Housing

Company, which retained its clean audit status,

and Johannesburg Fresh Produce Market, which

improved from a fi nancially unqualifi ed audit

opinion with fi ndings to a clean audit outcome.

Johannesburg Theatre (SOC) Ltd regressed from

a clean audit outcome to fi nancially unqualifi ed

with fi ndings due to material misstatements that

were contained in fi nancial statements submitted

for auditing. History within the province has

shown that improvements and good audit

outcomes are often not sustained.



All auditees


The other two auditees that showed an

improvement in audit outcomes from fi nancially

qualifi ed audit opinions to fi nancially unqualifi ed

audit opinions with fi ndings are the Emfuleni and

Mogale City local municipalities. No municipality

received a clean audit outcome for the 2011-12

fi nancial year.

Table 3 above shows a regression in overall

movement in PDOs and compliance with laws

and regulations. Although the leadership had

made commitments to improve audit outcomes,

the eff ect of their commitment towards clean

administration was minimal as evidenced by the

provincial audit outcomes remaining stagnant.

Although the leadership is making the right

commitments, these commitments are not

honoured for the following reasons:

• Lack of monitoring of commitments.

• Staff below leadership level do not have the

required skills and competencies to implement

these commitments.

• In some instances, the leadership is over

committing without due consideration of the

nature of audit fi ndings, resources and time

required to resolve negative audit outcomes.

34




Me

tro

po

lita

n c

ou

nci

ls

The audit outcomes remained unchanged with Ekurhuleni

Metropolitan Municipality (Ekurhuleni Metro) and City of Tshwane

sustaining their unqualifi ed audit opinion with other matters.

Regrettably, the City of Johannesburg did not improve from the

qualifi ed audit opinion they had received in the 2011-2012 fi nancial

year.

Improvements

The Ekurhuleni Metro again received fi nancially

unqualifi ed audit outcomes with fi ndings on PDOs

and compliance with laws and regulations. The

actual results of the Ekurhuleni Metro showed an

improvement compared to the prior year. In the

current year there were no material misstatements

contained in the fi nancial statements. This was

attributable to the fact that they prepared quality

fi nancial statements on a quarterly basis that were

reviewed by the audit committee. Consistent with

the previous year, the Ekurhuleni Metro, excluding

its entities, did not have material fi ndings on PDOs.

The political leadership took advantage of quarterly

interactions with the Auditor-General of South

Africa (AGSA), used the opportunity to refl ect on

challenges and sought possible solutions.

The acting chief fi nancial offi cer (CFO) at Ekurhuleni

Metro took full ownership of the audit process and

consistently engaged with auditors. This, combined

with the leadership’s commitment, sincerity and

drive, contributed to the reduction in audit fi ndings.

Going forward, the Ekurhuleni Metro committed to

continue submitting quarterly fi nancial statements

with an intention of moving towards preparing

monthly fi nancial statements.

It is commendable that two local municipalities and

one district municipality were integrated into the

City of Tshwane without regression in the overall

audit outcome, despite the fact that one of the

integrated municipalities had previously received a

qualifi ed opinion.



Me

tro

po

lita

n c

ou

nci

ls

Inadequate oversight

being exercised

over municipal

entities

The political leadership and senior management of

the parent metros, especially at the City of Tshwane

and Ekurhuleni Metro, provided limited oversight

and monitoring to their municipal entities. This is

concerning because these entities’ outcomes had

a negative impact on the consolidated outcomes

of the metros. In addition, Ekurhuleni Metro made

inadequate eff ort to ensure that the municipal

entities had fully functioning boards of directors

throughout the fi nancial year.

Another contributing factor was that the municipal

entities of Ekurhuleni Metro and City of Tshwane

shared an audit committee with the parent

municipality; the audit committee’s attention was

predominantly focussed on the metros and not

the entities. The size of the entities is negligible

to the group and this is the main reason for this

business approach. However, from a governance

perspective, equal attention should be given to

all auditees. At the City of Johannesburg where a

number of entities are substantial to the group,

having independent audit committees was

evidently benefi cial in that the audit outcomes of

these entities were better than those of the metro.

Me

tro

po

lita

n c

ou

nci

ls Recurring material fi ndings on PDOs and non-


regulations

The City of Johannesburg and the City of Tshwane

had material fi ndings in three critical areas, namely

material amendments to the fi nancial statements,

usefulness and reliability of service delivery

reporting and an upward trend on unauthorised,

irregular as well as fruitless and wasteful

expenditure as a result of non-compliance with

laws and regulations. Minimal eff ort was directed

at clearing fi ndings on PDOs by the political and

administrative leadership, resulting in repeat

fi ndings.

35




Dis

tric

t a

nd

loca

l mu

nic

ipa

liti

es The actual audit outcomes of the district and local municipalities

improved slightly compared to the prior year. Seven municipalities

remained with unqualifi ed audit opinions with fi ndings on PDOs

and/or non-compliance with laws and regulations. It is a concern

that none of the municipalities achieved clean administration

and one municipality regressed from a fi nancially unqualifi ed

audit opinion with fi ndings to a qualifi ed audit opinion. This is an

indication that the attainment of clean administration remained

a challenge due to weak fi nancial disciplines and unsustainable

interventions. The stagnation and regression in terms of the

number of fi ndings were more prevalent at the auditees where

there was instability in the political leadership and senior municipal

offi cials.



Dis

tric

t a

nd

loca

l mu

nic

ipa

liti

es

Improvements

The Sedibeng District Municipality managed

to decrease the number of compliance

fi ndings from fi ve in the prior year to one

(material amendments in fi nancial statements

submitted for auditing). This was due to the

leadership setting the right tone from the top,

coupled with the implementation of a good

supply chain management (SCM) deviation

framework.

It is also worth noting that despite the

challenges faced by the municipalities

constituting the West Rand District

Municipality, Mogale City was able to improve

from a qualifi ed audit opinion to a fi nancially

unqualifi ed audit opinion with fi ndings

on laws and regulations. The prior year

qualifi cation opinions on service charges and

property, plant and equipment at the Emfuleni

Local Municipality were also addressed.

There is potential for further improvement in

the audit outcomes of these municipalities

due to the positive tone of the political

leadership as well as the alignment of the

political and administrative leadership of the

municipalities towards the attainment of clean

administration.

36




Dis

tric

t a

nd

loca

l mu

nic

ipa

liti

es

Regression to qualifi ed

opinion

The Westonaria Local Municipality regressed

from a fi nancially unqualifi ed opinion with

fi ndings to a fi nancially qualifi ed opinion with

fi ndings due to non-compliance with the

property, plant and equipment accounting

frameworks and a lack of adequate review

of the fi nancial statements by senior

management and the audit committee.

At the Randfontein Local Municipality, the

audit outcomes remained unchanged due

to instability in key positions. In addition,

management did not monitor the work

performed by the consultants in compiling

the fi xed asset register and the skills were not

transferred to municipal offi cials. The audit

committee was not eff ective as it did not

operate for the whole year and the head of

the internal audit position was vacant for the

whole year.

Concerning

The West Rand District Municipality needs

to improve alignment between the political

leadership and administrative leadership of

the district and local municipalities in order

to eff ectively implement commitments

and action plans aimed at achieving clean

administration. Sedibeng District Municipality

assisted the municipalities falling under its

jurisdiction; it is concerning that this practice

has not been replicated by the West Rand

District Municipality.

Councils and municipal public accounts

committees (MPACs) did not play their

prominent role of assisting the municipalities

to address the matters that may lead to

regressions in audit outcomes.



Mu

nic

ipa

l en

titi

es

The overall audit outcomes of municipal entities remained largely

unchanged with only two (5%) auditees, namely Johannesburg

Social Housing Company and Johannesburg Fresh Produce

Market, receiving clean audit opinions. A total of 21 (81%)

municipal entities received fi nancially unqualifi ed opinions and

three (12%) received qualifi ed opinions.

Sustained clean audit opinions and progress to clean audit

opinions

The Johannesburg Social Housing Company

retained its clean audit opinion and

Johannesburg Fresh Produce Market improved

to this category. The positive audit outcome

at these auditees was attributable to the

following factors:

• The leadership understood the importance

of clean administration and therefore

aligned themselves and processes to this

objective.

• Initiatives such as eff ective compliance

checklists and training on critical areas such

as SCM and PDOs.

• Leadership stability enabled the board to

discharge its duties without interference.

• Eff ective internal audit units and risk

committees.

• Accountability was enhanced by clearly

defi ned roles and responsibilities at each

level.

The above are good practices, which are likely

to result in clean administration if properly

replicated at other auditees across local

government.

37




Slow progress in clearing fi ndings on PDOs and


regulations

The analysis of the municipal entities’ audit

outcomes shows that except for the three

entities that received fi nancially qualifi ed

opinions, the rest of the entities received

fi nancially unqualifi ed opinions with fi ndings

on compliance with laws and regulations and

PDOs. We reported repeat fi ndings at 74% of

the municipal entities that received fi nancially

unqualifi ed opinions with fi ndings. In total,

65% of auditees in this category also reported

new compliance fi ndings. The upward trend

of fi ndings on compliance with laws and

regulations is an indication that fundamentals

of key controls have not been embedded in

the operations of the entities.

Due to lack of adequate oversight from

parent municipalities, a signifi cant number of

fi ndings, particularly the repeat fi ndings, were

not resolved. The unfavourable outcomes

present the opportunity for the leadership of

parent municipalities to close the gaps and

improve audit outcomes.

The way forward

If the audit outcomes are to be improved, the political leadership, the

coordinating departments working with the National Treasury and the

Department of Cooperative Governance and Traditional Aff airs (CoGTA)

will have to play a pivotal role. The three fundamental areas that will have

to be addressed are material amendments in the fi nancial statements,

compliance with laws and regulations as well as material fi ndings on PDOs.

To adequately address these areas and improve the outcomes, the focus

should be on ensuring that:

• the leadership and other key role players take full ownership of

key controls and ensure that there is adequate monitoring of

commitments made

• there are controls that are able to prevent and detect non-

compliance with laws and regulations

• in instances where transgressions and poor performance are

identifi ed, those charged with the responsibility of consequence

management should be able to act decisively

• positions of key offi cials are fi lled in time and management ensures

that such offi cials possess requisite skills and competencies that

enable them to address the clean administration challenges

appropriately

• monthly fi nancial statements with supporting schedules are

prepared.

Until these matters receive the appropriate response from the leadership,

the objective of clean administration will not be achieved.

38


2.1.2 Five-year progress towards clean audits

Producing fi nancial statements with unqualifi ed opinions is an important milestone towards clean audit outcomes – but not the ultimate objective. The

following fi gure shows the fi ve-year progress made by local government towards receiving unqualifi ed opinions with no fi ndings (i.e. clean audits) on

audit reports.

Figure 2

Five-year progress towards unqualifi ed opinion on fi nancial statements

3% 7%

19%

5% 5%

69% 74%

55%

74% 79%

28% 19%

26%21% 16%

?

2007-08 2008-09 2009-10 2010-11 2011-12 2013-2014

(32 auditees) (41 auditees) (42 auditees) (42 auditees) (38 auditees)

Unqualifi ed with no fi ndings Unqualifi ed with fi ndings Qualifi ed, adverse or disclaimed with fi ndings

39


It is commendable that progress has been made in eliminating the

disclaimed and adverse opinions. This demonstrates that if the leadership

can take the same decisive action over compliance with laws and regulations

and PDOs, the desired outcomes can be achieved. It is clear that during

the fi rst three years of the period presented there was a concerted eff ort

towards improving the audit outcomes – a mere 3% to a much improved

19%. Over the recent years, the auditees have become complacent as they

appear to be satisfi ed with sustaining fi nancial unqualifi ed audit opinions

with fi ndings. Despite the fact that most CFO positions were fi lled, there

was a lack of discipline in preparing fi nancial statements on a regular

basis. Findings on PDO reporting continue to be a challenge with the

most prevalent challenge being that of non-compliance with laws and

regulations, which could be attributable to management’s failure to take

action against transgressors.

Over the years, the auditees that were able to deal with internal control

weaknesses and improve their audit outcomes adopted the following best

practices and processes:

• The fi nance units are adequately staff ed with the offi cials possessing

the required skills and competence.

• The SCM units implement and monitor eff ective action plans to

address prior year audit fi ndings.

• There is proper implementation and continuous monitoring of key

controls.

• Internal audit units extensively review the fi nancial statements and


• The leadership demonstrates its full commitment to the clean

administration objective.

Although we continued to support stakeholder initiatives such as the

provincial operation clean audit (OPCA) committee of the Department

of Local Government to encourage clean administration, we have noted

that the messages generated through our audit reports and the follow-

up interventions have failed to infl uence actions that led to improved

audit outcomes. The provincial OPCA and the municipality-specifi c

OPCA committees need to ensure that they coordinate and sharpen the

focus of their initiatives and activities to build momentum to drive clean

administration as well as implement and monitor decisive action plans and

commitments to improve audit outcomes if the clean audit target of 2014

is to be achieved.

2.1.3 Useful and reliable reporting against predetermined objectives and compliance with laws and regulations – three-year progress

In order to obtain clean audit opinions, auditees should report annually on

the achievement of their PDOs in a useful and reliable manner and their

audit reports should not contain material fi ndings on compliance with laws

and regulations. The following fi gure shows the three-year progress made

by local government in the province towards meeting these requirements.

40


Figure 3

Three-year progress in addressing fi ndings on predetermined objectives and compliance with laws and regulations

49%48%

50%

45%43%

29%

0%

5%

0%

2009-10 2010-11 2011-12

Findings on both PDOs and compliance with laws and regulations

(19 auditees)

Compliance with laws and regulations findings only

(17 auditees)

PDO findings only (0 auditees)

41


Compliance with laws and regulations remains a challenge for the province,

as there was an increase in the number of auditees with fi ndings when

compared to the previous period from 89% in 2010-11 to 95% in 2011-12

fi nancial year. The most common fi ndings on non-compliance pertained

to amendments made to the fi nancial statements and unauthorised,

irregular as well as fruitless and wasteful expenditure. The detailed analysis

of fi ndings arising from the audit of compliance with laws and regulations

is included in section 2.4.

Findings on PDOs and compliance with laws and regulations have

increased by a greater margin over the three years analysed. Findings of

this nature are preventing the province’s outcomes from improving. The

movements resulted in an increase in the number of fi ndings on both

PDOs and compliance with laws and regulations from 13 in 2011 to 19 in

2012. The reasons for auditees having fi ndings on compliance with laws

and regulations and PDOs resulted from the following defi ciencies:

• Senior management’s failure to adequately monitor controls and

review the process for planning and reporting on achievements

against PDOs.

• Lack of controls to ensure that planned objectives meet the SMART

principles or criteria.

• Lack of recording of the actual achievement and extent of

performance and ensuring that the reported performance

information was complete and supported and evidenced by

accurate information.

• Inadequate cooperation between the organisational performance

department and the user departments in reporting the municipality’s

performance.

• Poor understanding of the principles and guidelines by individuals

involved in the strategic planning process, as they were not aware

of the National Treasury Framework for managing programme

performance information (FMPPI).

• Poor document management systems to support the reported

information and inadequate internal policies and procedures

over the processes pertaining to the reporting of performance

information.

• Lack of review of the recording of actual achievements by senior

management, vacancies at the performance information unit,

and a lack of implementation of a performance system to ensure

information reported is complete, valid and accurate.

• Lack of training of offi cials on the requirements for performance

reporting.

The above defi ciencies and pervasive root causes noted earlier were

an indication of some of the challenges that the leadership of aff ected

municipalities and municipal entities would have to focus on in order to

address fi ndings relating to PDOs. Repeated non-compliance with laws

and regulations went unpunished or there were no consequences, and

therefore offi cials continued doing the wrong things, as they were not

held accountable. This trend can only be reversed by the leadership taking

decisive action against transgressors.

42


2.2 FINDINGS ARISING FROM THE AUDIT OF

FINANCIAL STATEMENTS

2.2.1 Material misstatements in fi nancial statements

The purpose of the annual audit of the fi nancial statements is to provide

the users thereof with an opinion on whether the fi nancial statements

fairly present, in all material respects, the fi nancial position (statement

of fi nancial position) and results of an auditee’s operations (statement of

fi nancial results) and cash fl ows for the reporting period in accordance

with the applicable accounting framework and the requirements of the

applicable legislation.

The audit provides the users with assurance on the degree to which the

fi nancial statements are reliable and credible on the basis that the audit

procedures performed did not identify any material errors or omissions

therein.

During the audit process, we aff ord auditees the opportunity to correct

material misstatements to enhance fair presentation. However, this is not

intended to allow auditees to correct errors that have their roots in poor

fi nancial management during the year, but rather to allow for presentation

matters to be addressed. Unfortunately, the trend is that the auditees

place too much reliance on the audit process to identify and correct errors

resulting from poor fi nancial management throughout the fi nancial year;

as a result, root causes and the control environment were not addressed.

43


Figure 4

Material misstatement in fi nancial statements

Unqualified8 (21%)

Qualified 6 (16%)

Outcomes if misstatements were not corrected

Qualified/disclaimed30 (79%)

Unqualified32 (84%)

No materialmisstatements

8 (21%)

Some corrected5 (13%)

None corrected1 (3%)

All corrected24 (63%)

Outcomes after correction of misstatements 63% of auditeesavoided qualification

Material misstatements

corrected during the audit process

Auditees with no material misstatementsAuditees that submitted fi nancial statements for

auditing with material misstatements subsequently corrected

Auditees with uncorrected material misstated fi nancial statements

44


2.2.2 The quality of fi nancial statements submitted for auditing

All auditees submitted fi nancial statements for auditing by the legislated

deadline. As in the prior years, the majority of auditees submitted fi nancial

statements that contained material misstatements in one or more areas.

In total, 24 (63%) of the audit outcomes would have been qualifi ed had

there not been year-end adjustments to the fi nancial statements during

the audit process; and only eight (21%) of the 38 auditees would have

received unqualifi ed fi nancial statements.

The inability to produce credible and reliable fi nancial statements was

evident across all categories of auditees, with only one metro and six

municipal entities submitting fi nancial statements with no material

misstatements. The continued reliance on the auditors to identify

corrections to be made to the fi nancial statements in order to obtain an

unqualifi ed audit opinion, is not sustainable. The other contributing factor

was the lack of collaboration between coordinating departments and

auditees on complex fi nancial and performance reporting issues. In addition,

some audit committees were not eff ective in ensuring that management

takes corrective action and implements their recommendations.

Table 5

Key outcomes and trends – quality of fi nancial statements

Category Key outcomes and trends

Metropolitan council

In total, two (67%) metros [2010-11: 3 (100%)] submitted

fi nancial statements that contained material misstatements

and one metro (Ekurhuleni Metro) managed to avoid

material amendments by addressing fi ndings raised

during the interim audit. The leadership commitment

and management’s willingness to honour the executive

leadership’s commitment of preparing monthly fi nancial

statements contributed to the achievement of the

fi nancially unqualifi ed results. Although Ekurhuleni Metro

prepared and submitted quarterly fi nancial statements to

the audit committee, it is the intention of management to

progress towards preparing monthly fi nancial statements.

District and local

municipalities

All district and local municipalities (100%) [2010-11: 11

(92%)] submitted fi nancial statements that contained

material misstatements and seven (78%) auditees in this

category received a fi nancially unqualifi ed opinion with

fi ndings after material amendments were made to the

fi nancial statements.

Municipal entities

A total of 19 (73%) municipal entities [2010-11: 17 (63%)]

submitted fi nancial statements that contained material

misstatements and 17 (65%) of the municipal entities

received a fi nancially unqualifi ed audit outcome as a

result of the audit process. It is encouraging that seven

(27%) municipal entities were able to receive fi nancially

unqualifi ed audit outcomes without the assistance of the

audit process.

45


2.2.3 Uncorrected material misstatements in fi nancial statements resulting in qualifi ed audit opinions

A total of six (16%) auditees did not correct all the material misstatements identifi ed during the audit process due to unavailability of information

or documentation required to determine the correct amounts to be refl ected in the fi nancial statements. These auditees could therefore not avoid

receiving a qualifi ed audit opinion. Key areas for misstatements included non-current assets, current assets, liabilities, revenue and other disclosure items.

The following sections provide more detail in the areas that were misstated in the fi nancial statements.

Financial statement qualifi cation fi ndings

Figure 5 shows the three most common qualifi cation areas as well as auditees’ progress, or lack thereof, to address prior year qualifi cations. Table 5 lists

the basis and the reasons for the qualifi cations.

Figure 5

Progress on, and nature of, most common fi nancial statement qualifi cations

20%

17% 17%

50%

25%

75% 60%

33%67%

40%

50%

50%

17% 17%

67%

Progress Progress Progress Progress Progress Nature of findings Nature of findings Nature of findings

Revenue [Denominator – ( 2012=4 (2011=5)] Receivables [Denominator – ( 2012=5 (2011=5)]Property, infrastructure, plant and equipment

[Denominator - 2012:=4 (2011=5)]

Progress Prior year qualifi cations addressed New qualifi cations Repeat qualifi cations

Nature of qualifi cations Existence/occurrence Valuation/accuracy Completeness

46


Of the three most common qualifi cation areas that are shown above,

revenue was leading with repeat qualifi cations and with 25% new

qualifi cations. Given that 20% of revenue qualifi cations from the prior

year were resolved, resolving the repeat qualifi cations will most likely

reduce the number of auditees with a fi nancially qualifi ed opinion in the

province. Since qualifi cation on receivables was linked to misstatement in

revenue, addressing the revenue qualifi cation adequately would therefore

resolve related receivables qualifi cation. With regard to property, plant and

equipment, half of the prior year qualifi cations were resolved. Auditees

with a qualifi ed opinion in this category are encouraged to replicate the

good practices of decisively and diligently implementing action plans to

address prior year qualifi cations. District municipalities and provincial and

national treasuries are encouraged to play their role in supporting the

municipalities.

Table 6

Common qualifi cation areas

Qualifi cation area

Basis for qualifi cation

Reason for qualifi cations

Revenue

Accuracy,

occurrence

and

completeness

of service

charges

(electricity,

water and

refuse)

Auditees did not provide for audit

purposes suffi cient appropriate audit

evidence to support the accuracy,

occurrence and completeness of service

charges.

We identifi ed diff erences between the

billing data and the source data relating

to water and electricity meter readings.

The evidence to confi rm the basis to

disregard actual meter readings and to

use estimates was not available. This was

noted at the City of Johannesburg and

its two municipal entities, Johannesburg

Water and Johannesburg City Power.

Lack of audit

evidence

– various

revenue line

items

At Metsweding Economic Development

Agency suffi cient appropriate audit

evidence could not be obtained for the

following classes of transactions:

• Government grants

• Other revenue

• Investments

47


Qualifi cation area



Current assets

Completeness,

valuation,

allocation

and rights

of consumer

debtors

Suffi cient appropriate information was not

available to support the completeness,

valuation, allocation and rights of

consumer debts due to the material

defi ciencies that were identifi ed in the

revenue billing system.

Suffi cient

appropriate

audit evidence

– investments

The Westonaria and Randfontein local

municipalities did not timeously clear long

outstanding reconciling items regarding

investments and did not provide

supporting documentation to support

these reconciling items.

Suffi cient

appropriate

audit evidence

– cash

and cash

equivalents

The Westonaria and Randfontein local

municipalities could not provide suffi cient

appropriate audit evidence to support

material reconciliations between the

overdrawn cash and cash equivalents

balance per the cashbook and the general

ledger.

Qualifi cation area



Non-current assets –

property, plant and

equipment, investment

property and investments

Lack of

suffi cient

appropriate

audit evidence

The City of Johannesburg could not

provide suffi cient appropriate evidence

for the restatement of the corresponding

fi gures and the assessment of

impairments, useful lives and residual

values of property, plant and equipment.

Valuation and

completeness

The Randfontein Local Municipality did

not have an accurate and complete fi xed

asset register to support the property,

plant and equipment balance.

Interpretation

of the

accounting

standards,

valuation and

completeness

The Westonaria Local Municipality did

not account for property, plant and

equipment in accordance with the

Generally Recognised Accounting

Practise (GRAP 17). The municipality

did not review property, plant and

equipment for classifi cation, changes in

useful lives, residual values, impairment

and depreciation. The municipality did

not provide suffi cient appropriate audit

evidence to support the amount disclosed

as work in progress.

Disclosure notes (leases)

Classifi cation

The City of Johannesburg did not classify a

lease agreement as a fi nance lease where

substantially all the risks and rewards of

incidental ownership were transferred to

the municipality.

48


The following table shows auditees’ progress, or lack thereof, in addressing their prior year qualifi cation fi ndings.

Table 7

Auditees’ history of fi nancial statement qualifi cation areas

AuditeeAudit opinion

2011-12

Movement in addressing 2010-11 qualifi cation areas

Audit opinion 2010-11

Non-current assets

Current assets

LiabilitiesOther

disclosure items

Revenue Expenditure



City of Johannesburg Qualifi ed New Repeat Addressed New Repeat Addressed Qualifi ed

Randfontein Local Municipality Qualifi ed Repeat New Addressed Addressed Qualifi ed

City Power Johannesburg Qualifi ed Repeat Repeat Qualifi ed

Johannesburg Water Qualifi ed Repeat Repeat Qualifi ed

Emfuleni Local Municipality

Financially

unqualifi ed with

fi ndings

Addressed Addressed Addressed Qualifi ed

Mogale City Local Municipality

Financially

unqualifi ed with

fi ndings

Addressed Qualifi ed

49


The following table shows auditees that received qualifi ed opinions in 2010-11 but no longer existed in 2011-12 as they were integrated into the City of

Tshwane, which received a fi nancially unqualifi ed opinion. The integration into the City of Tshwane resulted in all the qualifi cation areas from the prior

period being addressed in the 2012 fi nancial year as evidenced by the overall outcomes of the City of Tshwane.

Table 8

Merged auditees – history of fi nancial statement qualifi cation areas


2011-12



Non-current assets

Current assets

LiabilitiesOther

disclosure items

Revenue Expenditure



Kungwini Local

Municipality

No separate

audit opinion as

these auditees

were integrated

into City of

Tshwane

Auditee

integrated

into the

Metro

Auditee

integrated

into the

Metro

Auditee

integrated

into the

Metro

Qualifi ed

Nokeng Tsa Taemane

Local Municipality

Auditee

integrated

into the

Metro

Qualifi ed

Civirelo Water

Auditee

integrated

into the

Metro

Qualifi ed

Tshwane Centre for

Business Information

and Support (CENBIS)

Auditee

integrated

into the

Metro

Qualifi ed

50


The following table shows auditees that would have been excluded from the table 5 analysis, as they did not receive qualifi ed opinions in 2010-11

fi nancial year, but regressed to fi nancially qualifi ed audit opinions in 2011-12.

Table 9

New fi nancial statement qualifi cations


2011-12



Non-current assets

Current assets

LiabilitiesOther

disclosure items

Revenue Expenditure



Westonaria Local Municipality Qualifi ed New New New

Financially

unqualifi ed

with

fi ndings

Metsweding Economic

Development Agency (MEDA)Qualifi ed New New New entity

51


In substance, the qualifi cations in the province remained unchanged year

on year. A total of four (10%) auditees that had received qualifi ed opinions

in the previous year received the same opinion in the year under review. A

total of two (5%) auditees, Emfuleni and Mogale City local municipalities,

successfully addressed all their prior year qualifi cation and improved

their audit opinions to fi nancially unqualifi ed with fi ndings. However, it is

concerning that two of the qualifi cations (5%) in the current year were new

qualifi cations. These qualifi cations bring into question the sustainability of

unqualifi ed areas as well as sustainability of prior qualifi cations addressed.

The pervasive root causes of fi nancial statements that received a qualifi ed

opinion or fi nancial statements that contained material amendments were

due to the following:

Slow response to the message of the Auditor-General of South Africa

• Weaknesses in the internal control environment and lack of

consequence management create opportunities for transgression.

• Commitment to prepare monthly fi nancial statements with

supporting schedules for review by the audit committees was not

implemented.

• Auditees relied on consultants to deliver on the responsibilities of

the fi nance units without adequate review of their work.

• Vacancies that were not fi lled timeously with staff possessing

appropriate skills and competencies.

Lack of consequences

• Clean audit objectives were not included in the performance

contracts of the offi cials and they were not strictly enforced, resulting

in offi cials not being held accountable for repeat transgressions.

• Lack of proper discipline and diligence in adhering to the fi nancial

controls also contribute to the lack results.

• No clear communication of responsibilities and consequences for

transgressions in policies and procedures.

Lack of appropriate competencies at key positions

• Almost all the CFOs had the relevant skills and expertise to prepare

fi nancial statements, however, they lacked the discipline and

diligence to prepare fi nancial statements on a regular basis.

• Lack of appropriate skills at the lower levels within the fi nance

unit was also a weakness; and serious attention should be given

to appointing adequately skilled staff and enforcing performance

management systems.

The way forward

Gauteng is well resourced in terms of availability of cash resources, funding

capacity and access to highly skilled professionals. It is critical that political

leadership and management mobilise these resources and allocate them to

key priorities. This will assist in improving audit outcomes at an acceptable

rate and the province will redeem its moral ground of leading by example.

52


2.3 FINDINGS ARISING FROM THE AUDIT OF REPORTING ON PREDETERMINED OBJECTIVES

The Public Audit Act, 2004 (Act No. 25 of 2004) (PAA) requires the AGSA to audit annually the reported information relating to the performance of the

auditees against their predetermined objectives. Annexure 1 lists all auditees that had fi ndings on PDOs. A phased-in approach to auditing the PDOs

started in 2008-09 and the trend has shown very slow progress in improving the audit outcomes of PDOs.

2.3.1 Overall outcomes from the audit of reporting on predetermined objectives

The fi gure below shows the overall audit outcome, which shows an overall improvement in the PDO outcomes.

Figure 6

Overall audit outcomes from the audit of reporting on predetermined objectives

52% (12)

Unchanged

with findings

13 (34%)

Regressed

5 (13%)

Unchanged with

no findings

12 (32%)

Improved

7 (18%)

New auditee

with findings

1 (3%)

Movement in number of auditees with findings on PDOs

50% (19) 54% (21)

50% (19) 46% (18)

2011-12 (38)

2010-11 (39)

Auditees with PDO findings Auditees with no PDO findings

Performance targets not measurable

Reported performance information not consistent with planned objectives, indicators/measures and targets

Performance information not accurate or valid when it is compared to source

information

Findings – metros Findings – municipalities Findings – municipal entities

7% (2)

7% (3)

7% (2) 7% (2)

15% (4) 19% (5)

67%

33%

56%

11% 11% 22% 67%

13% 13%7%

11% (3) 11% (3)

15% (4)

Metros District and local

municipalities

Municipal

entities

Findings on both usefulness and reliability Findings on usefullness only Findings on reliability only No PDO fi ndings

53


Indicator Key fi ndings Good Concerning Poor

Ov

era

ll

Metropolitan councils

Consistent with the prior year, the Ekurhuleni

Metro received an audit opinion with no fi ndings

on PDOs. We reported PDO fi ndings at the City of

Tshwane and City of Johannesburg due to lack

of adequately skilled staff at the performance

reporting units and an inadequate involvement of

audit committees and internal audit units.

District and local

municipalities

The district municipalities improved on their audit

outcomes, setting a good example to their local

municipalities. The West Rand District Municipality

had no fi ndings on PDOs, while the Sedibeng

District Municipality had fewer fi ndings compared

to the prior year. The leadership of both district

municipalities showed an interest in the outcomes

of PDOs.

The rest of local municipalities showed a decline

in reliability of reported performance information

and a slight improvement in the usefulness of

information. Despite oversight by the political

leadership, councils and MPACs auditees were

unable to master the discipline of addressing and

eliminating repeat fi ndings on PDOs.

Municipal entities

Municipal entities showed improvement in the

PDOs. A total of seven (62%) municipal entities did

not have fi ndings on PDOs. This was attributable to

quarterly reporting of PDOs, which was adequately

reviewed by internal audit units for accuracy,

validity and completeness.


Good

The Ekurhuleni Metro and the Emfuleni Local

Municipality established performance audit

committees that focused on the quarterly reports

of the municipalities and obtained assurance from

internal audit units on the accuracy, completeness

and reliability of the reported performance

information.

The Ekurhuleni Metro established an integrated

development planning offi ce. The planning offi ce is

responsible, among others, for the annual revision

of the integrated development plans (IDPs) in

line with changes in the strategic priorities of the

national and provincial treasuries. The performance

audit committee ensured that the IDP targets met

the SMART criteria.

The internal audit units of Midvaal and

Johannesburg Development Agency had capacity

and skills to adequately verify quarterly information

against the requirements of FMPPI. The good

practices above should be replicated by all

municipalities and municipal entities.

Concerning

The regression of 6% is concerning as it indicates

that insuffi cient or unsustainable controls have

been implemented to prevent the PDO fi ndings.

A total of seven (78%) municipalities, two (67%)

metros and nine (33%) municipal entities had

fi ndings on PDOs. This was mostly due to the lack of

regular monitoring and evaluation of performance

reports throughout the fi nancial year, therefore the

usefulness and accuracy are only assessed during

the audit process. The following auditees had

fi ndings on both the reliability and usefulness of

the performance reports.

Table 10

Predetermined objectives – overall assessment

54



Poor

Without adequately skilled offi cials at appropriate

levels, ensuring that planned targets that meet the

requirement of FMPPI, fi ndings on PDOs will remain

a challenge. This results in PDO reports that are not

reliable and useful thus negatively aff ecting the

councils’ oversight responsibility on service delivery.

Planned service

delivery targets not

achieved

The annual performance reports of 13 (34%)

auditees showed that more than 20% of planned

service delivery targets were not achieved, as a

result of poor planning, poor project management

as well as lack of monitoring and oversight.

At the City of Tshwane and Westonaria Local

Municipality, changes were made to performance

objectives without being communicated to the

public and approved by the councils, as required by

the legislation.

55


2.3.2 Findings on predetermined objectives

The following fi gure shows auditees’ progress in addressing prior year fi ndings and the nature of current year fi ndings.

Figure 7

Progress on, and nature of, predetermined objective fi ndings

85%

15%

8%

38%

38%

38%

Progress Progress Nature of findings Nature of findings

74%

7%

20%

9%

26%

47%

5%

47%53%

58%

37%

Usefulness (Denominator = 13) Reliability (Denominator = 13)

Progress Prior year PDO fi ndings addressed New PDO fi ndings Repeat PDO fi ndings

Nature of fi ndingsPresentation Consistency Relevance Measurability

Accuracy Validity Completeness

The usefulness of reported information is measured against the criteria of presentation, consistency, measurability and relevance. The information

contained in the performance reports of 12 (63%) auditees [2010-11: 15 (83%)] was not useful.

56


Findings on reliability relate to whether the reported information on

performance against PDOs 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 data, evidence or

documentation. The information contained in the performance reports of

13 (68%) auditees [2010-11: 11 (61%)] was not reliable. The following table

presents the most common types of fi ndings.

Table 11

Most common types of fi ndings on usefulness and reliability of reported information

Category of PDO fi ndings

Most common types of fi ndings

Most common material

fi ndings on usefulness

The most common material fi nding on usefulness of

reported information was that performance targets were

not specifi c and/or measurable to ensure that the required

performance could be meaningfully measured. Findings on

reliability of annual performance reports mostly related to

the accuracy and validity of the performance information.

The fi ndings on predetermined objectives were as a result

of :

• offi cials not fully understanding performance reporting

framework requirements

• lack of adequate IT systems to report on predetermined

objectives

• insuffi cient review and interrogation by independent

offi cials at an appropriate level

• internal audit plans not covering formulation and

reporting of predetermined objectives

• performance reports submitted to councils on a quarterly

basis were not adequately verifi ed for credibility and

accuracy.

2.3.3 Conclusion on reporting on predetermined objectives

The inability by the auditees to fully resolve fi ndings on predetermined

objectives is concerning given that 2014 is not far away and that clean

administration cannot be achieved without addressing PDO reporting.

The municipal leadership should take the AGSA message seriously and

capacity building is required to address the lack of skills. There is a need

to ensure that robust performance management takes place as well as

enforcement of consequence management. Governance structures such

as audit committees, internal audit units and other oversight bodies need

to ensure that adequate monitoring takes place in order to make signifi cant

strides in addressing the fi ndings in this area.

The pervasive root causes of fi ndings on PDOs were due to the following:

Slow response to the message of the Auditor-General of South Africa

• The value of PDO reports was fully realised by the councils and

as a result the council’s responsibility for oversight, including

performance management, was not at an appropriate level.

• Lack of continuous monitoring of action plans by political leadership

to address fi ndings on performance reporting.

Lack of skills

• Inadequate controls over documentation and collation of

performance information, and information that was reported was

not supported by appropriate evidence.

• Inadequate training of offi cials by the provincial treasury on the

requirements of FMPPI.

• Inadequately skilled offi cial appointed at the performance unit.

Lack of consequences

• Unclear defi nition of roles and responsibilities, resulting in offi cials not being held accountable for not achieving planned service delivery targets.

57


• The indicators and targets contained in the planning documents

should form the basis for the signed performance agreements of

senior managers.

• Lack of alignment between offi cials’ performance contracts and

performance objectives and targets included in the IDPs.

• Absence of robust performance management.

Monitoring by audit committees, internal audit units and oversight

bodies

• Risks to PDO reporting were not included in the risk management

strategies of the municipalities and municipal entities.

• Lack of adequate quarterly reviews of reports by internal audit units

and the audit committees throughout the year contributed to some

of the fi ndings on PDOs.

• Oversight bodies did not adequately review the IDPs to ensure that

SMART principles were adhered to when developing objectives and

targets.

The way forward

Auditees need to prioritise addressing the above root causes, as PDOs

are a social contract with the citizens. The governance structures should

focus on ensuring that measurable and specifi c objectives are formulated

as per the requirements of the framework, and performance reports are

supported by appropriate evidence so that the council is able to exercise

robust oversight over PDOs.

In addition, governance structures such as audit committees and internal

audit units should intensify their reviews of quarterly reports and monitor

actual achievements compared to targets and track corrective action.

The credibility and reliability of performance information is of critical

importance as it enables full and eff ective oversight by the council and

provides reasonable assurance to the council about attainment of service

delivery objectives.

2.4 FINDINGS ARISING FROM THE AUDIT

OF COMPLIANCE WITH LAWS AND

REGULATIONS

2.4.1 Overall outcomes arising from the audit of compliance with laws and regulations

The PAA requires the AGSA to audit on an annual basis compliance

with laws and regulations applicable to fi nancial matters, fi nancial

management and other related matters. The compliance audit was limited

to the following focus areas: ■ Material misstatements in submitted annual

fi nancial statements ■ Asset and liability management ■ Audit committees

■ Budget management ■ Expenditure management ■ Prevention of

unauthorised, irregular as well as fruitless and wasteful expenditure

■ Financial misconduct ■ Internal audit ■ Revenue management

■ Strategic planning and performance management ■ Transfer of funds

and conditional grants ■ Procurement and contract management (supply

chain management) ■ Human resource management and compensation.

Annexure 1 lists all auditees that had material non-compliance fi ndings in

one or more of these compliance focus areas. Transversal non-compliance

fi ndings relating to these focus areas are analysed below, except for the

following:

• Findings on strategic planning and performance management and

other PDO-related non-compliance are analysed in section 2.3.

• Procurement and contract management (SCM) fi ndings are analysed

in section 2.4.4.

58


Figure 8

Details of non-compliance fi ndings

50% 52%

48%

2011-12 2010-11

100% 100%92%

8%


municipalities

Municipal

entities

Unchanged withfindings 32 (84%)

Regressed 4 (11%)

Improved1 (3%)

New auditee 1 (3%)Unchanged with no

findings 1(3%)

Movement in number of auditees with compliance findings

Procurement management

Audit committees

Expenditure management

Asset and liability management

Annual financial statements and annual report

Unauthorised, irregular as well as fruitless and wasteful expenditure

Material misstatement / limitations in submitted annual financial statements Regression

Regression

Regression

Regression

Regression

Regression

Regression

Common areas of non-compliance: 38 auditees

79%

76%

71%

66%

32%

18%

60%

48%

2%

5%

18%

5%

5%

8%

Auditees with no compliance fi ndings Auditees with compliance fi ndings

59


All municipalities remained unchanged with fi ndings on non-compliance

with laws and regulations while there was an increase in the number of

municipal entities that had fi ndings on non-compliance with laws and

regulations compared to the prior year. This prevalence indicated that

processes that were in place to detect and prevent instances of non-

compliance with laws and regulations were not eff ective. The leadership

needs to enhance its oversight responsibilities and hold offi cials

accountable to ensure a reduction in the extent of non-compliance with

laws and regulations.

Table 12

Outcomes and trends arising from the audits

Indicator Key outcomes and trends Good Concerning Poor

Good

The Johannesburg Social Housing Company sustained its

clean audit opinion status. This was encouraging as it indicated

that the fundamentals of internal controls were in place and

were operating at the required level. The Johannesburg Fresh

Produce Market resolved material non-compliance fi ndings

reported in the prior year and this enabled it to move to the

clean audit category.

The leadership at these entities had a culture of zero

tolerance towards instances of non-compliance with laws and

regulations. The deviations from the SCM policies were not

approved without adequate documentation to support such

deviations. The deviations were only approved if they complied

with deviation frameworks, as prescribed by the National

Treasury.


Poor

We reported material non-compliance fi ndings at 36 (95%)

auditees [2010:11: 33 (79%)]. The top two areas of non-

compliance are material misstatements in fi nancial statements

submitted for auditing and procurement and contract

management.

The root causes of these repeat fi ndings are due to:

• lack of processes that facilitated the implementation of

a compliance checklist as previously committed by the

leadership

• deliberate disregard for laws by transgressors and lack of

consequence for those not complying with applicable

legislation

• failure to implement the commitment of preparing monthly


• lack of a deviation framework that would prevent and detect

non-compliance with laws and regulations

• inadequate monitoring and oversight performed by

governance structures.

The inability of the leadership to set the appropriate tone

conducive to proper governance and compliance with laws and

regulations created an environment where non-compliance

with laws and regulations is a norm as evidenced by 95% of the

auditees with reported non-compliance fi ndings.

2.4.2 Findings on compliance with laws and regulations

The following fi gure shows a lack of progress made by auditees towards

addressing prior year fi ndings on non-compliance with laws and

regulations.

60


Figure 9

Common areas of fi ndings on compliance with laws and regulations

11% 8% 14%

23%

30

27% 44%

77% 73%

56%

17% 3%

30%

75% 67%

50%

25%

7%

75%

25% 33%

73%

50%

9%

Findings in top 3 areas of compliance (100%=30) Findings in other areas of compliance (100%=12)

26 2512

43

4

Material

misstatement/limitations in

submitted annual financial

statements


well as fruitless and

wasteful expenditure

Procurement management Expenditure

management

HR management Asset and liability

management

Internal audit

Prior year compliance fi ndings addressed New compliance fi ndings Repeat compliance fi ndings

Specifi c areas of non-compliance are further discussed in other sections of this report. Section 2.2.1 analyses the extent and impact of material

misstatements in annual fi nancial statements submitted for auditing. Section 2.4.3 details the fi ndings on procurement management and section 2.4.4

discusses the extent and nature of unauthorised, irregular as well as fruitless and wasteful expenditure.

61


The following table summarises the nature of the most common fi ndings in other areas of non-compliance per type of auditee.

Table13

Summarised fi ndings in other areas of non-compliance

Nature of other areas of non-compliance per type of auditee

Expenditure management: 12 (20%) auditees Asset and liability management: three (18%) auditees

e

52% (12)

50%

33%

17%

52% (12)

33%

33%

33%

Findings relate mainly to payment of suppliers later than 30 days. The resultant

interest will impact on the fruitless and wasteful expenditure.

The most common fi ndings on asset and liability management related to:

• lack of processes to record revenue

• inadequate controls to collect money owed to the municipalities and

municipal entities

• inadequate management, accounting and information system to ensure that

assets were accounted for correctly.

Internal audit: two (16%) auditees Revenue management: four (18%) auditees

e

50%

50%

e

52% (12)

50%

25%

25%

The most common fi ndings on internal audit related to non-evaluation of

compliance with laws and regulations and reporting on PDOs.

Revenue fi ndings related mainly to:

• inadequate management, accounting and information system to recognise

revenue when earned

• non-reconciliation of revenue transactions and related balances on a regular basis.

Metros Municipal entities Municipalities Improvement Regression

62


2.4.3 Findings arising from the audit of supply chain management

The fi gure below presents the movement in the number of auditees with SCM fi ndings, the prevalence of SCM fi ndings across the auditees and a

summary of SCM fi ndings, with a comparison to the audit results of the 2010-11 fi nancial year.

Figure 10

Findings arising from the audit of supply chain management

100%

11%

89% 58%

42%

MetrosDistrict and local

municipalities

Municipal

entities


Regression

11 (29%

New entity with findings

1 (3%)

Improved

5 (13%)

Unchanged with

findings

13 (34%) Unchanged with

no findings

8 (21%)

Movement in number of auditees with findings on SCM

14%

0%

0%

11%

6

Reduction

Reduction

Improvement

Increase

Increase

Increase

Increase

Regression

50%

2011-12 2010-11

Summary of findings on SCM

Internal control deficiencies

Uncompetitive or unfair procurement processes

Awards to close family members of employees and councillors

Awards to employees and councillors or other state

officials

Limitation on planned scope of audit of awards

5% 2

4

29% 12

58% 22

43% 18

13% 5

10% 4

8% 3

8% 3

Inadequate contractmanagement

Same level of findings as in 2010-11

Auditees with no SCM fi ndings Auditees with SCM fi ndings

63


Our audits included an assessment of procurement processes, contract

management and the related controls. To ensure a fair, equitable,

transparent, competitive and cost-eff ective SCM system, the processes and

controls needed to comply with legislation and minimise the likelihood of

fraud, corruption, favouritism as well as unfair and irregular practices. We

assessed 38 auditees.

We reported fi ndings arising from the audit in the management reports

of 24 (63%) of the auditees and in these cases the fi ndings were material

enough to be reported in the audit report. All metros, 89% of the district

and local municipalities and 58% of the municipal entities had material

SCM fi ndings.

The following table provides key outcomes and trends, and further analyses

of the SCM fi ndings.

Table 14Signifi cant aspects of supply chain management


Good

The City of Tshwane had a committee that the city manager was part

of, which approved all the justifi able deviations and also invested in a

system that detects and prevents awards to people in the service of

the municipality, resulting in a reduction of the deviations.

The City of Johannesburg implemented a deviation framework that

complied with SCM legislation to curb unjustifi able use of deviations.

The appropriate use of the deviation framework should serve as an

early warning signal.

In order to close the gaps identifi ed in the SCM processes, the

Ekurhuleni Metro requested management to update and align the

SCM policy to the SCM regulations.

The leadership at the Sedibeng District Municipality and the Midvaal

Local Municipality had a zero-tolerance culture towards non-

compliance with laws and regulations. For instance, the deviations

from the SCM were not approved without adequate documentation

to support such deviations.

Sound records management and deviation frameworks at both

Johannesburg Fresh Produce Market and Johannesburg Social

Housing Company contributed to the clean audit outcomes. The

deviation register, with reasons for deviating, was submitted to the

audit committee on a quarterly basis.


Poor

The prevalence of SCM fi ndings at municipalities was mainly due to

SCM offi cials lacking appropriate competencies to deal with SCM

regulations. The following were main root causes of recurring material

fi ndings on SCM legislations:

• Lack of internal controls to detect or prevent awards made to

employees, councillors, family members and people in other

service institutions as well as identifi ed false declarations.

• Lack of consequence management for employees and suppliers

who fail to declare their confl ict of interest.

• The accounting offi cers did not implement adequate controls and

mechanisms to monitor contracts that were due for renewal prior

to extending them.

• Auditees did not proactively identify and disclose in the fi nancial

statements the unauthorised, irregular as well as fruitless and

wasteful expenditure.

• Performance contracts of senior leadership and senior offi cials

did not always include key performance indicators linked to

compliance fi ndings with the enabling legislation. This was not

conducive to driving the culture of ownership and accountability.

Concerning

The following were concerning:

• Internal audit plans were not adequately addressing risks relating to

material non-compliance.

• Management did not take ownership and accountability for

implementing the recommendations made by the legislative

oversight and audit committees.

• Complete and accurate quarterly fi nancial and non-fi nancial

reports were not always submitted to the relevant stakeholders.

64


2.4.3.1 Limitations on planned scope of the audit of awards

A total of two (5%) auditees could not provide suffi cient appropriate audit evidence to verify that awards had been made in accordance with the

requirements of SCM legislation. We could not perform alternative audit procedures to obtain reasonable assurance that the expenditure incurred

in respect of these awards was not irregular. The reason for these limitations was inadequate document management. Due to these limitations, the

fi ndings reported in the remainder of this section might not refl ect the full extent of irregularities and SCM weaknesses at the auditees.

The following table shows the auditees where limitations were experienced.

Table 15

Limitations experienced on planned scope of the audit of awards

Auditee Number of awards Value of awards

East Rand Water Care Company 3 R4,0 million

Sandspruit Works Association 2 R0,2 million

Total 5 R4,2 million

2.4.3.2 Awards to employees and councillors or other state offi cials

SCM Regulation 44 prohibits awards to persons or entities owned or managed by them if they are in the service of the auditee (i.e. employees and

councillors) or if they are in the service of any other state institution. Such expenditure is also considered irregular. The audit included the identifi cation

of such prohibited awards. We performed further testing to determine whether the legislated requirements with regard to declaration of interest were

adhered to. The table below shows the extent and nature of these awards and whether any non-compliance with legislation was identifi ed, with an

indication of the positions of the offi cials involved. Where prohibited awards had also been identifi ed in the previous year, the name of the auditee is

highlighted in red.

65


Table 16

Prohibited awards to employees and councillors or other state offi cials

Awards made to employees and councillors

Awards made to offi cials of other state

institutions

Supplier did not declare interest

Supplier did not submit declaration of

interest

Employee or councillor did not

declare interest

AuditeeNumber of instances

Amount(R’m)

PositionsNumber of instances

AmountNumber of instances



Amount

Municipalities

Mogale City Local Municipality 1 R0,02 mOther

employees4 R2,17 m

City of Tshwane 281 R77,99 mOther

employees2074 R108,63 m 2 R0,71 m 72 R13,12 m 40 R73,91 m

City of Johannesburg 50 R20,00 m 50 R20,00 m

Ekurhuleni Metro 50 R19,58 m 8 R13,20 m 42 R6,38 m

Emfuleni Local Municipality 8 R34,72 m

Merafong City Local Municipality 1 R0,08 m

Randfontein Local Municipality 44 R1,50 m

Midvaal Local Municipality 1 R0,02 m

West Rand District Municipality 11 R0,40 m

Municipal entities

Johannesburg City Parks 5 R2,66 m 5 R0,03 m

Johannesburg Fresh Produce

Market10 R0,51 m

City Power Johannesburg 5 R10,41 m

Metropolitan Trading Company 2 R0,49 m

Pikitup Johannesburg 1 R0,12 m

Sandspruit Works 5 R0,73 m

Total 2011-12 242 R78,01 m 2271 R202,02 m 60 R33,91 m 141 R22,15 m 40 R73,91 m

Total 2010-11 35 R46,67 m 113 R42,66 m 109 R41,59 m 21 R24,90 m 4 R0,52 m

Total awards: 2011-12 2 513 R280,00 m

Total awards: 2010-11 148 R89,33 m

66


A total of 16 (42%) auditees made awards to the value of R280 million to suppliers in which offi cials, councillors and offi cials of other state institutions

had an interest. This marks a signifi cant regression compared to the R89,4 million identifi ed at nine (21%) auditees in the prior year. The rand value of

these awards has more than tripled.

2.4.3.3 Awards to close family members of employees and councillors

Awards to persons or entities owned or managed by persons who are close family members of persons in the service of the state, whether at the auditee

or at any other state institution, are not prohibited. However, such awards of more than R2 000 must be disclosed in the fi nancial statements of the

auditee, as required by SCM Regulation 45. A close family member is defi ned as a spouse, child or parent of a person in the service of the state.

The audit included the identifi cation of awards to close family members. We performed further testing to determine whether the fi nancial statement

disclosure was made and whether the legislated requirements with regard to declarations of interest were adhered to.

The following table shows the audit fi ndings raised at auditees where awards to close family members of offi cials of the auditee were identifi ed, with an

indication of the positions of the offi cials involved. The percentage is based on the number of auditees reported on.

Table 17

Awards to close family members

Auditee

Awards made to close family members of persons in service of the auditee

No disclosure in fi nancial statements

Offi cial did not declare

interest

Supplier did not submit declaration

of interest

Supplier did not declare

interest

Number of instances

Amount PositionsNumber of instances

Number of instances

Number of instances

Number of instances

Ekurhuleni Metro 3 R0,80 m Other employees 1 1 2 1

City of Tshwane 557 R6,50 m Senior manager 515 21 21 557

Joburg Property Company 1 R0,60 m Other employees 1 1 1 1

Total 2011-12 561 R7,90 m 517 23 24 559

A total of three auditees made awards to the value of R7,9 million to suppliers in which close family members of employees of the auditee had an interest.

It was the fi rst time that we identifi ed such awards.

67


2.4.3.4 Uncompetitive or unfair procurement processes

The principles of contracting for goods and services in a manner that is

fair, equitable, transparent, competitive and cost-eff ective come from our

Constitution. Legislation, most notably the Municipal Finance Management

Act, 2003 (Act No. 56 of 2003) (MFMA) and SCM regulations, prescribes the

processes and rules to be followed by auditees in order to consistently

and correctly apply the constitutional principles and to safeguard the

process against abuse. The preferential procurement framework further

gives eff ect to the constitutional principle of aff ording preference to the

previously disadvantaged in the allocation of work by the public sector.

Our audits also focus on whether procurement processes followed were

fair and competitive in that they provided all suppliers equal opportunity

to compete for public sector contracts and in that the process did not

favour some suppliers above others.

It is important that the prescribed processes be followed to ensure that the

selected supplier meets the requirements and has the capacity and ability

to deliver the goods and services, and that those goods and services are

procured at competitive and economical prices.

The following table summarises the most common fi ndings on non-

compliance with SCM legislation that resulted in uncompetitive or unfair

procurement processes.

68


Table 18

Summarised fi ndings on uncompetitive or unfair procurement processes


Three written quotations not invited – no deviation approved/approved deviation not reasonable/justifi ed – 9 (24%)

Competitive bids not invited – no deviation approved/approved deviation not reasonable/justifi able – 14 (37%)

52% (12)

56%

33%

11%

52% (12)

14%

22%

64%

• A price quotation process is prescribed for procurement of goods and

services valued between R2 000 and R200 000.

• A total of seven (18%) auditees did not, in all instances, obtain three price

quotations from prospective providers and a properly delegated offi cial or

committee did not approve the deviations, as required.

• A competitive bidding process should be followed for the procurement of

goods and services above R200 000.

• A total of four (11%) auditees did not always invite competitive bids and a

properly delegated offi cial or committee did not approve the deviations or

approved deviation was not reasonable/justifi able.

No declaration of interest submitted by provider – 9 (24%) Preference point system not applied – 3 (8%)

67%

33%

52% (12)

100%

• Auditees made wards to suppliers that did not submit a completed

declaration of interest (MBD4 form).

• Auditees did not apply the preference point system in all procurement

of goods and services above R30 000, as required by the Preferential

Procurement Policy Framework Act.

69


Table 18



Procurement from suppliers without SARS tax clearance – 7 (18%) Other fi ndings – 17 (45%)

57%

29%

14%

52% (12)

64%

18%

18%

• Auditees made awards to suppliers without proof from the South African

Revenue Service (SARS) that their tax matters were in order.

• Other fi ndings include no declaration of past SCM practices, no certifi cate of

independent bid determination and bids advertised for shorter period than

prescribed.

Metros Municipal entities Municipalities Improvement Regession

2.4.3.5 Inadequate contract management

Shortcomings in the manner in which contracts were managed resulted in delays and fruitless and wasteful expenditure, which in turn impacted

directly on service delivery. We reported inadequate contract management fi ndings at fi ve (13%) auditees. This was a regression compared to three (7%)

auditees reported in the prior year. The table below summarises the most common fi ndings on inadequate contract management.

Table 19

Inadequate contract management

Key fi ndings Auditees Percentage

Contracts amended or extended – reasons not tabled in the council 2 6%

Contracts amended or extended without approval by a delegated offi cial 1 3%

No signed contract/not signed by delegated offi cial 1 3%

Performance of contractors not monitored on monthly basis 1 3%

70


2.4.3.6 Inadequate supply chain management controls

Internal control defi ciencies in the SCM environment were the highest at

three auditees, namely Ekurhuleni Metro, City of Tshwane and Westonaria

Local Municipality. This marked an improvement compared to six (14%)

auditees in the prior year.

The most common defi ciencies identifi ed during the audit of fundamental

SCM controls are as follows:

• SCM policies/procedures/fraud prevention plan did not provide

measures for prevention of abuse of SCM system.

• Internal audit unit did not evaluate SCM controls/processes and

compliance.

• Audit committee’s review of compliance with laws and regulations

did not include SCM.

• SCM offi cials were not aware of SCM policies/did not understand

roles and responsibilities.

• SCM policy/procedures were in confl ict with applicable legislation/

did not include all requirements.

2.4.3.7 Conclusion on supply chain management

Non-compliance with SCM regulations is pervasive in the province. In

addition to the root causes listed above, the following also contributed to

the fi ndings on SCM:

Systems and processes

• Proper budget monitoring mechanisms were not implemented on

a monthly basis to avoid incurred unauthorised expenditure.

• The lack of willingness to develop and implement a compliance

checklist and exception reports as control tools which must be

regularly monitored.

• Lack of continuous awareness and training on relevant laws and

regulations to curb the instances of non-compliance.

Oversight and monitoring

• The councils did not hold management accountable for creating an

environment where compliance with laws and regulations is a norm.

• The lack of collaborative eff ort by all coordinating institutions to

monitor and track implementation of commitments to curb non-

compliance.

Eff ective governance measures

• Inadequate assistance by internal audit in the review of eff ectiveness

of design, implementation and monitoring of internal control to

address audit fi ndings.

The way forward

The increasing trend of non-compliance with applicable legislation

and prescripts can only be addressed eff ectively if the leadership and

coordinating institutions set the right tone; systems and processes are

implemented to address internal control weaknesses; and robust oversight

and eff ective governance mechanisms are enhanced.

2.4.4 Unauthorised, irregular as well as fruitless and wasteful expenditure incurred

The MFMA requires accounting offi cers and authorities to take eff ective

and appropriate steps to ensure that unauthorised, irregular as well as

fruitless and wasteful expenditure is prevented. Although there is an

expectation that no such expenditure should be incurred, it is not always

possible for an accounting offi cer to prevent the occurrence thereof even

if all reasonable steps had been taken. In instances where it does occur, the

MFMA makes it compulsory for auditees to disclose such expenditure in

their annual fi nancial statements. The MFMA further requires that all cases of

unauthorised, irregular as well as fruitless and wasteful expenditure should

be investigated. If the investigation determines that an offi cial is liable

for the expense, disciplinary steps should be taken and the expenditure

should be recovered.

71


The extent of unauthorised, irregular as well as fruitless and wasteful expenditure and the pervasiveness of the related non-compliance with legislation

applicable to unauthorised, irregular as well as fruitless and wasteful expenditure as shown below are indicative of a breakdown in auditees’ internal

control environment.

Figure 11

Unauthorised, irregular as well as fruitless and wasteful expenditure incurred

100%22%

78% 62%

38%


municipalities

Municipal

entities


Any two of unauthorised,

irregular or fruitless and

wasteful expenditure

11 (29%)

Unauthorised

expenditure only 2 (5%)

All 3 of the unauthosided



3 (8%)

Irregular expenditure only

10 (26%) No unauthorised,

irregular or fruitless

and wasteful

expenditure

5 (13%)

Fruitless and wasteful

expenditure only

7 (18%)

Number of auditees that incurred unauthorised, irregular and/or

fruitless and wasteful expenditure


Irregular expenditure

not prevented

[11-12: 25 (66%)]

[10-11: 20 (53%)]

Unauthorised expenditure

not prevented

[11-12: 5 (13%)]

[10-11: 8 (19%)]

Disciplinary steps not

taken against officials who

made or permitted UIFW

[11-12: 1(3%)]

[10-11: 0(0%)]

Fruitless and

wasteful expenditure not

prevented

[11-12: 19 (50%)]

[10-11: 20 (42%)]

Nature of compliance findings on unauthorised, irregular

as well as fruitless and wasteful expenditure (UIFW)

Auditees with no SCM fi ndings Auditees with SCM fi ndings

72


Table 20

Key trends relating to unauthorised, irregular as well as fruitless and wasteful expenditure

Indicator Key fi ndings

High percentage of auditees with unauthorised,


and wasteful expendituture

Findings on compliance relating to unauthorised, irregular

as well as fruitless and wasteful expenditure remained at the

same high prevalence as in the previous fi nancial year at

27 (71%) auditees. The upward trend of reported amounts

of unauthorised, irregular as well as fruitless and wasteful

expenditure is continuing and has become a norm within

the province, signifi cant from R1,500 million to R2,715

million in the current year.

Category of auditees with unauthorised,


and wasteful expendituture

Compliance fi ndings on unauthorised, irregular as well as

fruitless and wasteful expenditure were identifi ed across all

auditees and 27 (71%) auditees incurred one or more types

of unauthorised, irregular as well as fruitless and wasteful

expenditure.

• All metros incurred irregular as well as fruitless and

wasteful expenditure and two of the three metros

incurred unauthorised expenditure. A total of seven

(78%) district and local municipalities incurred irregular

expenditure and two (22%) local municipalities incurred

unauthorised expenditure. In total, four (44%) local

municipalities incurred fruitless and wasteful expenditure.

• A total of 16 (62%) municipal entities incurred irregular

expenditure, 13 (50%) incurred fruitless and wasteful and

only one (4%) municipal entity incurred unauthorised

expenditure.

Auditees with no

unauthorised expenditure

It is commendable that 33 (87%) auditees did not incur

unauthorised expenditure. This indicates that good

budgeting processes are in place.

2.4.4.1 Nature of, and overall trends in, unauthorised expenditure

The fi gure below refl ects the three-year trend in unauthorised expenditure,

the extent to which it was identifi ed during the audit (and not by the

auditees’ internal control systems) and the type of auditee where it

occurred.

73


Figure 12Nature and trends – unauthorised expenditure

67%

33%33% 67%

4%

96%

Metros District and local municipalities Municipal entities

R22 million

R718 million

R204 million

R47 million

R668 million

R79 million9%

Amount Number of auditees

2011-12

Identified by auditees Identified during audit

2010-11 2009-10

1

2

6

5

3

10

2011-12 2010-11 2009-10

All of UE identified by auditees All or part of UE identified during audit Unauthorised expenditure (UE)

Auditees that did not incur unauthorised expenditure Auditees that incurred unauthorised expenditure

74


Table 21

Nature of, and current year movement in, unauthorised expenditure

NatureNumber of

auditees

Movement in number of

auditees from 2011-12

Amount

Movement in amount

from 2010-11

Overspending of

votes/main division

within votes

538%

R718 m 186%

Expenditure not in

accordance with votes1 100% R22 m 100%

The table below summarises key outcomes and trends.

Table 22

Key outcomes and trends – unauthorised expenditure


Concerning

The unauthorised expenditure incurred was as a result

of overspending of votes/main division within votes.

Unauthorised expenditure invariably means that money

intended for other programmes was used to cover

unauthorised expenditure, which negatively aff ects

service delivery.

Increase in auditees

that incurred unauthorised expenditure

A total of six (16%) auditees incurred unauthorised

expenditure of R740 million, two more than in the

2010-11 fi nancial year. This represents an increase from

the R252 million identifi ed in the previous year at four

auditees. The expenditure related to overspending of

votes due to the inadequate monitoring of compliance

with approved budgets. It is encouraging that, of the

R740 million total unauthorised expenditure, R718 million

was identifi ed by the auditees as a result of improvement

in compilation and analysis of information for fi nancial

reporting purposes.

2.4.4.2 Nature of, and overall trends in, irregular expenditure

The following fi gure refl ects the three-year trend in irregular expenditure,

the extent to which it was identifi ed during the audit (and not by the

auditees’ internal control systems) and the type of auditee where it

occurred.

75


Figure 13

Nature and trends – irregular expenditure

67%

33%

22%78%62%

38%


R760 million

R4 million

R1 069 million

R756 million

R205 million

R15 million

R426 million

R30 million

R668 million

R79 million9%


2011-12


2010-11 2009-10

2214

18

43

8

2011-12 2010-11 2009-10

Limitation (award not audited and excluded from the totalAll of IE identified by auditees All or part of IE identified during audit

Irregular expenditure (IE)

Auditees that did not incur irregular expenditure Auditees that incurred irregular expenditure

76


Irregular expenditure does not necessarily mean that money had been

wasted or that fraud had been perpetrated. However, it is a measure of

an auditee’s ability to comply with laws and regulations as it relates to

expenditure and procurement management.

The table below shows the nature of and current year movement in

irregular expenditure.

Table 23

Nature of, and current year movement in, irregular expenditure

NatureNumber of

auditees

Movement in number of auditees from

2011-12

AmountMovement in amount from

2010-11

Related to SCM 25 33% R1,779 m 39%

Other non-

compliance1

50%R54 m 114%

Improvement Regression

The following fi gure shows the extent of irregular expenditure disclosed

in the current year but resulted from non-compliance with legislation in

prior years.

Figure 14

Irregular expenditure incurred in prior year

R1 145 million

(26 auditees)

R688 million

(7 auditees)

73% R1 198 million

(19 auditees)

2011-12 2010-11

Identified in current year Incurred in prior years – identified in current year

77


Table 24

Key outcomes and trends


High value and high

percentage of auditees

incurring irregular

expenditure

Irregular expenditure increased from R1,197 million to

R1,833 million and was incurred by 26 auditees (68%), a

regression from the 21 (50%) auditees in the previous year.

The nature of the irregular expenditure related to:

• expending of budgets through uncompetitive or unfair

procurement processes

• procurement through deviations not in line with SCM

regulations regarding emergencies, impracticality of

obtaining quotations and use of sole suppliers

• awards to employees, councillors, family members and

other state offi cials

• contracts and quotations not audited due to limitation of

scope.

The root causes of the increase in irregular expenditure were

the following:

• Weaknesses in the internal control environment and lack

of consequence management create opportunities for

transgression and non-compliance with SCM prescripts.

• Inadequate contract management process results in

extension of contracts without following SCM prescripts.

• Inadequate documentation of the reasons to justify

deviations.

Concerning

Irregular expenditure was identifi ed across all auditees.

While it is encouraging that a signifi cant portion of irregular

expenditure was identifi ed by the auditees, it is concerning

that the systems and processes did not prevent it from

occurring.

2.4.4.3 Nature of, and overall trends in, fruitless and wasteful expenditure

The following fi gure refl ects the three-year trend in fruitless and wasteful

expenditure, the extent to which it was identifi ed during the audit (and not

by the auditees’ internal control systems) and the type of auditee where it

occurred.

78


Figure 15

Nature and trends – fruitless and wasteful expenditure

67% 33% 56%44%50%

50%


R70 million

R72 million

R8 million

R8 millionR44 million

R14 million

R668 million

R79 million9%


2011-12


2010-11 2009-10

9

5

14

10

8

16

2011-12 2010-11 2009-10

Fruitless and wasteful expeniture Fruitless and wasteful expeniture (FWE)

All of FWE identified by auditees All or part of FWE identified during audit

Auditees that did not incur fruitless and wasteful expenditure Auditees that incurred fruitless and wasteful expenditure

79


The movement indicated in the table below is the overall movement in the

number of auditees and the movement in amount of fruitless and wasteful

expenditure incurred by these auditees.

The actual fruitless and wasteful expenditure relates mostly to payments

made to employees and interest incurred on late payments.

Table 25

Nature of, and current year movement in, fruitless and wasteful expenditure

NatureNumber

of auditees

Movement in number of

auditees from 2011-12

AmountMovement in amount from

2010-11

Actual fruitless

and wasteful

expenditure

19 14% R142 m 173%

Regression

Table 26

Key outcomes and trends


Poor

A total of 19 (50%) auditees incurred fruitless and wasteful

expenditure of R142 million (2010-11: R52 million). Although

the number of auditees incurring fruitless and wasteful

expenditure decreased from 22 (52%) auditees in the previous

year; the rand value increased signifi cantly. The nature of the

expenditure related to interest incurred due to late payments

to suppliers. Consistent with the prior year, the main driver of

fruitless and wasteful was late payment of suppliers.

2.4.4.4 Conclusion on unauthorised, irregular as well as fruitless and wasteful expenditure

The Gauteng province’s trend of increased level of reported unauthorised,

irregular as well as fruitless and wasteful expenditure is concerning and

is an impediment to the achievement of sound governance and clean

administration. The leadership should focus on eliminating the fi ndings

resulting in this expenditure. The main root causes are attributable to

implementation of commitments, governance structures promoting a

culture of accountability and oversight responsibility by the leadership.

The following graphic shows the fundamental root causes of unauthorised,

irregular as well as fruitless and wasteful expenditure.

80


Figure 16

Fundamental root causes of unauthorised, irregular as well as fruitless and wasteful expenditure

Governance

structures to

promote

accountability

Implemtation of

commitmets

Oversight resposibilty

by the leadership

81


Implementation of commitments

While there was an expectation that the outcomes of the prior year would

improve, based on the commitments that were made in the prior year,

the lack of willingness and inability to implement those commitments

have resulted in regression on unauthorised, irregular as well as fruitless

and wasteful expenditure. Without a concerted eff ort from the leadership

to implement compliance checklists and deviation frameworks aimed at

improving audit outcomes, the prevalent trend in unauthorised, irregular

as well as fruitless and wasteful expenditure will continue.

The national and provincial treasuries should enforce and monitor

compliance with issued guidance and practice notes on SCM relating to

procurement activities. Furthermore, the national and provincial treasuries

should put measures in place to create awareness on challenges that the

local government faces and that result in repeated non-compliance fi ndings.

Governance structure to promote accountability

The audit committee needs to be more persuasive in getting management

to take ownership of decisive action plans with clear time frames to

address the fundamental root causes of unauthorised, irregular as well as

fruitless and wasteful expenditure and commitments made to curb non-

compliance with laws and regulations. In addition, audit committees and

internal audit units should proactively assist in building the culture of

accountability and ownership to ensure sustainable compliance with laws

and regulations.

It is important that the councils empower MPACs to ensure that they

are able to take punitive measures where there have been SCM-related

transgressions.

Oversight responsibility by the leadership

A lack of political will in decisively dealing with the transgressors and

holding management accountable has created an environment with the

leadership tone depicting a willingness to accept perpetual disregard for

SCM-related laws and regulations.

Councils have a role to play in reducing the misuse of deviations and

ensuring strict compliance with SCM-related laws and regulations. The

eff ective oversight by the council is also dependent on the submission of

reliable and credible in-year reports on non-compliance in order to drive

accountability and enforce consequence management. This is currently

not entrenched within the activities of the audit committees.

This section provides the root causes of audit outcomes and

recommendations to address these root causes. Section 3.1 provides

a summary of the root causes with further detail on these root causes

and areas of risk that require attention. Section 3.2 details the signifi cant

defi ciencies in auditees’ systems of internal control, section 3.3 discusses

human resource management, section 3.4 analyses the eff ective use of

consultants for fi nancial reporting, section 3.5 discusses IT management

and section 3.6 details the eff ectiveness of audit committees and internal

audit units.

82


83


83

22

83

SECTION 3ROOT CAUSES OF AUDIT OUTCOMES

3.1 SUMMARY OF ROOT CAUSES OF POOR AUDIT OUTCOMES ........84

3.2 SIGNIFICANT DEFICIENCIESIN AUDITEES’ SYSTEMS OFINTERNAL CONTROL .....................89

3.3 HUMAN RESOURCE MANAGEMENT .............................97

3.4 INFORMATION TECHNOLOGY MANAGEMENT AS A KEY DRIVER OF AUDIT OUTCOMES ....106

3.5 AUDIT COMMITTEES AND INTERNAL AUDIT UNITS ...............126

84


SECTION 3 Root causes of audit outcomes

3.1 SUMMARY OF ROOT CAUSES OF POOR

AUDIT OUTCOMES

The AGSA audit process includes an assessment of the root causes of

audit fi ndings based on the identifi cation of internal controls, which failed

to prevent or detect the misstatement of fi nancial statement or non-

compliance with laws and regulations. We confi rm the root causes with

the auditee’s management and report them in the management report,

which is issued to the accounting offi cers and shared with the mayors.

The root causes of material fi ndings reported in the audit reports are

included as internal control defi ciencies classifi ed under the key drivers of

(i) leadership; (ii) fi nancial and performance management; and (iii)

governance. Section 3.2 provides more information on the specifi c drivers

of internal control.

The tables that follow summarise the most common root causes of the

audit outcomes in Gauteng local government, provide recommendations

to address the root causes and identify the role players responsible to

address the root causes. We had reported the majority of these root causes

and recommendations in the 2010-11 management, audit and general

reports. The AGSA’s view on the reasons for not addressing the previous

year root causes is also provided.

85


Table 27

Previous year root causes not addressed, recommendations and additional root causes

No. Root cause

Number of auditees

where the root

cause was identifi ed

Audit outcomes aff ected

Detail on root causes and recommendationsRole players that should address the root causeF P C

1. Slow response by political leadership in addressing the root causes of poor audit outcomes

13 (33%) X X X At least 33% of the auditees’ leadership showed poor responses to the AGSA message and did not take ownership of key controls and this was evidenced by the following:

• The value of PDO reports had not been fully realised by the council because 50% of the PDO reports were not useful and reliable.

• Inadequate monitoring of progress of implementation of external and internal audit action plans to address internal control defi ciencies.

• Lack of consequence for accounting offi cers and offi cials who have consistently produced repeat qualifi cations and/or audit fi ndings on compliance with laws and regulations, including the reported increase in irregular expenditure.

Council, mayor and municipal manager

Reasons why the previous year’s root causes were not addressed

The following were the reasons for slow responses by the leadership in addressing the above root causes:

• Middle and lower management offi cials responsible for implementing agreed action plans and commitments lacked skills and competencies to action them.

• The political leadership was not adequately equipped with credible information to monitor the implementation and progress of action plans.

• The leadership at some auditees was complacent and did not respond to risks of material amendments and this led to fi nancial statements not meeting the quality requirements of the accounting framework.

• General reliance on the use of consultants.

86


No. Root cause

Number of auditees

where the root




Previous year commitments not yet implemented a) Implementing and monitoring on a regular basis adequate action plans to address audit fi ndings identifi ed in the previous audit cycle and focus on preventing repeat fi ndings.

b) Preparing a set of monthly fi nancial statements with supporting schedules and submit them to the audit committees.

c) Ensuring ongoing monitoring of the oversight of fi nancial reports, compliance reports and reports on PDOs, as well as eff ective risk management.

d) MPACs committed to verify credibility and accuracy of the annual fi nancial statements and reported performance information prior to submission to the council and for audit purposes; this process was still at an infant stage as MPACs were still being trained.

e) Internal audit units committed to review fi nancial statements, compliance with laws and regulations, reporting of performance against PDOs and quarterly key controls. The provision of assurance to the audit committee was not eff ective.

Additional recommendations f ) The council should provide oversight by ensuring that all committees that had an eff ect on clean administration were operating eff ectively.

2. Lack of

consequences for

poor performance

and transgressions

18 (47%) X X X A total of 18 (47%) auditees did not strictly apply performance management policies and procedures to ensure that poor performance would be adequately addressed.

When offi cials and general employees are not held accountable for their actions, a perception could be created that poor performance is tolerable. Similarly, lack of improvement in internal controls and repeat audit fi ndings create opportunities for poor management of performance and lack of accountability.

Council,

municipal manager,

CFO

87


No. Root cause

Number of auditees

where the root




Reasons why previous year’s root causes were not addressed

The reasons for not addressing this pervasive root cause:

• Performance criteria that were needed to ensure attainment of clean administration were not incorporated into the individual performance contracts of the responsible employees. Even if the content of the performance contract addressed those critical areas, these contracts did not seem to be strictly enforced, resulting in employees not appreciating the urgency and importance of a high-performance culture and clean administration.

• Poor monitoring and supervision of operational staff (middle to lower level), making it diffi cult for the responsible offi cials to enforce consequence management. The strategic objectives of the auditees were not included in the performance agreements of the operational staff .

• Those charged with the responsibility of consequence management avoided confl ict with employees.

Previous year recommendations not yet implemented

a) It was recommended that the leadership should develop, document and monitor performance measurement tools for all staff in conformity with the objectives of the auditees.

b) It was recommended that human resource policies and procedures be communicated to all staff , especially the new staff members.

Additional recommendations c) Clean administration objectives should be incorporated into the individual performance management contracts of the responsible key personnel. These should also be cascaded down to all levels of staff within the organisation.

d) The leadership should ensure:

• strict enforcement of human resource policies and procedures regarding performance management

• that those charged with the responsibility of consequence management are adequately trained and supported when dealing with poor performers

• the tone from the top is strong and does not tolerate any non-compliance with performance management policies

• that there are consequences for accounting offi cers who have consistently produced negative and/or stagnant audit outcomes, through including the attainment of clean audit outcomes in their performance contracts.

88


No. Root cause

Number of auditees

where the root




3. Key offi cials lacking minimum competencies and skills

24 (63%) X X X Offi cials in key positions at 63% of the auditees lacked the required competencies and skills necessary to perform their duties. Offi cials with minimum qualifi cations but without necessary experience or exposure were appointed in vacant positions.

Existing employees did not keep up with developments in the changing local government environment through ongoing training. Five (13%) auditees had partially addressed this pervasive root cause from the previous year, while 19 (50%) auditees did not address it.

The auditees did not implement eff ective human resource management to ensure that adequate and suffi ciently skilled resources were in place and performance against set targets was monitored.

Municipal manager,

CFO, Department of Local Government, treasuries and SALGA

Reasons why the previous year’s root causes were not addressed

The main reasons for slow progress in implementation were lack of resources and budget to capacitate auditees.

Offi cials with minimum qualifi cations were appointed in vacant positions and therefore they were not able to perform at the expected level. This resulted in fi nance units that were not appropriately resourced with offi cials possessing appropriate technical skills.

Management did not take enforcement of minimum qualifi cation criteria and relevant experience of employees appointed seriously.

Some CFOs were appropriately skilled in terms of the minimum qualifi cation requirement and some were operationally wise but they lacked appropriate competencies to deal with technical matters, resulting in over-reliance on consultants. Furthermore, they were not held accountable for not ensuring that they complied with continuing professional development requirements.

Previous year recommendations not yet implemented

a) All key vacancies be fi lled by a suitably competent staff complement, i.e. staff with adequate public sector experience with good track record.

The leadership should ensure that staff receive adequate technical training to remain competent and abreast of latest technical developments.

b) The leadership should develop and maintain adequate action plans that aim to address key vacancies in time, reduce acting positions to exceptional circumstances and place suitably skilled and qualifi ed personnel in correct positions.

Additional recommendations c) Councils and boards of directors should adequately exercise oversight to resolve the problem of competencies. Suitably qualifi ed offi cials with adequate public sector experience and good track records should be appointed in key positions to drive clean administration.

Audit outcomes aff ected F = Financial P = Predetermined objectives C = Compliance

89


3.2 SIGNIFICANT DEFICIENCIES IN AUDITEES’ SYSTEMS OF INTERNAL CONTROL

The following fi gure provides the overall assessment of the drivers of internal control, namely leadership, fi nancial and performance management, and

governance.

Figure 17

Drivers of internal control

46%

35%

19%

42%

33%

25%

12%

44%

44%

Leadership GovernanceFinancial and performance

management Internal control driver

Objectives impacted on by internal control driver

Financial management and

reporting

Service delivery planning and

reporting

Compliance with laws and regulations

Leadership 41% 42% 17% 47% 36% 17% 39% 42% 19%

Financial and performance management

25% 53% 22% 45% 31% 24% 37% 39% 24%

Governance 53% 34% 13%56% 32% 12% 54% 37% 9%

Good Concerning Intervention required

90


A key responsibility of accounting offi cers and other offi cials is to implement

and maintain eff ective and effi cient systems of internal control. As part of

the audits the auditee’s system of internal control is assessed to determine

its eff ectiveness in ensuring reliable fi nancial and performance reporting

and compliance with laws and regulations is achieved, which in turn will

result in a clean audit. For purposes of allocating corrective actions, the

principles of the diff erent components of internal control, namely drivers

of internal control, have been categorised under leadership, fi nance and

performance management and governance.

A good system of internal control and fi nancial governance requires a

strong control environment. The municipal offi cials are required to ensure

good administration of the municipality by maintaining eff ective, effi cient

and transparent systems of internal controls. The role of the council is to

oversee whether the municipality is managing the fi nancial administration

of the municipality, as required by laws and regulations.

To ensure implementation of basic fi nancial disciplines, councillors must

hold offi cials accountable for the fi nancial and performance information

of the municipalities. There should be clearly defi ned consequences where

there is no progress in the implementation of commitments agreed at

quarterly key control discussions. Consequence management must be

part of performance and reward management systems of the auditees.

The above fi gure provides the overall assessment of these drivers at the

time of concluding the audit. Signifi cant defi ciencies identifi ed in internal

control resulted in material misstatements (corrected and uncorrected)

in fi nancial statements and performance reports as well as fi ndings on

compliance with laws and regulations. The following broad areas of

concern are highlighted:

Table 28

Key fi ndings – drivers of internal control


Concerning

As shown above, there was regression in the drivers of the audit outcomes underpinning leadership, fi nancial and performance management. Although some improvements were noted in certain drivers, internal controls were not fully embedded as the norm nor were they operating eff ectively throughout the fi nancial period.

The executive leadership had committed to meet with us quarterly to discuss the status of the key controls as well as progress on implementation of these commitments in order to achieve clean audit outcomes. Where there was limited interaction with the executive leadership, the correlation between negative audit outcomes and failure to derive benefi ts from key controls was evident.

Previously, key control assessment and discussions with the political leadership were driven by the AGSA. The process has been handed over to municipalities’ internal audit units. Going forward, the aim is to ensure that all management takes full ownership of the process and drives the discussions of the key controls at the quarterly meetings. The AGSA leadership would attend those meetings to confi rm and provide support, where necessary. It is concerning that the handover process has not been embraced by all auditees as they see it as an AGSA initiative.

The fi nancial and performance management drivers revealed that fi ling and record keeping was still a concern at other auditees. The accountability and ownership of records and the concept of an audit trail were not fully understood by all. For example, procurement through deviations that resulted in irregular expenditure was not supported by adequate records or reasons.

Offi cials have not realised the benefi t of preparing monthly fi nancial statements as a management tool to reduce material amendments to the annual fi nancial statements.

Councillors and the leadership did not always hold offi cials accountable for the lack of credible fi nancial and performance information and the lack of progress in implementing commitments made.

91



Good

The overall status of key controls for governance remained

the same. There was, however, a slight improvement in the

percentage of auditees in which intervention was required

in the prior year. The institutionalisation of controls resulting

from the interactions between the executive mayors and

chairpersons of internal audit yielded notable improvements in

the governance driver of internal control. We realised a number

of control defi ciencies that had previously not been addressed,

being remedied. The establishment of the PDO audit

committee to review the performance report was an eff ective

improvement to the governance structure of a municipality.

The fi gure below presents the current status of the key internal controls.

Figure 18

Current status of key controls

37%

35%

50%

13% 19%

46%

36%

33%

41%

42%

48% 44%

45% 44%

7%

25% 23%

42%

2011-13 2011-12(3rd quater) (Year-end)



Leadership Financial and performance

management

Governance

There was minimal progress in the oversight responsibility over fi nancial,

performance reporting, compliance, and related internal controls because

the leadership had not honoured their commitments to implement and

monitor action plans in this regard. There were large numbers of vacant

key positions, including municipal manager and CFO positions. Hence, the

eff ectiveness of oversight was compromised. This was consistent with the

prior year fi ndings, which indicates that the leadership did not adequately

address compliance fi ndings to reduce, prevent or detect non-compliance

with laws and regulations.

Despite the previous commitment to prepare regular, accurate and

complete fi nancial and performance reports that are supported and

evidenced by reliable information, there was minimal improvement in this

regard. The lack of institutionalisation of eff ective internal control over daily

and monthly processing and reconciling of transactions was still prevalent.

Consistent with prior year, there was inadequate review and monitoring of

compliance with applicable laws and regulations.

There was still a lack of adequate quarterly reviews of fi nancial and

performance reports by internal audit units and audit committees. This

compromised the eff ectiveness of the councils because governance

structures did not provide them with credible information.

The following table presents the status of internal control elements at

June 2012, underlying leadership, fi nancial and performance management

and governance and movement in the implementation thereof. Annexure

3 provides the status of key controls per auditee.

92


Table 29

The status of, and movement in, the internal control elements underlying leadership, fi nancial and performance management

Driver no. 1: Leadership Movement Assessment of driver

Provide eff ective leadership based on a culture

of honesty, ethical business practices and good

governance, protecting and enhancing the interests

of the entity. 58%

64% 29%

36%

7%

6%

2011-12

2010-112010-11

The leadership should continue to ensure a culture of honesty, ethical business practices and good governance, thereby enhancing and protecting the interests of

their respective entities.

However, certain entities were not ensuring ethical business practices or good governance, thus harming the interests of the entity. This was evidenced by the

prevalence of repeat qualifi cations, material amendments to the fi nancial statements, repeat fi ndings on PDOs and compliance with laws and regulations.

The leadership should ensure that the following are addressed in order to improve audit outcomes:

• A culture of implementing eff ective controls to prevent repeat qualifi cations, audit fi ndings, material amendments to the fi nancial statements, fi ndings on PDOs

and non-compliance with laws and regulations should be prevalent in the province.

• There should be consequences for transgressors.

• Executive mayors are encouraged to obtain credible feedback on progress made in implementing commitments to address control defi ciencies.

Exercise oversight responsibility regarding fi nancial

and performance reporting and compliance with

laws and regulations and related internal controls. 37%

24% 41%

39%

35%

24%

2011-12

2010-11

The leadership should have mechanisms to enable them to oversee that management has a sound control environment to produce valid, complete and accurate

fi nancial statements, and performance information reports. In exercising the oversight responsibility the leadership should ensure the following:

• That the credibility and accuracy of fi nancial statements and performance reports are verifi ed through internal processes, by the accounting offi cers, internal

audit units and audit committees, prior to submission for auditing.

• That the fi nancial statements and performance information are assessed against planned targets and budgets. Appropriate measures are implemented where

deviations against budgeted plans are noted.

• The speaker’s responsibility to insist on credibility of information before use or submission to the council meeting. This should be a standing item on the council

meeting agenda.

Financial statements are a vital decision-making tool for the leadership, namely the member of the mayoral committee (MMC) for fi nance, and accounting offi cers,

therefore credible, accurate and complete fi nancial information is vital.

93


Driver no. 1: Leadership Movement Assessment of driver

Implement eff ective human resource management

to ensure that adequate and suffi ciently skilled

resources are in place and that performance is

monitored. 49%

32% 63%

29%

5%

21%

2011-12

2010-11

Section 3.3 provides an assessment of fi ndings arising from the audit of human resource management.

Establish and communicate policies and procedures

to enable and support an understanding and

execution of internal control objectives, processes

and responsibilities. 69%

42% 44%

20%

13%

11%

2011-12

2010-11

Policies and procedures in draft should be prioritised for approval and immediate implementation. In addition, all policies with procedures should be stored at a

central repository for easy access and enhanced awareness. Regular monitoring of compliance with these policies and procedures should be institutionalised.

Develop and monitor the implementation of action

plans to address internal control defi ciencies.55%

36% 42%

36%

22%

9%

2011-12

2010-11

Action plans developed to address the external and internal audit fi ndings should be clear, precise and time bound, and responsibilities should be assigned with

monitoring mechanisms to ensure eff ectiveness. Internal audit should provide continued assurance on the eff ective implementation of the action plans. Progress

towards implementation of the action plans should form part of agenda items at audit committee meetings.

All municipalities should establish an OPCA committee chaired by the mayor/municipal manager/CFO that will monitor eff ectiveness of implemented controls, and

results must be reported to the audit committees and MPACs.

The progress in addressing control defi ciencies hampering the attainment of clean administration should be tabled in and discussed quarterly with the portfolio

committees.

Develop and monitor the implementation of action

plans to address internal control defi ciencies in

the IT environment. Establish an IT governance

framework that supports and enables the business,

delivers value and improves performance.

55% 23%

93%

22%

7%

2011-12

2010-11

Section 3.5 provides an assessment of IT controls.

94


Driver no. 2: Financial and performance management

Movement Assessment of driver

Implement proper record keeping in a timely manner

to ensure that complete, relevant and accurate

information is accessible and available to support

fi nancial and performance reporting.

45%

64%

39%

24%

16%

12%

2011-12

2010-11

Document management systems should be implemented to enable management to access information when required and provide suffi cient trails of all business

activities regarding the fi nancial and performance reporting and compliance with laws and regulations to ensure that information is available within the agreed

turnaround time. It is a statutory requirement that full and proper records of the fi nancial aff airs be maintained by the accounting offi cer.

Implement controls over daily and monthly

processing and reconciling of transactions.

42%

65%

44%

19%

14%

16%

2011-12

2010-11

To support monthly fi nancial statements and month-end procedures, controls should be implemented to ensure that reconciliations are prepared, including journal

entries, which are reviewed and approved by the CFO or appropriate level. Where consultants are appointed to assist in the fi nancial statement preparation process,

the service level agreements (SLAs) should include transfer of skills to offi cials in order to reduce the reliance on consultants in the future. Reconciliations should also

be prepared to streamline the quarterly reporting processes with supporting documents.

Prepare regular, accurate and complete fi nancial

and performance reports that are supported and

evidenced by reliable information.

23%

42%

43%

38%

34%

20%

2011-12

2010-11

The municipalities and some entities did not institutionalise the preparation of quality monthly fi nancial statements, including disclosure notes with supporting

documents and key reconciliations. Audit outcomes of the entities that implemented this discipline have improved.

The recurring IT fi ndings should be addressed to enhance the credibility of both fi nancial and non-fi nancial data.

Review and monitor compliance with applicable laws

and regulations.

23%

33%

40%

45%

37%

22%

2011-12

2010-11

95




Lack of compliance monitoring and review by the auditees resulted in the challenges experienced.

Other root causes resulting in this trend are as follows:

• Deliberate disregard for laws and regulations.

• Lack of consequences for those who transgressed and those who were not performing.

• Eff orts were not directed to ensuring that there was compliance with the relevant legislations.

• Contract registers detailing contracts awarded were not maintained and monitored, resulting in unwarranted extension of contracts and use of deviations.

The leadership must create and drive a culture of ethical behaviour encouraging compliance. Compliance offi cers should be appointed to develop a compliance

checklist and continually assess and monitor compliance with all laws and regulations.

Design and implement formal controls over IT

systems to ensure the reliability of the systems

and the availability, accuracy and protection of

information and to address application systems

susceptible to compromised data integrity

(information systems).

46%

10%

39%

68%

15%

22%

2011-12

2010-11

There was a slight improvement in the assessed driver of internal control relating to design and implementation of IT systems in the province. The results, however,

have not translated into improved audit outcomes.

Driver no. 3: Governance Movement Assessment of driver

Implement appropriate risk management activities

to ensure that regular risk assessments, including

consideration of IT risks and fraud prevention, are

conducted and that a risk strategy to address the

risks is developed and monitored.

52%

83%

37%

5%

11%

12%

2011-12

2010-11

Risk assessments were not conducted eff ectively as plans and controls that were implemented were not focused on addressing risks that have a direct impact on

the operations of the municipalities and entities. This was evidenced by the regressed audit outcomes and recurring fi ndings on IT, business continuity, human

resource management, compliance with laws and regulations and PDOs.

Risks aff ecting the operations of the entity should be monitored and this should be done on a regular basis. The progress on implementation and risk monitoring

should be discussed on a quarterly basis at the risk committee meetings.

96




Ensure that an adequately resourced and functioning

internal audit unit is in place that identifi es internal

control defi ciencies and recommends corrective

action eff ectively.

50%

52%

38%

18%

12%

30%

2011-12

2010-11

Section 3.5 provides an assessment of the eff ectiveness of internal audit units.

Ensure that the audit committee promotes

accountability and service delivery through

evaluating and monitoring responses to risks and

providing oversight of the eff ectiveness of the

internal control environment, including fi nancial and

performance reporting and compliance with laws

and regulations.

59%

48%

29%

23%

12%

29%

2011-12

2010-11

Section 3.5 provides an assessment of the eff ectiveness of audit committees.

Improvement Unchanged Regression

97


3.3 HUMAN RESOURCE MANAGEMENT

Eff ective human resource (HR) management is a key driver of audit

outcomes. In this context, HR management is deemed eff ective if adequate

and suffi ciently skilled resources are in place and their performance and

productivity are properly managed.

As detailed in section 3.1 the vacancies in key positions, competencies

of key offi cials and the lack of consequences for poor performance and

transgressions were again identifi ed as root causes contributing to poor

audit outcomes. These weaknesses are symptoms of ineff ective HR

management in local government.

For the past two years, the audits included a specifi c focus on HR

management on the following areas: ■ HR planning and organisation

■ Management of vacancies ■ Appointment processes ■ Performance

management ■ Acting positions ■ Management of leave, overtime and

suspensions.

We reported fi ndings arising from the assessment of HR management in

the management reports of 14 (37%) auditees, while some of the fi ndings

were material enough to be reported in the audit report.

The following fi gure shows the three main areas of HR management

at auditees, which should be improved to positively impact on audit

outcomes. Further detail on the fi ndings is provided in sections 3.3.1 to

3.3.4.

Figure 19

Summary of human resource management weaknesses

73%

8%

11%

16%

Performance management

Competencies of key

personnel

Management of vacancies

and acting positions

The audits of SCM, fi nancial misconduct and unauthorised, irregular and

fruitless and wasteful expenditure included procedures to determine

whether there were consequences for transgressions by offi cials, as

required by legislation. The fi ndings from the audits are presented in

section 3.3.4.

3.3.1 Management of vacancies and acting positions

The biggest challenge for local government is to attract and retain qualifi ed

competent persons across all areas of administration. Key fi ndings from

the audits are presented below.

98


Table 30

Analysis and trends – vacancies and acting positions


Good

It is commendable that Mogale Local Municipality had a 100%

occupancy rate. In addition, the following municipalities had

no vacancies at senior management level:

• Midvaal

• Mogale

• Sedibeng District

• West Rand District

• Westonaria

Poor

The average overall vacancy rate for all municipalities at year-

end was 20%. The highest vacancy rate was at Emfuleni Local

Municipality with 57%. The average overall vacancy rate for all

municipal entities at year-end was 16%. The highest vacancy

rate was at Johannesburg City Parks with 70%.

Concerning

At 12 (32%) auditees the overall vacancy rate increased from

2010-11.

The average vacancy rate at senior management level for all

municipalities at year-end was 15%.

The highest senior management vacancy rate was at Emfuleni

Local Municipality with 43%.

At seven auditees (18%) the senior management vacancy rate

increased from 2010-11:

• City of Tshwane

• Johannesburg Metro Bus

• Johannesburg Zoo

• Johannesburg Road Agency

• City of Johannesburg

• Johannesburg Fresh Produce Market

• Emfuleni Local Municipality


Concerning

Senior management positions at fi ve auditees (13%) were vacant for more than 12 months:

• Randfontein Local Municipality

• Merafong Local Municipality

• City of Johannesburg

• Emfuleni Local Municipality

• Sandspruit Works

At four (11%) auditees vacant positions were not advertised within six months of becoming vacant:

• Ekurhuleni Metropolitan Municipality

• Lesedi Local Municipality

• Randfontein Local Municipality

• Johannesburg Fresh Produce Market

Offi cials were appointed to act in vacant positions until the vacancies were fi lled; however, at four (11%) of the auditees (Ekurhuleni Metropolitan Municipality, Johannesburg Fresh Produce Market, Sandspruit Works, Metropolitan Trading Company) the acting periods were longer than the accepted benchmark of six months.

Long-term acting positions combined with poor succession planning below the senior management level, usually mean that the person requested to act has to perform the acting responsibilities and their previous responsibilities as well. This leads to the acting person not being able to take on the full responsibility, functions and powers of the post, eff ectively leading to a lower commitment to the deliverables as a result of the temporary nature of the position.

Municipal manager positions were vacant at two municipalities

(17%) (Randfontein and Merafong Local Municipalities). At

Merafong Local Municipality, the position had been vacant for

more than 12 months.

Although the municipal manager position was not vacant for

more than 12 months at Lesedi, it had not been advertised

within six months of becoming vacant.

99



Concerning

The position of CFO was vacant at four (33%) municipalities

(Ekurhuleni Metropolitan Municipality, City of Johannesburg,

Randfontein Local Municipality and Emfuleni Local

Municipality). At two (17%) of these municipalities (City of

Johannesburg and Emfuleni Local Municipality) the position

had been vacant for more than 12 months. At one (8%) of the

municipalities (City of Johannesburg), the vacant position had

not been advertised within six months of becoming vacant.

The head of SCM position was vacant at one (8%) municipality

(Randfontein Local Municipality). This position had been vacant

for more than 12 months and it had not been advertised

within six months of becoming vacant.

The reasons for the continuing vacancies are as follows:

• Lack of progress in professionalisation of the public service administration,

especially at a local government level.

Perceived poor image of local government and political interference made it

less attractive to skilled and competent professionals.

The impact of the vacancies:

• offi cials were appointed to act in vacant positions until the vacancies were

fi lled; however, decision-making powers are often limited in acting capacity

• when a person acts in a position, they tend not to take on the full

responsibility, functions and powers of the post, with a lower commitment

to the deliverables as a result of the temporary nature of the position.

Recommendations to address the weaknesses in the management of

vacancies and acting positions:

• The leadership should ensure that eff ective human resource management

policies are implemented to ensure that adequate and suffi ciently

skilled resources are in place and that performance against set targets is

monitored.

• Coordinating, monitoring and oversight organisations, such as the

Department of Local Government, provincial and national treasuries,

legislature and Offi ce of the Premier, should intervene where necessary.

3.3.2 Competencies of key offi cials

The complexities in local government, the challenges experienced

and the high expectations of the public demand that key personnel at

municipalities should have the skills, experience and capacity to assume

and fulfi l their responsibilities and exercise their functions and powers.

The reforms in fi nancial and performance management also resulted in

a higher level of competency requirements than in the past for municipal

managers, CFOs, senior managers, SCM offi cials and other fi nancial offi cials.

The poor audit outcomes, failures in service delivery and the high demand

for consultants and for support from national and provincial governments,

however, indicate an environment where the persons appointed in these

posts did not have the required competencies.

The root cause of this was two-pronged – personnel that did not have

the required competencies were appointed in key positions, and current

employees did not keep up with the changing local government

environment through ongoing training and development.

However, the implementation of the municipal regulations on minimum

competency levels and the amendments to the Municipal Systems Act

(MSA) is an opportunity to improve the situation. The regulations defi ne

the minimum competency levels of accounting offi cers, CFOs, senior

managers, SCM offi cials and other fi nancial offi cials, taking into account

the diff erences in size and scope of the municipalities. It provides for a

phasing-in period for staff currently in those positions to obtain the

minimum competency level through academic studies, experience and by

addressing any gaps in competencies through training and development.

The phasing-in period ended on 1 January 2013 and, as per the regulations,

the aff ected positions may not continue to be fi lled by persons who do not

meet the minimum competency levels and this impacts on the continued

employment of the aff ected offi cials.

However, the National Treasury gave municipalities the opportunity to

apply for an 18-month extension by September 2012 (until 1 July 2014) for

100


the enforcement of the regulations as a “special merit case” based on the

particular circumstances faced by the municipality.

The amendments made to the MSA (eff ective July 2011) declare the

appointment of a municipal manager without the minimum competency

levels null and void. It also provides for a defi ned appointment process of

municipal managers, which includes monitoring and intervention by the

member of the executive committee (MEC) for local government.

The table that follows presents the key fi ndings arising from the audits.

Table 31

Analysis of competencies of key offi cials


Good

At 30 June 2012, fi ve positions of municipal managers were

fi lled with candidates who met the prescribed minimum

competency requirements. At two auditees, municipal

manager positions were vacant and the rest of the positions

were fi lled before 5 July 2011. Therefore, as at 30 June 2012

(six months from the eff ective date of the regulations) all

appointed municipal managers in the province had met the

minimum competency levels defi ned in the regulations.

The three CFOs appointed after 5 July 2011 possessed the

prescribed minimum competency level. A total of four CFO

positions were vacant and the remainder of CFOs were

appointed before 5 July 2011.

By 30 June 2012, one of the appointed heads of SCM at a

municipality met the minimum competency levels defi ned in

the regulations.

Concerning

Based on the audits and an assessment of the root causes

of poor audit outcomes the competencies of key offi cials

responsible for fi nancial and performance reporting were

deemed inadequate.


The reason for the inadequate competencies of key offi cials was that existing

employees did not keep up with the changes in the fi nancial and compliance

environment through ongoing training and development and even those

that were assessed to be competent reverted to using consultants.

The impact of the inadequate competencies included the following:

• Stagnation or regression in audit outcomes, thus impacting clean

administration.

• Poor service delivery which leads to service delivery protests.

• Continuous use of consultants without adequate transfer of skills.

• PDO reports that are not useful and reliable.

Recommendations to address the weaknesses:

• Appointment of suitably qualifi ed offi cials with adequate public sector

experience and good track records should be appointed in key positions to

drive clean administration.

• Councils and boards of directors must exercise oversight to ensure that

clean administration commitments made and agreed with management

are implemented in time.

• The leadership must ensure that there is an ongoing training and

development of own staff ; that the use of consultants for work that could

be done by own staff will be discouraged and that using consultants will be

limited to areas that require specialist skills and competencies.

• The coordinating authorities (Department of Local Government, provincial

and national treasuries) should provide ongoing training to assist the

leadership.

101


3.3.3 Financial reporting assistance provided by consultants

As in previous fi nancial years, auditees continued to engage consultants

to assist them with accounting-related services and the preparation of

year-end fi nancial statements. Consultants assisted 20 (53%) auditees,

compared to 18 (43%) in 2010-11. Based on the available information, the

cost to auditees of consultants was estimated to have exceeded R16 million

(2010-11: R41 million) for the 2011-12 fi nancial year. This excluded amounts

spent by the National Treasury, provincial treasury and the Department of

Local Government on consultants assigned to assist municipalities.

The following fi gure shows the most common reasons why consultants

were engaged, the extent of use by auditees categorised per audit

outcome with an indication of whether it is a recurring use and whether

skills were transferred. Not all improvements in audit outcomes (or the lack

of improvement) could be directly attributed to the use of consultants as

the contracted scope of work varied from one auditee to the next.

102


Figure 20

Assistance provided by consultants


100% – both used consultants 15 (50%)

used consultants

3 (50%)

used consultants

3 (50%)

did not use

consultants

15 (50%)

did not use

consultants

Unqualified with no findings (2)

Recurring use at

both auditees

Skills not transferred at

both auditees

Recurring use at

2 auditees


2 auditees

Recurring use at

9 auditees


7 auditees

Unqualified with findings (30)

Qualified with findings (6)

20% 60% 20%Reasons for use of consultants

Vacancies Lack of technical skills Other reasons

103


Conclusion

The above graphic confi rms that a lack of technical skills still remained

the most prevalent reason for the use of consultants in the province.

Consultants were used for preparing fi nancial statements, for reviewing

tax calculations, and fi lling vacancies. Of the 20 auditees that engaged

consultants, 16 auditees appointed consultants for fi nancial management

due to lack of skills and the other four used consultants due to vacancies

that were not fi lled. It is also evident from the above graphics that the

use of consultants did not always lead to better audit outcomes as of the

20 (53%) auditees that used consultants only two received clean audit

opinions. The three (50%) auditees that received qualifi ed opinions used

consultants and two of them were repeat instances. This raised major

concerns regarding monitoring of the work of consultants and the value

these consultants added to the local government sphere. It was also

concerning that nine of the auditees that received unqualifi ed opinions

with fi ndings have made recurring use of consultants, with no success in

clearing non-compliance fi ndings. Furthermore, the transfer of skills still

remained a huge concern, as it could be confi rmed at only nine auditees

out of 20 (45%) that used consultants.

Reasons why optimal benefi t is not derived from the use of consultants:

• Lack of credible information provided by management.

• Some CFOs had no competencies and skills to evaluate the work of

consultants.

• Consultants did not transfer skills to auditees’ offi cials, this could be

intentional to ensure continued business for consultants or it could

be the lack of employees with appropriate competencies to transfer

skills.

• Consultants were engaged too late in the process, limiting the

contribution they can make.

• Performance of consultants was neither monitored nor enforced

and some auditees did not have the SLAs with consultants and as a

result they were not held accountable for their actions.

The following should be considered to ensure that consultants’ services are

utilised in an eff ective manner:

• SLA with clearly defi ned performance clauses should exist and be

monitored on a regular basis.

• CFOs should undergo technical training that will equip them with

the requisite skills to adequately review the work performed by

consultants.

• Where consultants are needed, the scope should be such that

they are able to infl uence fi nancial reporting process, which feeds

into their core work of preparing fi nancial statements. This could

eff ectively be done by involving them early in the process so that

they are able to give guidance, where necessary.

• Skills should be transferred on a continuous basis and should be part

of the SLA. Improved audit outcomes and transfer of skills should be

signifi cant contributors to the consultants’ measurement tool.

3.3.4 Performance management

Inadequate management of performance of municipal managers, senior

management and other offi cials was identifi ed in 2010-11 to be the

root cause of many of the failures of local government. The controls and

performance objectives of the municipalities did not fi lter through to the

performance contracts of municipal offi cials in order to direct their daily

operations.

A lack of discipline, an absence of commitment to serving the public

interest and municipal offi cials’ non-adherence to the code of conduct

were identifi ed as root causes by national, provincial and oversight role

players and were echoed by the experiences of the public at some

municipalities. In order to improve the performance and productivity of

104


municipal offi cials, the leadership should set the tone by implementing

sound performance management processes, evaluating and monitoring

performance and consistently demonstrating that poor performance has

consequences.

The following table provides key fi ndings from the assessment of

performance management processes.

Table 32

Performance management analysis


GoodAll of the appointed municipal managers in the province had

signed performance agreements for 2011-12.

Concerning

Consistent with the prior year, there were repeat instances

where performance agreements of section 57 managers had

not been signed.

Poor

Appropriate performance management systems were not

established at six (16%) municipal entities to monitor, measure

and evaluate the performance of offi cials, other than the

municipal manager and senior management.

The reasons for the weaknesses in the performance management system are:

• performance objectives of the municipalities were not cascaded down to

lower levels of staff to ensure that their day-to-day activities were directed

at achieving the mandate of the municipalities and municipal entities

• clean audit objectives, such as adequate clearing of audit fi ndings, were

incorporated into the performance contracts of the offi cials and they were

not strictly enforced.

The impact of poor performance management includes the following:

• Inability of the leadership to hold offi cials accountable for poor

performance.

• Poor performance led to poor service delivery and protests.

• Creating a culture of tolerating mediocre performance.



• Key performance indicators of individuals’ performance contracts should

include targets that would ensure attainment of the organisation’s

objectives and include corrective actions where targets were not met.

• The leadership should ensure that performance management process is

robust and strictly enforced.

• Poor performance should be adequately addressed and appropriate

disciplinary actions taken, where necessary.

3.3.5 Consequences for transgressions

In terms of the MFMA, fi nancial misconduct is committed by a municipal

manager, senior manager or other offi cial if he/she deliberately or

negligently –

• fails to comply with a duty imposed by a provision of the MFMA or

fails to perform a delegated duty

• makes or permits, or instructs another offi cial of the municipality

to make, an unauthorised, irregular or fruitless and wasteful

expenditure; or

• provide incorrect or misleading information in any document which

in terms of a requirement of the MFMA must be submitted to the

mayor or the council of the municipality, or to the Auditor-General,

the National Treasury or other organ of state; or made public

• contravenes a provision of the MFMA (municipal manager only).

The MFMA and the Disciplinary regulations for senior managers prescribe

how such fi nancial misconduct should be dealt with through an

investigation and disciplinary process with sanctions if found guilty and

criminal proceedings, if applicable.

The SCM regulations further provide for steps to be taken if improper

conduct is identifi ed in SCM processes and the MFMA prescribes the steps

105


to be taken to investigate and deal with unauthorised, irregular as well as

fruitless and wasteful expenditure.

The fi ndings in this general report on failures to comply with legislated

obligations and responsibilities, the non-compliance with legislation,

indicators of improper conduct in SCM and the occurrence of unauthorised,

irregular and fruitless and wasteful expenditure require an appropriate

response in accordance with the mentioned legislation. Such a response

should clearly demonstrate that there are consequences for transgressions

by offi cials in local government.

Table 33

Analysis of consequences for transgressions


GoodAt 75% of municipalities, there were no allegations of

misconduct reported.

Concerning

Two (67%) of the metros (City of Johannesburg and City

of Tshwane), one (11%) municipalities (Randfontein Local

Municipality) and fi ve (19%) of the municipal entities reported

allegations of fi nancial misconduct.

Despite the high incidence and increasing trend of irregular

expenditure and non-compliance with SCM regulations or

policies, 75% of municipalities and 81% of municipal entities

did not have any recorded allegations of misconduct in

the SCM processes. Thus resulting in non-adherence to the

regulation that requires municipalities and municipal entities

to keep a register of allegations of misconduct.

The reasons for the lack of consequences for transgressions by local

government offi cials were:

• legislation, such as SCM regulations, that is subject to diff erent

interpretations and therefore easily abused

• lack of credible and persuasive evidence to back up allegations

• no decisive action taken against offi cials who were identifi ed in forensic

reports as breaking the laws and regulations.


The impact of the lack of consequences:

• Public servants that were not fully committed to serving the public.

• Misuse of public resources.

• Intentional disregard for laws and regulations.


• There should be a strengthened control environment by leadership setting

the right tone.

• The SCM and other compliance units at the national and provincial

treasuries should play a more prominent role in supporting local

government and enforcing compliance, as required by the MFMA.

• The role of MPACs should be adequately capacitated to be able to provide

the councils with credible information for decision-making purposes.

• Coordinating and oversight organisations should play a prominent role in

assisting municipalities attain clean administration.

• The National Treasury should close the gaps in regulations, such as SCM

regulations (paragraph 36), to ensure that they are not deliberately misused.

• The new chief procurement offi cer function at the National Treasury should

be assessed for suitability at the provincial treasury.

106


3.4 INFORMATION TECHNOLOGY MANAGEMENT AS A KEY DRIVER OF AUDIT OUTCOMESThe following fi gure indicates the status of information technology in the Gauteng local government.

Figure 21

Status of information technology across Gauteng local government

1 Minimal movement in the status of information technology across local government and municipal entities

Status of local

government

information

Confi dentiality

The necessary level of secrecy should

be enforced for all local government

information. This was assessed by

auditing the following focus areas:

• Security management

• IT governance

• User access controls

Integrity

All local government formation sould

be authentic, remains unaltered until

authorised to change and is complete.

This was assessed by performing data

analysis and auditing the following

focus areas:


• User access controls

Availability

All local government information

should be ready for use when

expected. This was assessed by

auditing the following focus areas:


• IT services continuity

Status of key enabling

controls

Good governance

Eff ective management

Secure architecture/infrastructure

Management intervention required Minimal improvement

107


2 3

IT control life cycle

Level 1: Control design At a minimum, management should design IT controls that would address the threats and weaknesses identifi ed in vulnerability assessments. Particular attention should be given to the threats and weaknesses that would impact the confi dentiality, integrity and availability of data.

The majority of auditees have challenges with the design of controls and have not even begun to deal with implementation and sustained effectiveness

Drivers of IT control weakness – many cannot be addressed from within IT

Level 2: Control implementation Once the IT controls have been designed, management should ensure that they are implemented and embedded in IT processes and systems. Particular attention should be given to ensuring that staff are aware of, and understand, the IT controls being implemented, as well as their roles and responsibilities in this regard.

Level 3: Control effectivenessManagement should ensure that the IT controls that have been designed and implemented are functioning effectively at all times. Management should sustain these IT controls through disciplined and consistently performed daily, monthly and quarterly IT operational practices.

• Minimal executive involvement in matters pertaining to IT

• Minimal involvement of internal audit/audit committee/risk management in IT matters

IT not viewed as strategic enabler

• Ineffective IT support for municipalities by the Department of Local Government

Municipalities not adequately

supported

• Enterprise-wide IT risk assessments were not undertaken before policies and procedures were developed

Poor IT governance

• IT vacancies were not fi lled • Over-reliance on IT consultants • Lack of technical skills to monitor IT consultants • Skills not transfered where internal resources existed • Ineffective oversight

Ineffective management

of IT

108


3.4.1 Summary of the overall information technology audit outcomes

We assessed IT controls in four key focus areas at 12 municipalities and

12 municipal entities. The controls assessed were in the focus areas of

IT governance, security management, user access management and IT

service continuity.

Although most municipalities and municipal entities had initiated

measures to implement IT controls in accordance with the commitments

they made in the prior year, the majority had not fully implemented all the

required actions.

In most instances, the failure to fully implement the required IT

controls could be attributed to the lack of an oversight body within the

municipalities to assume responsibility for tracking and implementing IT

controls. This was coupled with shortages of specialised skills internally to

ensure that appropriate IT controls would be implemented and monitored.

Furthermore, management did not prioritise IT as a service delivery enabler.

The reason for this was that the role played by eff ective IT environments in

service delivery was not clearly understood.

3.4.2 Information technology governance

IT governance is the responsibility of both executive and IT management.

Both play a role in IT governance and interaction between the two makes

governance function. IT governance is an integral part of organisational

governance and consists of the leadership, organisational structures and

processes that ensure that the organisation’s IT resources would sustain

its strategies and objectives. IT governance allows the organisation to

manage IT risks and derive value from IT investments, and supports the

achievement of business objectives that are dependent on IT systems.

The controls at the municipalities were evaluated in terms of their status

in relation to the IT control life cycle, namely design, implementation and

operating eff ectiveness. Outcomes are shown below:

109


Figure 22

Information technology governance analysis – municipalities

None

City of Johannesburg

Ekurhukeni Metropolitan

City of Tshwane

Sedibeng District

West Rand District

Lesedi Local

Merofong Local

Mogale City Local

Randfontein Local

Westonaria Local

None

Emfuleni Local

Midvaal Local

Control not designed Controls designed but not implemented

Minimal improvement

Controls implemented but not operating effectively

No control weaknesses

110


Metropolitan municipalities

None of the metropolitan municipalities had formally approved and

implemented IT governance frameworks. The lack of a formally approved

IT governance framework could lead to IT investments not supporting the

enterprise’s objectives and strategies and clear lines of accountability not

being established. Ultimately, it would lead to a breakdown in controls and

management oversight.

Root cause

The process that facilitated the council meeting agenda was not eff ective.

As a result, policies and procedures, which would include IT governance

frameworks, were not approved during council meetings.


None of the district municipalities had IT governance frameworks in place.

As a result, IT consultants employed by the district municipalities were not

consistently monitored and managed.

Due to the small size of local municipalities and their high level of

dependence on the support of IT vendors, IT governance focused largely

on the management of the consultants. Most of the local municipalities

used the services of consultants for the provision of IT services; however,

SLAs with these consultants had either not been approved or were not

monitored. Service providers took advantage of the municipalities’

lack of due care and did not render all the services for which they were

contracted, with the result that the delivery of effi cient and eff ective IT

services within municipalities suff ered. Furthermore, payments made to

service consultants without approved SLAs are to be deemed irregular.

Root causes

• Lack of understanding that IT governance is an integral component

of the overall governance framework.

• The IT functions at municipalities did not have the skills to monitor

the services rendered by consultants, who exploited this weakness

by not providing services that complied with all the requirements.

• Inadequate project management of vendors.

• No penalty clause in SLAs that could be enforced when the required

services are not rendered.

• Poor management of IT and ineff ective oversight.

Good practice

• IT managers had the support of executive management in ensuring

that IT controls were implemented and monitored based on the

previous reports issued by the AGSA.

Municipal entities

A municipal entity is a mechanism used by a municipality to deliver

services to its community. Municipal entities are accountable to the

parent municipality. The entity must perform according to the SLA and

performance objectives set by the municipality.

The controls at the municipal entities were evaluated in terms of their

status in relation to the IT control life cycle, namely design, implementation

and operating eff ectiveness. The fi gure below shows the outcomes of this

evaluation.

111


Figure 23

Information technology governance analysis – municipal entities

None

City Power Johannesburg

Johannesburg City Parks

Johannesburg Development Agency

Johannesburg Fresh Produce Market

Johannesburg Property Company

Johannesburg Metropolitan Bus Services

Johannesburg Road Agency

Johannesburg Tourism Company

Johannesburg Water

Pikitup Johannesburg

None


Signifi cant improvement




Metropolitan Trading Company

112


Due to the small size of municipal entities and their high level of

dependence on the support of IT vendors, IT governance focused largely

on the management of the consultants. With the exception of the

Johannesburg Metropolitan Trading Company and the Johannesburg

Social Housing Company, all municipal entities had adequate SLAs with

their vendors. Although the SLAs for the two entities were approved, they

did not include performance reporting requirements. This could lead to

IT management not being able to hold service providers liable for not

delivering IT services.

Root causes

• Lack of understanding of the importance of formalising the

performance reporting requirements.

• Poor management of IT and ineff ective oversight.

Good practice

IT management, with the support of the executives, at municipal entities

realised that IT consultants are an integral part of their IT environment and

therefore they should be continuously monitored and managed. The focus

was then at ensuring that adequate SLAs were approved.

3.4.3 Security management

Security controls are measures designed by management to prevent and

detect unauthorised access to IT infrastructure supporting the fi nancial

and performance application systems. This is normally the responsibility

of the IT department. The controls at the municipalities were evaluated in

terms of their status in relation to the IT control life cycle, namely design,

implementation and operating eff ectiveness. The fi gure below shows the

outcomes of this evaluation.

113


Figure 24

Security management analysis – municipalities

City of Tshwane

Emfuleni Local

Mogale City Local


Ekurhukeni Metropolitan

West Rand District

Lesedi Local

Merofong Local

Midvaal Local

Randfontein Local

Westonaria Local

None Sedibeng District


Minimal improvement



114



None of the metropolitan municipalities had an adequately secured IT

environment. Alignment between the security policies and the design of

the systems was found to be lacking at all the metropolitan municipalities.

At the City of Johannesburg, the security policy lacked certain key controls,

while a formally approved policy was not in place at the Ekurhuleni Metro.

Although the City of Tshwane’s policy was adequate, compliance with the

policy was lacking.

The inadequacy or non-existence of IT security policies could lead to

external parties gaining unauthorised access to fi nancial information

without detection, which could compromise the confi dentiality, integrity

and availability of data.

Root causes

• Policies were designed without conducting proper, enterprise-wide

IT risk assessments.

• IT policies and procedures were not approved at council meetings

due to lack of appreciation of the importance of IT matters.

• Management oversight was ineff ective.


With the exception of the Emfuleni and Mogale City local municipalities,

none of the municipalities had formalised security policies. Although

Emfuleni and Mogale City had security policies in place, the systems were

not aligned to the policies.





Root causes




• Municipalities lacked IT skills and management did not have IT skills

development plans.

• An understanding of the importance of IT security in securing and

enabling business processes was lacking.

Good practice

No weaknesses were identifi ed in the management of IT at the Sedibeng

District Municipality, which could be ascribed to the leadership

demonstrated by the IT manager, hands-on management and

maximisation of limited resources. This good practice should be replicated

by other municipalities.

Municipal entities




evaluation.

115


Figure 25

Security management analysis – municipal entities

Johannesburg City Parks City Power Johannesburg


Johannesburg Fresh Market Produce

Johannesburg Road Agency Johannesburg Metropolitan Bus Service

Johannesburg SocialHousing Company Johannesburg Water

Metropolitan Trading Company Pikitup Johannesburg Water

None


Moderate improvement




Johannesburg TourismCompany

116


The majority of the entities used complex fi nancial systems that were

supported by IT vendors. Security policies to which vendors were required

to adhere were either not approved, or not complied with. The lack

of compliance was due to the policies not being aligned to the system

settings.





Root causes




• Management did not monitor the services provided by consultants.

Furthermore, no penalty clauses for non-delivery of services had

been included in the agreements.

Good practice

Although the Johannesburg Property Company and Johannesburg

Tourism Company had small IT environments and therefore used less

complex systems that did not require multifaceted security management

structures, their IT managers had the support of executive management

in ensuring that security management controls were implemented and

monitored.

3.4.4 User access management

User access controls are measures designed by management to prevent

and detect unauthorised access, creation of, or amendments to fi nancial

and performance information stored in the application system. This is

normally the responsibility of core and supporting business units. The

controls at the municipalities were evaluated in terms of their status in

relation to the IT control life cycle, namely design, implementation and

operating eff ectiveness. The fi gure below shows the outcomes of this

evaluation.

117


Figure 26

User access analysis – municipalities

Ekurhuleni MetroCity of Johannesburg

City of Tshwane

West Rand District

Lesedi Local

Merafong Local

Midvaal Local

Randfontein Local

Westonaria Local

Sedibeng District

Emfuleni Local

Mogale City Local

None None


Minimal improvement



118



At the City of Johannesburg an adequate user account management

policy was in place. However, the IT consultants who had been contracted

to manage the Systems, Applications and Products System (SAP) did not

adhere to the policy.

The Ekurhuleni Metropolitan Municipality had an outdated policy that had

been developed in 2001 and therefore did not cater for all the systems

used at the municipality. In addition, the policy was inadequate and not

consistently implemented. The management’s action plan to implement

enterprise-wide user account management policies, procedures and

processes for all systems had been delayed.

The user account management policy at the City of Tshwane was

inadequate as it did not cover all the critical systems in use. Due to the

lack of adequate user account management policy, user accounts were

created without appropriate approval. User access reviews were not

regularly undertaken to ensure that users’ access remained aligned to their

job responsibilities. Furthermore, access was not timeously revoked after

users had resigned.

The lack of adequate user account management policies and procedures

could lead to unauthorised access, creation of, and amendments to,

fi nancial and performance transactions. Financial information might, as a

consequence, be at risk of being compromised by fraudulent activities and

performance information might be misrepresented.

Root causes

• IT was poorly managed as IT management did not monitor

adherence to the policies developed.

• IT risk assessments were inadequate as they focused on addressing

IT fi ndings and not on the ongoing IT risks faced by the organisation.

• Standardised user account management procedures were lacking.

• IT was poorly managed and oversight was ineff ective.

• Policies were designed without conducting proper, enterprise-wide

IT risk assessments to ensure that all application systems in use were

covered.


User account management practices had been established at the

Sedibeng District Municipality, as well as at the Emfuleni and Mogale City

local municipalities; however, the policies were not complied with. None of

the other municipalities had approved user account management policies

and procedures.

Due to the lack of adequate user account management policies, user

accounts were created without appropriate approval. User access reviews

were not regularly undertaken to ensure that users’ access remained

aligned to their job responsibilities. Furthermore, users’ access was not

timeously revoked after users had resigned.


could lead to unauthorised access, creation of, and amendments to, fi nancial

and performance transactions and master fi les. Financial information

might, as a consequence, be at risk of being compromised by fraudulent

activities and performance information might be misrepresented.

Root causes

• IT management did not monitor adherence to the policies

developed.

• The absence of approved user account management policies and

procedures could be ascribed to the lack of dedicated resources

with the right skills and experience to develop them. A high level

of reliance was placed on IT consultants, who exploited the lack of

skills and experience at the municipalities.

Municipal entities




evaluation.

119


Figure 27

User access analysis – municipal entities


Johannesburg Metropolitan Bus ServiceJohannesburg City Parks



Johannesburg Fresh Market Produce


Johannesburg Water

None








Johannesburg TourismCompany

120


The municipal entities either did not have policies or their policies were

inadequate/not complied with.

Due to the lack of adequate user account management policies, user

accounts were created without appropriate approval. User access reviews

were not regularly undertaken to ensure that users’ access remained

aligned to their job responsibilities. Furthermore, users’ access was not

timeously revoked after users had resigned.


could lead to unauthorised access, creation of, and amendments to,

fi nancial and performance transactions. Financial information might, as a

consequence, be at risk of being compromised by fraudulent activities and

performance information might be misrepresented.

Root causes

• IT management did not fulfi l their responsibilities. In environments

where there were complex systems, used consultants were not

monitored due to the lack of the skills required to do so.

Good practice

Municipal entities, such as the Johannesburg Property Company,

Metropolitan Trading Company and Pikitup Johannesburg, demonstrated

good IT control practices and no signifi cant control defi ciencies, which

could be attributed to management’s hands-on approach and their

appreciation of the importance of IT controls.

3.4.5 Information technology service continuity

IT service continuity controls are measures designed by management to

ensure the availability of fi nancial and performance information in the event

of data loss or a disaster. This responsibility is normally shared between the

IT department and the business. The controls at the municipalities were

evaluated in terms of their status in relation to the IT control life cycle,

namely design, implementation and operating eff ectiveness. The fi gure

below shows the outcomes of this evaluation.

121


Figure 28

Information technology service continuity analysis – municipalities

Ekurhuleni Metropolitan

City of Tshwane

West Rand District

Merafong Local

Randfontein Local

Westonaria Local

None






Lesedi Local

Mogale City Local

Sedibeng District

Emfuleni Local

Midvaal Local

122



The City of Johannesburg had a disaster recovery plan (DRP), but did not

fully implement it as the disaster recovery site had not been fi nalised

and the DRP had not been tested. Neither the City of Tshwane nor

Ekurhuleni Metro had approved DRPs. The impact of a lack of approved

and implemented DRP could lead to delays in the resumption of business,

resulting in a loss of revenue and/or data.

Root causes

• The costs involved in setting up a disaster recovery site were

prohibitive.

• IT policies and procedures were not approved at council meetings

due to lack of appreciation of the importance of IT matters.


The Sedibeng District Municipality had a DRP, but did not implement it. The

West Rand District Municipality did not have a DRP. The impact of a lack of

approved and implemented DRP could lead to delays in the resumption of

business, resulting in a loss of revenue and/or data.

Due to the small size of the local municipalities and the cost involved in

developing a DRP, the focus of IT continuity was on backup management.

At most municipalities, the backups were performed by IT consultants.

Four of the local municipalities did not have approved backup policies

and procedures. The backup policies and procedures were in place at the

Mogale City, Lesedi and Emfuleni local municipalities, but were not fully

implemented. For instance, the Mogale City and Lesedi local municipalities

were not performing data restorations to ensure that they would be able

to restore their fi nancial data in the event of a loss of data. This could lead

to municipalities not being able to restore their fi nancial and performance

data when a disaster had occurred, for instance in the event of a natural

disaster or civil unrest.

Root causes

• Resource constraints impeded the development of adequate DRPs

and backup procedures.




• No penalty clause in SLAs that could be enforced when the required

services are not rendered.

Good practice

IT managers had the support of executive management in ensuring that IT

controls were implemented and monitored based on the previous reports

issued by the AGSA.

Municipal entities




evaluation.

123


Figure 29

Information technology service continuity analysis – municipal entities

Johannesburg Road Agency None


Signifi cant improvement

Controls implemented but not operating effectively No control weaknesses







Johannesburg Metropolitan Bus Service

Joburg Property Company


Johannesburg Water


Due to the small size of the municipal entities and the cost involved in developing DRPs, the focus of IT continuity was on backup management. The

Johannesburg Road Agency did not have approved backup policies and procedures. The Metropolitan Trading Company and Johannesburg Social

Housing Company did have backup policies, but they did not fully implement these policies as backups were not tested for restoration and not taken

off site.

124


Municipalities might, consequently, not be able to restore their fi nancial and performance data in the event of a disaster.

Root causes

• Poor management of IT controls and ineff ective oversight.

• IT management did not monitor adherence to the policies as they lacked understanding of the importance of data loss in case of disaster.

Good practice

The backups of most municipal entities were adequately managed, which could be attributed to IT managers understanding the importance of backing

up data to ensure its availability in the event of a disaster.

3.4.6 Quick wins and recommendations

Figure 30

Quick wins

All municipalities

• Mayoral council and management should approve the IT policies and procedures.

• Local minicipalities and municipal entities should adopt and align the IT policies and procedures of metropolitan municipalities.

• The IT governance framework developed by the Department of Public Service Administration (DPSA) should be approved and adopted.

All municipalities and entities

• The SLAs should be revised to include penalty clauses.


• Municipal managers should ensure that policies are implemented by chief information offi cers (CIOs) and IT consultants.

• City of Johannesburg should engage with City of Cape Town regarding the processes followed to test DRPs.

• District and local municipalities

• The provincial government information technology offi cer (GITO) should assist the municipalities by overseeing IT consultants in terms of compliance with

their contracts.

• District and local municipalities should act as backup sites for one another.

Municipal entities

• Municipal entities with no control weaknesses should share their user account management best practices and chief executive offi cers (CEOs) should ensure

that they are adopted and implemented.

Control design

Control implementation

125


Figure 31

Recommendations

All municipalities

• Executives should agree with the adoption of the IT governance framework developed by the DPSA.

• Provincial GITO should assist in the assessment of gaps in the IT frameworks of municipalities and entities.

• An implementation manager should ensure that development plans are established for up skilling their IT staff .

• Provincial GITO should assist in developing plans for the transfer of skill from consultants to staff , which should be monitored.

• The OPCA committees should priorities oversight responsibilities for municipalities that are lacking in control design.


• A shared disaster recovery centre should be established for the province.


• The provincial GITO should extend the CIO council invitation to share knowledge to all municipalities.

• The provincial GITO should establish IT vendor forums for municipalities and entities.

• Audit committees should be restructured so that hey can be clustered.

Control design

Control implementation

Control susstainabilty

126


3.5 AUDIT COMMITTEES AND INTERNAL AUDIT UNITS

Eff ective governance is a key driver of internal control, which in turn impacts audit outcomes. Risk management and eff ective audit committees and

internal audit functions are key elements of this driver of internal control. In terms of the MFMA, an audit committee and internal audit unit must be

established by all auditees. Audit committees serve as an independent governance structure whose function is to play an oversight role regarding

the systems of internal control, compliance with legislation, risk management and all other matters of governance. In executing its duties, the audit

committee assists the accounting offi cer in the eff ective execution of his/her responsibilities, with the ultimate aim of ensuring that the organisation

achieves its objectives. Internal audit units form an integral part of providing assurance on governance, risk management and internal control.

The fi gure below shows the results of an assessment of the eff ectiveness of audit committees and internal audit units.

Figure 32

Assessed effectiveness of audit committees and internal audit units

9%

5

14

8 16

97%

82%

87%

61%

61%

58%

66%

82%

82%

3%

18%

13%

39%

39%

42%

34%

18%

97%

95%

87%

32%

39%

32%

53%

87%

3%

5%

13%

68%

61%

68%

47%

13%

61% 39%18%

Assessment: Audit committee Assessment: Intenal audit Aspect assessed

In place

Fully compliant with legislated requirements

Evaluates internal controls

Evaluates reliability/integrity of financial information

Evaluates reliability/integrity of performance information

Evaluates supply chain management

Evaluates compliance with laws and regulations

Interacts with executive authority

Positive impact on audit outcomes

Yes No

127


The table below provides information on the key fi ndings from the

assessment.

Table 34

Assessment of the effectiveness of audit committees and internal audit units

Governance structure aspect

Key fi ndings

Audit committee and internal audit units in

place

At 37 (97%) auditees, these governance structures

were in place. Randfontein Local Municipality is the

only auditee in the province that did not have the

audit committee in place for the full fi nancial year and

where the position of the head of internal audit was

vacant. Although the audit committee was in place

at Westonaria Local Municipality, the exercise of their

oversight role over performance reporting was not

eff ective as there was no performance audit committee.

This was evidenced by the regression in fi nancial audit

outcomes and increased fi ndings on PDOs.

The implementation of audit committee and internal

audit recommendations is what distinguishes an audit

committee being in place, compliant and operational

versus an audit committee being eff ective. Thus,

the eff ectiveness of these structures requires the

executive leadership and senior management taking

audit committees seriously and addressing their

recommendations in time.

In addition, the eff ectiveness of audit committees

depends on the support and respect received from the

provincial executive and the leadership as well as the

councils and the municipal leadership. The leadership

should ensure that audit committees and internal audit

units have suffi cient fi nancial and other resources to

eff ectively fulfi l their responsibilities.


Key fi ndings

Audit committees and internal

audit units fully compliant with

legislation

The establishment of eff ective audit committees is not

only a legislative requirement, but also provides one

of the fundamental requirements of a good control

environment. These key structures serve to ensure that

proper risk assessment is done in areas of fi nancial and

performance reporting as well as compliance with laws

and regulation.

The eff ectiveness of the internal audit unit was

hampered by the following:

• Lack of technical capacity at internal audit units.

• Resignations of skilled offi cials before skills could be

transferred.

• Vacancies at internal audit units – at a chief audit

executive level.

• Internal audit units not proactively auditing

performance information on a quarterly basis.

Audit committees and

internal audit units evaluate

internal control

At two (5%) auditees, namely Randfontein and

Westonaria local municipalities, internal controls were

not evaluated by the internal audit unit or reviewed by

the audit committee. These structures did not function

eff ectively at these two auditees

Audit committees and

internal audit units evaluate the reliability

of performance information

Without adequately skilled offi cials at appropriate

levels, ensuring that planned targets that meet the

requirement of FMPPI, fi ndings on PDOs will remain

a challenge. This results in PDO reports that are not

reliable and useful, thus negatively aff ecting the councils’

oversight responsibility on service delivery.

Internal audit methodology is not aligned to AGSA

audit of PDO methodology and thus hampering

the eff ectiveness in evaluating the reliability and

usefulness of PDO reports. The skills and capacity of the

governance structures need to be enhanced through

continuous training in order to ensure robust oversight

is discharged.

128



Key fi ndings

Audit committees and internal audit units

evaluate SCM and compliance

with laws and regulations

The continued upward trend of non-compliance

with laws and regulations remains a challenge

for the province. The root causes of these repeat

fi ndings are due to lack of processes that facilitate

the implementation of a compliance checklist and a

deviation framework that would prevent and detect

non-compliance with laws and regulations as well as

inadequate monitoring and oversight performed by

governance structures. Lack of enforcing consequences

for transgression of laws and regulations was a

contributing factor to the increase on reported irregular

expenditure.

The lack of submission of quarterly reports on non-

compliance by management to the audit committees

deters audit committees from discharging their

oversight responsibilities on non-compliance.

Audit committees

interact with executive authority

The legislation requires audit committees to present

performance reports to the councils at least twice a

year. However, this requirement has not been met by

the majority of the audit committees. Not all the chairs

of the audit committees interacted with the councils

quarterly.

The audit committee chairs should meet with the

mayors on a quarterly basis to comment on the

eff ectiveness of internal controls (key controls),

eff ectiveness of internal audit units and the quality of



Key fi ndings

Positive impact of audit committees and

internal audit units on audit

outcomes

Quality of fi nancial and performance information

and other reports shared with the council remained

a concern due to inadequacy of reviews by audit

committees. The speaker should insist on receiving

credible information from audit committees and

they should provide assurance to the council that

performance information provided was credible.

Adequate review by the audit committees is dependent

on management submitting reliable and credible

fi nancial, compliance and performance information

to the audit committees. Audit committees need to

enhance their persuasiveness in holding management

accountable. The leadership needs to support audit

committees and internal audit units in order to reap the

full benefi ts of these independent assurance providers.

129

SECTION 4INITIATIVES AND IMPACT OF

KEY ROLE PLAYERS ON AUDIT OUTCOMES

4.1 ASSURANCE PROVIDERS IN LOCAL GOVERNMENT .................. 130

4.2 OVERSIGHT BY MUNICIPAL PUBLIC ACCOUNTS COMMITTEES ................................ 139

4.3 INTERACTIONS WITH MAYORS ..... 140

4.4 INITIATIVES AND COMMITMENTS OF KEY ROLE PLAYERS TOIMPROVE AUDIT OUTCOMES ........ 141

4.5 AUDITOR-GENERAL OF SOUTH AFRICA’S INITIATIVES TO ENCOURAGE CLEAN AUDITS ........ 151

130


This section provides an overview of the impact of the key role players

in local government. An assessment on these assurance providers is

included in section 4.1. The level of oversight by municipal public accounts

committees is included in section 4.2, while the interaction with mayors is

included in section 4.3. The commitments made by key role players, the

status thereof and the impact on audit outcomes are reported in section

4.4. Section 4.5 outlines the AGSA’s ongoing initiatives to encourage clean

administration.

4.1 ASSURANCE PROVIDERS IN LOCAL

GOVERNMENT

The accountability of local government for its actions, performance,

fi nancial management and compliance with legislation serves as a

cornerstone of democratic governance in South Africa. The annual reports

serve as a mechanism in which the mayors and their municipal managers

report on the fi nancial position of the auditee, its performance against

PDOs and overall governance. One of the most important oversight

functions of councils is the consideration of auditees’ annual reports. For

the council to perform its oversight function, assurance is needed that the

information in the annual report is credible. To this end, the annual report

also includes the audit report of the AGSA, which provides the assurance

on the credibility of the fi nancial statements and annual performance

report and the auditees’ compliance with laws and regulations.

In addition to the AGSA, there are other role players in local government

that contribute to the credibility of fi nancial and performance information

and compliance with legislation by ensuring that adequate internal

controls are implemented at auditees.

The role players recorded below are (1) those directly involved with the

management of the auditee (management/leadership assurance); (2) the

role players that perform an oversight/governance function, either as an

internal governance function or an external monitoring function (internal

independent assurance and oversight); and (3) the independent assurance

providers that provide an objective assessment of the auditee’s reporting

(external independent assurance and oversight).

The level of assurance provided by the role players was assessed based on

the status of internal controls of auditees and the impact of the diff erent

role players on the controls. In the current environment characterised

by inadequate internal controls, material misstatements in fi nancial and

performance information and pervasive non-compliance with legislation,

all role players are expected to provide an extensive level of assurance. The

outcome of the assessment of the province is shown below.

SECTION 4 Initiatives and impact of key role players on audit outcomes

131


Figure 33

Level of assurance provided by role players that form part of the auditee

25%

53%

22%

28%

61%

11%

11%

67%

22%

Senior management

Municipal manager

Mayor

17%

67%

17%

19%

72%

8%

100%

Internal audit Audit committee

Department oflocal government,

treasuries and premier’s office

8%

67%

24%

19%

61%

3%

100%

Municipal council

Municipal public accounts

committee

Legislature and portfolio

committee

First level of assuranceManagement/leadership

Second level of assuranceInternal independent assurance oversight

Third level of assuranceExternal independent assurance and oversight

Provides assurance Provides some assurance Provides limited/no assurance

132


The table below refl ects the assessment per auditee and provincial role players

Table 35

Level of assurance provided by role players that form part of the auditee (auditee level)

AuditeeSenior

management

Accounting

offi cer/

authority

MayorAudit

committeeInternal audit

Municipal

councilMPAC


City of Johannesburg Metro

City of Tshwane

Ekurhuleni Metro


Sedibeng District

West Rand District

Emfuleni

Lesedi

Midvaal

Merafong City

Mogale City

Randfontein

Westonaria

Municipal entities


Joburg Property Company

Joburg Theatre (SOC) Ltd


Johannesburg Development Agency (Soc) Ltd

133


AuditeeSenior

management

Accounting

offi cer/

authority

MayorAudit

committeeInternal audit

Municipal

councilMPAC

Johannesburg Fresh Produce Market

Johannesburg Metropolitan Bus Services

Johannesburg Roads Agency



Johannesburg Water

Johannesburg Zoo



Roodepoort Civic Theatre

Sandspruit Works Association

Housing Company Tshwane

Brakpan Bus Company (Pty) Ltd

East Rand Water Care Company

Ekurhuleni Development Company SOC (Pty) Ltd

Germiston Phase II Housing Company SOC (Pty) Ltd

Lethabong Housing Institute SOC NPC

Pharoe Park Housing Company SOC (Pty) Ltd

West Rand Development Agency


Internal controls are activities designed to provide reasonable assurance that operations are “going according to plan”. They are therefore essential to the

eff ective operation of local government. The table below summarises the level of assurance provided by diff erent role players.

134


Table 36

Comments on the level of assurance provided by role players

Role player Comment

Senior management

and accounting offi cer/authority

In accordance with sections 62 and 95 of the MFMA, the accounting offi cer is responsible for managing the fi nancial administration of the

municipality and municipal entity. To execute its responsibilities eff ectively, management needs to understand how an integrated internal

control framework aff ects its municipality or municipal entity.

It is concerning that inadequate assurance at a majority of auditees is currently being provided by senior management and accounting

offi cers who are at the forefront of the organisation. The impact of this limited assurance is evident in the stagnant audit outcomes. Adequate

skills and competencies, ethics and integrity, an embedded system of internal control, established policies and procedures and clearly

defi ned roles and responsibilities form the fundamental foundation for providing assurance. The assessment demonstrates that embedded

controls were not implemented in relation to the preparation of fi nancial statements and non-compliance with laws and regulations.

To improve assurance expected within the managerial ranks, the accounting offi cer should provide the leadership needed to establish and

guide an integrated internal control framework. The accounting offi cer should establish a positive “tone at the top” by conducting their aff airs

in an honest and ethical manner and establishing accountability at all levels of the municipality or municipal entity. If the accounting offi cer

does not demonstrate strong support for internal controls, the organisation as a whole will be unlikely to practice good internal controls.

Finance offi cials are instrumental in overseeing accounting and fi nancial reporting controls. The responsibilities of fi nance offi cials to

supervise the preparation of accounting records, to produce fi nancial reports and demonstrate compliance with laws and regulations

should be priority goals for local government. Because of their vital role in providing the desired assurance, fi nance offi cials should be

knowledgeable about both control procedures and the integrated internal control framework followed. Finance offi cials should work closely

with or support the accounting offi cer in fostering a positive control environment.

Mayor

Mayors must execute their fi nancial management roles and responsibilities in accordance with sections 52 and 53 of the MFMA and must

address any issues raised by the AGSA in accordance with section 31(1) of the MFMA.

The overall outcome of the assessment of mayors was that they were not providing the extensive level of assurance as required.

Improvement was needed on assurance provided by mayors, starting with ownership of the key control processes and eff ective monitoring

of commitments for improved audit outcomes. Although some mayors availed themselves for quarterly key control interactions, they were

not driving the implementation.

To improve assurance provided at this level, there should be an alignment and commitment to clean administration between mayors, the

accounting offi cer and senior management as this will ultimately result in improvement in audit outcomes. In addition, mayors need to drive

consequence management when it is evident that administration is not aligned to clean audit.

135


Role player Comment

Internal audit units

The role of the internal auditor in the assurance model is that of an objective adviser with respect to the design and eff ectiveness of internal

controls implemented by management.

Internal audit units were not adequately capacitated, resulting in ineff ective assurance, advisory and reporting functions. There was a

shortage of appropriate technically skilled auditors. Although we had provided training to internal audit units on PDO reporting, no

signifi cant improvement can be seen in the outcomes. Risk assessments were not aligned to the regularity audit focus areas and as a result

fi ndings still arose on non-compliance with laws and regulations and PDOs, which prevented clean audit outcomes.

The above scenarios contributed to poor quality internal audit reports. As a result, recommendations were not taken seriously by

management. Internal audit units also did not add credibility to the fi nancial reporting process nor to the quarterly review of key controls.

Each local government has its own unique set of circumstances and risks that will aff ect the design and implementation of its controls.

Therefore, before determining which controls should be implemented, internal auditors should adequately evaluate risk assessment process

performed by risk offi cers before basing their internal audit plans on the risk registers.

Audit committee

The role of audit committee in assurance model is to enhance the eff ectiveness of the control framework through the use of its internal audit

structure and assist the council in meeting its oversight responsibilities for internal controls.

Audit committees were not operating at the desired level of assurance. Although fi nancial information might have been reviewed to a certain

extent, audit committees did not place enough focus on performance information reporting and compliance reporting. Some members

lacked skills in these areas, which prevented auditees from achieving clean administration.

The eff ectiveness of the audit committee was reliant on management providing accurate and relevant information in time, as well as the

eff ective implementation of audit committee recommendations. During the year there were no consequences for management’s non-

adherence to audit committee recommendations.

To improve the level of assurance, audit committee chairpersons should interact with mayors and councils quarterly to confi rm credibility

and integrity of fi nancial and performance information. Audit committees should interact with mayors quarterly to drive the eff ectiveness of

internal controls, the eff ectiveness of internal audit and the status of the fi nancial statements. Audit committees must also monitor the work

of internal audit units and progress made on general report commitments.

136


Role player Comment

Municipal council

The role of councillors in providing assurance is to oversee that local government complies with the requirements for accountability,

eff ectiveness, and effi ciency. Councillors focus on developing policies as well as oversight over implementation of such policies through in-

year and annual reports. The municipal administration on the other hand focuses on implementation of such policies.

Councils did not provide the level of assurance that ensured adequate and eff ective oversight and monitoring at a majority of auditees.

Councils experience the following challenges:

• Insuffi cient understanding of their oversight functions.

• Ineff ective evaluation and monitoring of implementation of commitments by municipal management to address external and internal

audit fi ndings.

• Lack of oversight and support of MPACs to ensure their eff ectiveness.

• Lack of regular and robust interaction with audit committees and internal audit units to ensure adequate monitoring of implementation of

action plans.

• Insuffi cient understanding of the value of the PDO reports.

The AGSA has further identifi ed interactions with the council as an area for improvement. The accounting offi cer of the municipality is

responsible for keeping full and proper records of the municipality’s fi nancial aff airs. Therefore, the speaker of the council has the right to have

credible fi nancial and performance reports tabled at council meetings. Where these reports are not credible, there should be consequences

for the offi cials concerned.

To improve the level of assurance, the councils should give more support to the MPACs and give MPACs the power they deserve, and

should ensure that resolutions are monitored and investigations followed up. They did not realise the value of the quarterly performance

reports. Councillors should be empowered to understand fi nancial and performance management and the council must hold management

accountable. In addition, they should be empowered with knowledge regarding the SCM regulations.

MPAC

All municipalities have established MPACs since the 2011 local government elections. The training of MPACs commenced in 2012. MPACs thus

had limited experience and knowledge in providing oversight and, as a result, they were providing minimal level of assurance and oversight,

and have therefore had minimum impact on audit outcomes in the Gauteng province.

Furthermore, MPACs consisted of councillors that did not have adequate skills or had not been adequately trained to perform the oversight

function as expected. There was a need for ongoing and timely capacity building to ensure that they fully understood their role and to

embed a culture of eff ective oversight. MPACs need to meet more frequently in order to enhance their oversight.

MPACs also need a solid research capacity for them to perform eff ectively, and this is something the province can support at a central point.

Good practices that should be replicated in the province are the attendance of the MPAC chairperson at audit committee meetings and

MPAC resolutions that are monitored and implemented. Investigations should also be monitored by MPACs and reported back to the council.

137


It is evident from the above that the key role players did not have the desired impact on audit outcomes. To reap the full benefi ts of combined assurance,

local governance will have to go beyond the audit opinions towards establishing seamless systems and processes, routinely generating reliable cost and

performance information and analysis, undertaking other value-adding activities that support strategic decision-making and mission performance, and

building a fi nance team that supports the mission and goals of the auditees. The table below provides comments on the level of assurance provided by

each role player.

Table 37

Level of assurance provided by role players that form part of the auditee (coordinating/monitoring institutions’ level)

Auditee

Coordinating/ monitoring institutions

and provincial oversight

Comment

Provincial treasury

The provincial treasury had an extensive support programme for municipal budgets, fi nancial accounting and auditing,

resource management, compliance and asset management. However, the monitoring and implementation of these

programme activities can be improved to achieve the desired state of clean administration. It is recommended that a

self-assessment be done on the programme performance. Financial statement reporting, key controls and compliance

checklists should be key focus areas of the treasury. Material amendments to the fi nancial statements remained a

challenge despite treasury’s interventions.

Offi ce of the Premier

The premier’s responsibility for overseeing municipalities was enabled through the premier coordinating forum (PCF).

The AGSA was invited to meetings of this forum, while this forum was active in the province, its benefi ts were yet to be

fully realised as the forum did not meet frequently. This contributed to the slow progress in improving audit outcomes.

There was progress at some municipalities but others did not improve from their prior year audit outcomes.

Local Government

The Department of Local Government has an active OPCA committee as well as budget programmes to monitor and

advise municipalities. The AGSA attended the OPCA committee meetings. The provincial OPCA committee was not

aligned to the action plans of municipalities’ OPCA initiatives. While the department was visible at the municipalities,

their activities and progress in improving audit outcomes needed to be monitored and evaluated in order to promote

greater incidences of clean administration at the municipalities. Municipal initiatives at district and local levels had

not been eff ective in the past due to budget constraints. The provincial OPCA committee was not taken seriously

by auditees as there were no follow ups on commitments made previously and there were no consequences

recommended against offi cials who were not performing. Finally, the department did not submit reports on local

government, as required by the Municipal Systems Act, to legislature portfolio committees. This impaired the

eff ectiveness of the portfolio committees in exercising their oversight over local government.

138


Auditee

Coordinating/ monitoring institutions

and provincial oversight

Comment

Portfolio committee

on local government

The portfolio committee on local government did not have any impact on the audit outcomes of the province. The

portfolio committee was dependent on the Department of Local Government for information on the progress of

Operation clean audit 2014. It is recommended that the portfolio committee include this as a standing item on their

agenda and invite the department and municipalities to account for progress or lack thereof in achieving clean

administration.

Provincial legislature

The legislature had extensive oversight responsibilities over local government. The speaker’s forum and oversight

committee on premier and legislature (OCPOL) met regularly to discuss municipal fi nance issues with municipalities.

The messages of clean administration still have to be realised by the municipalities.

The legislature and committees engaged with the AGSA on a regular basis. There is a Gauteng speaker’s forum that the

AGSA engages with, as and when it meets.


139


Conclusion

Overall, the key role players in local government provided limited

assurance. The stagnant audit outcomes, as presented in section 2 of this

report, are a refl ection of the inadequate assurance provided by these role

players that have a direct impact on auditees. Signifi cant strides will have

to be made if the required level of assurance is to be provided for credible

decision-making.

Senior management and the accounting offi cers need to take ownership

and accountability for their actions and should set the correct tone at the

top. Accounting offi cers should take ownership of, and accountability

for, fundamental internal controls and should be held accountable for

transgressions. In order to increase the level of assurance at oversight level,

mayors should implement commitments made in the general report and be

proactive and play a more involved role in monitoring and implementation

of the control environment; internal audit units should be adequately

capacitated in terms of staffi ng; and the audit committee should play a

more active role and their reviews should include fi nancial information,

compliance reporting as well as PDO reporting on a more regular basis.

The council and MPACs should be trained in fi nancial, compliance and

performance information matters and should be provided with relevant,

credible information timeously. All oversight role players, including district

municipalities, should work together more eff ectively to provide a more

robust oversight function.

The quality and credibility of information supplied to coordinating role

players (Offi ce of the Premier, Department of Local Government and

provincial treasury) have an impact on the assurance they provide. During

the year, the quality of information was not at the required level, which

infl uenced the eff ectiveness of these oversight bodies. It is thus imperative

that all role players take ownership of the implementation and monitoring

of key controls to ensure that all information produced for oversight and

decision-making is accurate and reliable, thereby enhancing credibility and

accountability. Greater collaboration is also encouraged between district and

local municipalities, with the establishment of joint governance structures.

4.2 OVERSIGHT BY MUNICIPAL PUBLIC

ACCOUNTS COMMITTEES

The establishment and functioning of an MPAC at municipalities, was

introduced in the province in 2011. When operating as intended, the

MPAC will be one of the most critical role players in municipal oversight

and governance and should have a positive impact on audit outcomes.

The primary functions of the MPAC include the following:

• Considering and evaluating the content of the annual report

and making recommendations to the council when adopting an

oversight report on the annual report.

• Reviewing information relating to past recommendations made in

the annual report. This relates to current in-year reports, including

the quarterly, mid-year and annual reports.

• Examining the fi nancial statements and audit reports of the

municipalities and municipal entities and consider improvements

from previous statements and reports.

• Evaluating the extent to which the recommendations of the audit

committee and the AGSA have been implemented.

• Promoting good governance, transparency and accountability in

the use of municipal resources.

By the 2012 fi nancial year-end, MPACs had been implemented by all

municipalities in the province. As shown in section 4.1, the MPACs have not

yet provided the level of assurance required to contribute to the credibility

and reliability of fi nancial and performance reporting, compliance with

laws and regulations and eff ective internal controls.

140


The following are the root causes of ineff ective functioning of MPACs:

• Members were not adequately skilled and trained on fi nancial,

compliance and PDO matters.

• MPACs did not meet regularly throughout the year to formulate,

implement and monitor their resolutions.

• MPACs and council portfolio committees did not foster closer

cooperation to enhance oversight and coordination of resolutions.

• Councils and audit committees did not provide adequate support

to MPACs.

• Reshuffl ing of eff ective MPAC members to other committees, which

compromises eff ective functioning of the MPAC.

The recommended way forward to strengthen the operation and

functioning of MPACs is as follows:

• Members of MPACs should be trained continuously on providing

eff ective oversight and should be skilled in fi nancial, compliance

and PDO matters.

• Regular meetings should be held throughout the year and oversight

should not be limited to only the annual report, but should include

quarterly reports on fi nancial management and PDOs.

• Input and guidance should be requested from the AGSA and

auditors should be invited to attend all MPAC meetings.

• The council should perform an adequate evaluation of the

performance and eff ectiveness of MPAC on an annual basis.

• The speaker of the council should lift the profi le of the MPAC to

promote their infl uence and persuasiveness through the council.

• The MPACs should interact with the other committees of the council

through the speaker to ensure coordinated eff orts that add greater

value to the municipal council.

• MPAC hearings should be prioritised to ensure timeous oversight,

monitoring and review of resolutions.

The MPACs should look to the provincial public accounts committee for

support and should copy provincial public accounts committee’s best

practices in order to improve their eff ectiveness.

4.3 INTERACTIONS WITH MAYORS

In response to the 2010-11 audit outcomes, mayors committed an

hour of their time every 90 days to meet with our senior management.

Where mayors did not attend quarterly key control meetings, they were

represented by the member of mayoral committee (MMC) for fi nance.

At these interactions the status of the key controls of auditees and

commitments were discussed and identifi ed risks shared. Weaknesses in

key internal controls were highlighted to the mayors and MMCs, progress

on commitments to address prior year audit fi ndings were tracked and

new commitments were obtained. Although the engagements were well

received, these engagements had limited impact on the audit outcomes

of most of the auditees. The table below shows the number of interactions

with the mayors and the assessed impact of the interactions.

141


Table 38

Interactions with mayors

AuditeeTotal number of

interactionsEvaluation of

impact

District municipalities

Sedibeng District 3 Some impact

West Rand District 2 Some impact

Local municipalities

Emfuleni 4 Some impact

Lesedi 3 Some impact

Merafong City 3 Some impact

Midvaal 3 Signifi cant impact

Mogale City 4 Signifi cant impact

Randfontein 4 Minimal impact

Westonaria 3 Some impact


City of Johannesburg Metro 4 Some impact

Ekurhuleni Metro 5 Signifi cant impact

City of Tshwane 4 Some impact

The leadership’s availability for and commitment to the interactions is a

key ingredient for the success of the interactions. Regrettably, interactions

with mayors did not always yield the desired impact as audit outcomes

remained unchanged from the prior year, with the exception of mayors at

Ekurhuleni Metro, Mogale City, Emfuleni and Midvaal municipalities where

visible improvement in internal controls was recorded as a result of the

leadership taking ownership of the commitments and action plans.

It is imperative that the AGSA quarterly interactions are attended by the

relevant mayor, MMC, chair of audit committee, municipal manager and

CFO to foster a common understanding of the matters requiring attention

to move the municipality towards clean administration.

The following contributed to the slow response to AGSA messages:

• The value of PDO reports was not fully realised by the council

and as a result, the council’s responsibility for oversight,

including performance management, was not at the appropriate

level.

• Inadequate monitoring of implementation progress on external and

internal audit action plans to address internal control defi ciencies.

This rendered commitments that were developed to be ineff ective.

• Lack of consequence for accounting offi cers and responsible offi cials

whose municipalities received repeat qualifi ed audit fi ndings and/

or non-compliance fi ndings.

4.4 INITIATIVES AND COMMITMENTS OF

KEY ROLE PLAYERS TO IMPROVE AUDIT

OUTCOMES

The table that follows outlines the key initiatives of the provincial leadership

and oversight to improve audit outcomes as well as further commitments

made to the AGSA for actions to be taken. The commitments include

those made in response to the previous year’s audit outcomes and new

commitments obtained through in-year interactions and engagements

with them between January 2013 and the date of this report. An assessment

of the impact of the initiatives and commitments is also provided.

142


Table 39

Commitments and initiatives of key role players in response to audit outcomes

Key role players Outline of initiatives and commitments made

Focus area targeted by

initiative/ commitment

Progress made with

implementing commitments

Impact of initiatives and commitments on audit outcomes

Speaker of the provincial

legislature

The speaker of the provincial legislature committed to:

• interact on a regular basis with the AGSA at platforms like the

speaker’s forum

• encourage speakers of councils to insist on credibility of fi nancial

statements and performance information

• promote active involvement of portfolio committees in

oversight over municipalities.

Quality of AFS,

SCM, PDOsNew Not yet able to assess

Provincial portfolio committee on

local government, provincial treasury

and OCPOL

Provincial portfolio committee on local government, provincial treasury and OCPOL

The provincial portfolio committee on local government,

provincial treasury and OCPOL committed to:

• interact with the AGSA on a quarterly basis to monitor and

evaluate commitments made

• respond, monitor and evaluate the Department of Local

Government and provincial treasury reports that are submitted

to the legislature

• monitor and evaluate the Department of Local Government’s

impact on clean administration in local government on a

quarterly basis, and share information with the public accounts

committee as required

• track the progress of implementation by the municipalities of

MPAC resolutions and report on this progress to the legislature

• promote initiatives at metropolitan and district municipalities to

enhance council oversight of the executive.

Quality of AFS,


143





Progress made with



Offi ce of the Premier

Offi ce of the Premier committed to:

• monitor and assess political leadership’s accountability for

control and oversight over municipalities through the premier’s

coordinating forum

• have a standard agenda item at premier’s coordinating forum

that will evaluate progress made by the province in the drive

towards clean administration

• review and improve the eff ectiveness of the coordinating

departments through making Operation clean audit a more

prominent standing agenda item at all Exco meetings.

Quality of AFS,


144





Progress made with



MEC for local government

In the prior year, the MEC for local government committed to:

track, review and monitor the progress made by the municipalities

and entities in:

• preparing and reporting on monthly fi nancial statements

• reporting quarterly on unauthorised, irregular expenditure and

fruitless and wasteful expenditure

• reporting quarterly on key control assessments

• reporting on outcomes arising from the audit of compliance

checklists.

Quality of

AFS, SCM,

compliance

In progress Limited impact

In the current year, the MEC for local government committed to:

• report to the portfolio committee on local government on

progress made to assist and support municipalities to obtain

clean administration

• share with the coordinating institutions quarterly reports on

progress made on clean administration at municipalities

• align the provincial OPCA committee to the initiatives of the

municipal OPCA committees

• ensure that OPCA committee verifi es whether municipalities

review fi nancial and performance information to confi rm

credibility thereof

• enforce the appointment of skilled personnel at the level

of section 57 managers and adherence to compliance to

legislation

• meeting regularly with provincial treasury, SALGA as well as with

the municipal managers of metros and districts to monitor the

status at municipalities and identify focus areas where assistance

is needed.

Quality of

AFS,SCM,

compliance,

PDOs

New Not yet able to assess

145





Progress made with



MEC for fi nance/ provincial treasury

In the prior year, MEC for fi nance committed to:

• track, review and monitor the progress made by the

municipalities and entities in:

• preparing and reporting on monthly fi nancial statements

• reporting quarterly on unauthorised, irregular expenditure as


• reporting quarterly on key control assessments

• reporting on outcomes arising from the audit of compliance

checklists.

Quality of AFS,

SCM

Not

implementedLimited impact

In the current year, MEC for fi nance committed to:

• coordinate fi nancial management improvement programmes

between the provincial treasury and the National Treasury to

ensure adequate support for municipalities, especially metros

• induct and capacitate the council and MPAC to discharge their

duties

• prepare a circular on regulation 36 of the SCM regulations

• assess skills and minimum competencies of fi nance offi cials and

monitor skills development initiatives

• continue to provide training on GRAP, PDOs and SCM to ensure

that municipal offi cials keep abreast of the latest developments.

PDOs,

quality of AFS,

compliance


146





Progress made with



Councils

The councils committed to:

• track the progress on the implementation by municipalities of

MPACs resolutions

• insist, through the speaker, that credible fi nancial and

performance information is submitted to council meetings

• exercise responsibility for oversight, including consequence

management

• receive training in order to be empowered to deal with fi nancial

and performance reporting

• ensure that MPACs are capacitated by the coordinating

institutions to fulfi l their oversight role eff ectively.

Quality of AFS,


SALGA

SALGA committed to:

• collaborate with the Department of Local Government and the

provincial treasury to provide training to councillors

• intensify its involvement through dedicated programmes in the

development of the CFO forums as well as audit committees

• provide intense support/follow up on commitments made by

the municipalities and provide guidance, where necessary

• continue to prioritise capacity building within local government

• continue in its role of supporting and advising the

municipalities. In addition, SALGA to continue playing a more

prominent role in audit outcome discussions and related

interventions going forward.

Quality of AFS,


147





Progress made with



Districts

District councils committed to:

assist the municipalities by:

• providing centralised services such as IT, engineering and

fi nancial support

• aligning the IDPs of all municipalities in the districts and

regularly monitor service delivery objectives

• supporting local municipalities with capacity and skills

constraints.

Oversight,

PDOs,

compliance


Mayors

In the prior year, mayors committed to:

• ensure ongoing monitoring of the oversight of fi nancial reports,

compliance reports and reports on PDOs, as well as eff ective risk

management in order to attain clean audit outcomes

AllNot

implementedNo impact

• engage quarterly with the audit committees’ chairpersons on

the eff ectiveness of internal controls and internal audit units, as

well as quality and credibility of fi nancial statements.

Quality of AFS In progress Limited impact

In the current year, mayors committed to:

• hold accounting offi cers accountable for implementing

controls to prevent and detect non-compliance with laws and

regulations

• meet with the AGSA on a quarterly basis to discuss the

eff ectiveness of key controls

• set the tone at the top to ensure adequate consequence

management.

Oversight,

quality of

AFS, PDOs,

compliance


148





Progress made with



Audit committees

In the prior year, audit committees committed to:

• report on the eff ectiveness of internal controls, credibility and

accuracy of the annual fi nancial statements and reported

performance information to the mayors on a quarterly basis.

Quality of AFS,

PDOs and

compliance

Not

implementedNo impact

In the current year, audit committees committed to:

• confi rm the credibility of information to the council and drive

consequence management.

Quality of

AFS, PDOs,

compliance, IT,

HR

In progress Limited impact

Internal audit units

In the prior year, internal audit units committed to:

• review fi nancial statements with supporting schedules to

prevent and detect material misstatements

Quality of AFS,

complianceNew Not yet able to assess

• review annual performance reports for consistency with SDBIPs

by doing quarterly audits

• review key controls on a quarterly basis

PDOs New Not yet able to assess

• follow up on implementation of action plans to address fi ndings

on PDOs at each department and/or entityPDOs New Not yet able to assess

• review quarterly key control dashboards to provide assurance

on their credibility.

Quality of

AFS, PDOs,

compliance, IT,

HR


149





Progress made with



Municipal managers and CEOs

Municipal managers and CEOs committed to:

• taking accountability and ownership of the control environment

and ensure that they provide credible information to key role

players to provide eff ective oversight

• fi ll key vacancies and employ people with the necessary

skills and competencies and ensure continuous professional

development

• implement controls to prevent and detect non-compliance with

laws and regulations

• prepare monthly fi nancial statements

• report monthly or quarterly unauthorised, irregular as well

as fruitless and wasteful expenditure to councillors and the

provincial treasury

• take ownership of key controls

• report on progress on action plans to mayors and councillors.

Quality of AFS,

PDOs, HRNew Not yet able to assess

Auditee-specifi c commitments:


• The mayor committed to implement measures to address

revenue management challenges.

Quality of AFS,


City of Tshwane • The mayor committed to establish a shareholder’s unit to ensure

that eff ective oversight is provided to the municipal entities.

Quality of AFS,


Ekurhuleni Metro

• The mayor committed to ensuring that CEOs and CFOs of all the

municipal entities attend OPCA committee meetings and give

feedback on the action plans addressing AGSA fi ndings.

Quality of AFS,


Randfontein Local Municipality

The mayor committed to:

• fi ll the vacant municipal manager and CFO positions

• monitor and implement commitments and action plans to

address qualifi cations.

Quality of AFS,


150





Progress made with



In addition, the following transversal commitments were made in the current year:

Reviewing performance agreements and aligning them to the revised IDP and SDBIP.

Conducting mid-year service delivery performance assessment and reporting to the council

and the treasury.

Developing the framework for credible performance evidence and draft user guidelines for

performance measuring instruments.

Quality of

AFS, PDOs,

compliance


151


A solid foundation of control and accountability requires a system

of checks and balances that provides reasonable assurance that the

entity’s transactions are appropriately recorded and reported, its assets

are protected, its established policies are followed, and its resources

are used economically and effi ciently for the purposes intended. Such

foundation requires full commitment of the political leadership and senior

management of municipalities and municipal entities. As detailed in

section 3, it is clear that pervasive root causes, especially slow responses to

AGSA messages, are the heart of fi nancially unqualifi ed with fi ndings audit

outcomes. Judging from the stagnation of these outcomes, it appears

as if those that are charged with the responsibility of driving clean audit

administration are complacent and satisfi ed with the results. Unless the

desired level of eff ort is put in honouring commitments, the picture in the

province is not going to change.

The way forward

Commitments of various role players, especially the provincial and national

coordinating institutions, are encouraging. Frank discussions between the

AGSA and relevant stakeholders regarding unimplemented commitments

bring hope that the above commitments will be implemented in time to

assist auditees, especially those that had very few fi ndings, move to clean

audit outcomes. The political leadership and senior management should

demonstrate their sustained commitment to improvement initiatives

by actually driving key improvement eff orts, enforcing implementation

of these commitments, ensuring that the necessary resources are made

available, and creating a system of rewards and incentives to recognise

those who support and achieve the desired outcomes.

4.5 AUDITOR-GENERAL OF SOUTH AFRICA’S

INITIATIVES TO ENCOURAGE CLEAN

AUDITS

Over the past two years, we have embarked on many initiatives to

enhance accountability and to infl uence the process towards improving

audit outcomes and clean administration. The main initiative was to

further strengthen our relationship with the political and administrative

leadership to deepen their understanding of the accountability, audit and

governance mechanisms, thereby paving the way towards improving

public confi dence. This initiative included the increased visibility of our

senior leadership and continuous interactions to highlight possible

challenges, audit fi ndings and transversal risks.

Summarised below are some of the key initiatives the AGSA has undertaken

to promote public sector accountability and to encourage the process of

improving audit outcomes and attaining clean audits.

152


Table 40

Auditor-General of South Africa’s key initiatives

Nature Outline of AGSA initiatives

Quarterly interactions with

political and administrative leadership on status of key

controls

During the 2011-12 fi nancial year, the AGSA provincial leadership continued to enhance the visibility of AGSA leadership through quarterly

interactions with the provincial leadership, executive mayors and accounting offi cers.

Quarterly interactions include discussions on key control defi ciencies and resulting commitments to achieve clean administration,

contentious and emerging accounting matters, fi nancial and cash fl ow positions and strategic projects of the municipalities and the

consolidated key control results and the status of commitments made after the 2011-12 audits.

Although the evaluation of key controls is performed by the auditees, the AGSA will continue to interact on a quarterly basis with MECs,

portfolio committees, executive mayors and accounting offi cers to obtain assurance on the implementation of key controls.

Stakeholder interactions

We will continue participating in, and presenting at, information-sharing interventions of the Gauteng Provincial Department of Finance and

Department of Local Government, e.g. municipal fi nance forum. We will also play an active role at provincial OPCA committee meetings to

improve eff ective oversight.

Monitor progress on action plans

We will have regular interactions with management of auditees to assess adequacy and progress made on the implementation of action

plans.

Understanding of why the fi nancial

statements are prepared

We will continue holding discussions with accounting offi cers and CFOs on the importance of preparing quality monthly, quarterly and

annual fi nancial statements that are used as a vital decision-making tool.

We will perform interim audits at some auditees to allow them time to resolve signifi cant fi ndings before the fi nal audit commences.

Promoting understanding

of PDO requirements

There will be greater coordination of eff ort between the AGSA audit team and the internal audit function at the entities, specifi cally in the

area of auditing of PDOs with the objective that potential problem areas are identifi ed and corrected timeously by management.

Our offi ce will collaborate with the provincial treasury regarding workshops on PDO reporting aimed at the executive and management. We

will raise awareness among auditees of the correlation between PDOs and eff ective service delivery through continuous engagement with

the stakeholders and emphasis on the importance of the reports on AOPO.

We will enable the councils to understand and use our reports on PDOs by providing training to MPACs and speakers of the council.

We will perform follow-up audits at auditees that have an opportunity to address PDO issues based on the mid-year performance reports.

MPACs

Our offi ce will continue engaging and communicating with the MPAC to ensure a credible oversight report is submitted to the council. We

will bring to the attention of MPAC chairs the importance of inviting the AGSA to the meetings – to enhance oversight and contribute to

clean administration.

153

SECTION 5FINANCIAL HEALTH OF LOCAL GOVERNMENT

5.1 GOING CONCERN ....................154

5.2 FINANCIAL HEALTHINDICATORS ..............................155

154


This section provides the reported outcome of the assessments of the

ability of municipalities to remain as going concerns (section 5.1) and of

the fi nancial health indicators of municipalities (section 5.2).

5.1 GOING CONCERN

Under the going concern assumption, an auditee is expected to be able

to continue to operate for the foreseeable future without curtailing its

operations. As the going concern assumption is a fundamental principle

in the preparation of the fi nancial statements, management is required

to assess the ability of the municipality or municipal entity to continue

as a going concern and provide the relevant disclosures in the fi nancial

statements. As part of the audit process, we also perform procedures to

assess whether there are any events or conditions that may cast signifi cant

doubt on the auditee’s ability to continue as a going concern.

The fi nancial statements of nine auditees (24%) disclosed that a material

uncertainty existed with regard to their ability to continue as a going

concern. The disclosure was also emphasised in the audit report. Those

auditees are Johannesburg Tourism Company, Roodepoort Civic Theatre,

Westonaria Local Municipality, Johannesburg Roads Agency, Metropolitan

Trading Company, Brakpan Bus Company, Lethabong Housing Institute,

Johannesburg Zoo and Pikitup Johannesburg.

For the reported going concern, uncertainties at Johannesburg Tourism

Company, Roodepoort Civic Theatre, Metropolitan Trading Company

and Johannesburg Zoo resulted from mergers that were not fi nalised at

30 November; and for Brakpan Bus Company and Lethabong Housing

Institute the uncertainties were due to the purpose and funding structure

of the entities, these entities are in a net liability position. The Ekurhuleni

Metropolitan Municipality had issued signed subordination contracts

as a parent municipality of these entities. These circumstances did not

place doubt on the auditees’ ability to render uninterrupted services to

their citizens in the foreseeable future. The table below provides detail

on the three auditees with a material uncertainty aff ecting rendering of

uninterrupted services.

Table 41

Events and conditions of material uncertainty

Auditee Events and conditions

Westonaria Local

Municipality

The fi nancial statements disclosed circumstances that

placed doubt on the ability of this municipality to provide

uninterrupted services to its citizens in the foreseeable

future. The indicators of going concern problems included

negative cash fl ows, high provision for doubtful debts and

long outstanding debts.


Current liabilities exceeded current assets, and the

accumulated defi cit placed doubt on the ability of this

entity to render uninterrupted services to its citizens in the

foreseeable future.


The accumulated defi cit and liabilities that exceeded its

assets, placed doubt on the ability of this entity to provide

uninterrupted services to its citizens in the foreseeable

future. A letter of guarantee from the parent municipality

to the entity was provided to cover the accumulated defi cit.

SECTION 5 Financial health of local government

155


5.2 FINANCIAL HEALTH INDICATORS

Management is responsible for the sound and sustainable management

of the aff airs of the municipality to which they are appointed and for

implementing an effi cient, eff ective and transparent fi nancial management

system for this purpose, as regulated by legislation. The annual AGSA audits

now include a high-level analysis of a municipality’s fi nancial management

indicators in order to provide management with an overview of selected

aspects of its current fi nancial management and enable timeous remedial

action where the municipality’s operations and service delivery may be at

risk.

There are no adverse or disclaimed audit opinions as a result; all auditees

are included in the analysis of fi nancial health.

The analysis is presented under the following headings:

• Budget and grant management (section 5.2.1)

• Debtor management (section 5.2.2)

• Creditor management (section 5.2.3)

• Financial performance and position and cash management (section 5.2.4)

• Concluding comments (section 5.2.5)

A municipality or municipal entity in good fi nancial condition would

generally maintain adequate service levels during fi nancial downturns,

identify and adjust to long-term economic or demographic changes, and

develop resources to meet future needs. Conversely, once in fi nancial

stress a municipality or municipal entity usually struggles to balance its

budget, suff ers through disruptive service level declines, has a diffi cult time

adjusting to socio-economic forces, and has limited resources to fi nance

future needs. Maintaining or restoring sound fi nancial condition requires

local government offi cials to adjust to long-term socio-economic and

demographic changes, respond to the economic impact of the business

cycle, and plan for the future.

5.2.1 Budget and grant management

There is a greater need for local government’s ability to balance recurring

expenditure needs with recurring revenue sources, while providing

services on a continuing basis.

5.2.1.1 Overspending of the operational budget

The fi gure below presents the overspending of fi nal operational budgets

per category of municipalities and municipal entities, refl ecting both the

percentage of auditees that overspent and the overall average percentage

overspending in the province. The analysis is based on auditees’ fi nal

operational budgets, after having been adjusted from the original budgets.

Figure 34

Overspending of the operational budget

24%

13%

6%

15%

27%

22%

Number and % of auditees that overspent

Average overspending of the budget

Overall District and local municipalities

Municipal entities

156


The overspending on the operational budgets indicates inadequate

monitoring of the expenditure incurred. Overall, nine (24%) of the

municipalities and municipal entities overspent their operational budgets

by an average overspending of 13%. None of the metros overspent their

operational budgets. The avoidance of overspending by metropolitan

municipalities indicates eff ective budgeting techniques and available

surplus funds to adjust original budgets. In total, two (22%) of the district

and local municipalities and two (27%) municipal entities overspent

their operational budgets by an average overspending of 6% and 15%,

respectively. Sedibeng District and Mogale City overspent operational

budgets by 6% and 5%, respectively. The overspending on the operational

budget is due to inadequate monitoring of the expenditure incurred. At

a municipal entity level, the following auditees overspent on operational

budgets:

• Brakpan Bus Company

• Johannesburg City Parks

• Johannesburg Property Company

• Johannesburg Water

• Lethabong Housing Company

• Johannesburg Metrobus

• Germiston Phase II

At the local and district municipality levels and the municipal entity level,

the overspending is a concern and indicates that the quality of budgeting,

availability of cash reserves and management of revenue and expenditure

against the budget are inadequate. This is concerning because the

overspending occurred even after adjusting the original budget for changes

in fi nancial and performance conditions. Local and district municipalities

and municipal entities need to ensure that quality budgeting techniques

are in place and are monitored monthly by qualifi ed and responsible staff

to avoid overspending. The accounting offi cers should review operational

budgets on a monthly basis, and the information provided to the councils

and boards should be reliable and credible.

Overspending of operational budget implies that auditees may not be able

to meet their monthly obligations, such as salaries, wages and payment

for goods and services. This implies that they may either over-utilise their

overdraft facility or use the capital budget for operational expenditure,

which could negatively impact service delivery.

Furthermore, the level of overspending by district and local municipalities

and municipal entities does not correlate with the service delivery

achievements of these auditees. As reported in section 2.3 under PDO

reporting, four municipalities and seven municipal entities did not achieve

at least 80% of their planned targets.

5.2.1.2 Underspending of the capital budget and conditional grants

The fi gure below presents the underspending of fi nal capital budgets

per category of auditees, refl ecting both the percentage of auditees that

underspent and the average percentage underspending in the province.

The analysis is based on auditees’ fi nal capital budgets, after having been

adjusted from the original budgets.

157


Figure 35

Underspending of the capital budget

45%

36%26%

30%

38%

44% 42%

100%

Average overspending of the

budget

Number and % of auditees that

underspent

Overall Metropolitan municipalities


Municipal entities

Underspending implies that the planned infrastructure projects, including

water, sanitation, electricity, roads and solid waste disposal projects, are

behind schedule or had not been started at the reporting date. Overall,

17 (45%) auditees underspent their capital budgets by an average

underspending of 36%, with all three metros underspending by an

average of 26%. In total, three (33%) of the district and local municipalities

underspent by an average of 41%, while 11 (42%) of municipal entities

underspent by an average of 38%. The prevalence of underspending at

17 (45%) auditees, as well as the extent of underspending of 36%, is of

concern as it impacts directly on assets and infrastructure used in service

delivery. It is indicative of, amongst other factors, poor capital budgeting

and poor fi nancial management of adjustment budgets, weak capital

project implementation planning and a shortage of suitably skilled

engineers and technicians to implement capital projects timeously. In

addition, underspending on capital budgets may also be an indicator of

whether auditees are compromising on capital programmes to resolve

cash fl ow challenges.

The prevalence of underspending on capital budgets aff ected

metropolitan municipalities (City of Johannesburg, Ekurhuleni Metro and

the City of Tshwane), local municipalities (Emfuleni, Sedibeng, Mogale and

Randfontein) and municipal entities (City Power, ERWAT, Johannesburg

Fresh Produce Market, Johannesburg Roads Agency, Johannesburg

Housing Company, Johannesburg Water, Housing Company Tshwane and

Pikitup).

Capital budgets are also directly linked to IDPs and service delivery

reporting; therefore, where capital budgets are signifi cantly underspent it

implies that IDPs and service delivery objectives are not being achieved

as intended. Furthermore, the non-attainment of planned targets and

objectives, as detailed in the PDO section, could have been exacerbated

by planned capital projects that were not undertaken.

5.2.1.3 Underspending of conditional grants

The fi gure below presents the underspending on conditional grants per

category of auditee, refl ecting both the percentage of municipalities

and municipal entities that underspent, as well average percentage

underspending in the province.

158


Figure 36

Underspending of conditional grants

34%

20%7%

9%

47%

78%

15%

67%

Average overspending of the

budget

Number and % of auditees that

underspent



Municipal entities

The graphic shows that 13 (34%) auditees underspent their conditional

grants by an average underspending of 20%. In total, two (67%) metros

underspent their conditional grants by an average of 7%, seven (78%) of

the district and local municipalities underspent by an average of 9% and

four (15%) municipal entities underspent by an average of 47%. At the

City of Tshwane, West Rand District, Sedibeng, Emfuleni, Lesedi, Mogale

City and Randfontein there was an underspending of conditional grants,

which had an impact on service delivery. The same was also reported at

Germiston Phase II, Roodepoort Civic Theatre, Sandspruit and West Rand

Development Agency.

Municipalities and municipal entities receive conditional grants from

the National Treasury and the provincial government with the purpose

of achieving specifi cally identifi ed objectives, mostly related to service

delivery. Some of these service delivery projects are critical to national

and provincial development priorities. Similar to the underspending on

capital budgets, the high incidence and extent of underspending on

specifi c-purpose conditional grants negatively impact on municipalities’

infrastructure roll-out, service delivery objectives, and are therefore of

concern.

The above analysis indicates that quality and adequacy of budget and

grant management by municipalities and municipal entities are still

of concern. The trend results from poor planning, poor monitoring of

budgets, poor reporting to councils and boards and vacancies in key

positions. A continuation of this trend will impact negatively on service

delivery to citizens.

5.2.1.4 The way forward

The MFMA requires the accounting offi cer of a municipality to report in writing

to the municipal council any impending overspending of the municipality’s

budget and any steps taken to rectify such overspending. At the municipal

entity level, the accounting offi cer has a similar responsibility to report to

the board of directors and to the accounting offi cer of the entity’s parent

municipality any fi nancial problems of the entity, including overspending of

the entity’s budget and any steps taken to rectify such fi nancial problems.

Therefore, management should develop a budget monitoring system that

identifi es signifi cant revenue or expenditure fl uctuations timeously and give

periodic status reports to the leadership so that corrective action can be

discussed and implemented as soon as possible.

The municipal and provincial leadership should insist on credible monthly

reports that measure actual expenditure against budgets and service

delivery. The reported actual expenditure (capital and current) should be

properly reconciled. The governance structures should give assurance

to the leadership that all reports provided to them are credible. These

reports should be monitored regularly and corrective actions taken, where

necessary.

159


In addition, the Department of Local Government and the provincial treasury should assist all municipalities to identify their HR capacity to manage

major capital projects, and measure the existing capacity against the number and value of budgeted capital projects. Where shortfalls in capacity are

identifi ed, appropriate appointments and/or outsourcing should be considered.

5.2.2 Debtor management

5.2.2.1 Debt-collection management

The following fi gure indicates the average period in days that it takes the diff erent categories of municipalities to collect outstanding consumer debts,

both before and after impairment (write-off ) of uncollectable debts. The graph also shows the extent, in percentage terms, to which debts were written

off (impaired).

Figure 37

Debt-collection period

Reduction in book value after

impairment: 60%


impairment: 62%


impairment: 70%


impairment: 54%

Movement in collection period: (days):

Overall

Movement in collection period:

Overall (days)

Metropolitan municiplalities


Overall (days):



Overall (days):

Municipal entities

57

141

83

60 52

218 200

114

Debt-collection period (after impairment) Debt-collection period (before impairment)

160


Overall, it takes municipalities and municipal entities 141 days (4.6 months)

on average to collect outstanding amounts from consumer debts where

no provision is made for uncollectable debt. The collection period reduces

to an average of 57 days (1.8 months) if debt impairment is taken into

account. The large diff erence between the debt-collection periods before

and after impairment and the extent of impairment of debts is the result

of the continuing year-on-year growth in both the outstanding debts and

the provision for uncollectable debt.

Metropolitan municipalities collected their debts in an average period of

83 days (2.7 months), but they had to impair 62% of their consumer debts

to achieve this target. Local and district municipalities require 60 days (1.9

months) to collect debts after 70% impairment of debts; and municipal

entities require 52 days (1.7 months) to collect debts after 54% impairment

of debts.

The extended collection periods may result in cash fl ow problems,

adversely eff ecting operational management. The excessive write-off of

debts highlights the culture of non-payment for services by consumers,

high levels of distribution losses due to non-technical reasons and the

impact of an economic recession accompanied by rising rates and tariff s.

The revenue not collected negatively impacts on the capital reserves of a

municipality or municipal entity. With less cash available for reinvestment

in capital infrastructure, it will result in a declining level of consistent quality

service delivery.

The collection of debts also impacts on the ability of an auditee to meet

its monthly payments, as and when they fall due. It is generally accepted

that a prudent level of cash coverage is three months of operational

expenditure (National Treasury). Monitoring of cash coverage by auditees

would be enhanced by conducting monthly bank reconciliations and

institutionalising monthly fi nancial reporting as a basic discipline.

The poor collection rates aff ected the service delivery imperatives .This was

especially common at metros as well as at local municipalities and had an

impact on service delivery. The auditees were not able to collect accounts

receivable in line with their budgets and this had an impact on attainment

of planned targets. The collection of doubtful debts had an impact on the

credibility of fi nancial statements presented for audits. In some instances,

the provision for doubtful debts was found to be inadequately determined

and this led to material amendments. Furthermore, the impact of material

amendments is refl ected in section 2.3.

Inadequate revenue management practices, including no reconciliation of

revenue on a frequent basis, led to the City of Johannesburg receiving a

qualifi ed opinion on revenue. The non-reconciliation of revenue, which is

a requirement of the MFMA, resulted in non-compliance fi ndings at four

other auditees. Section 2.4 documents further details.

5.2.2.2 Debt-collection intervals

The fi gure below expands on the debt-collection analysis and shows

the extent of municipalities, per category of municipality, and municipal

entities that collected their debts within the indicated debt-collection

intervals after having been adjusted for the impairment of debts.

161


Figure 38

Debt-collection intervals

0 to 30 days 30 to 60 days 60 to 90 days 90 to 120 days More than 120 days

Dept-collectionintervals

26% 27%29%

17%

8%5% 5%

50%64%

38%

100%

8%13%

9%

Overall Metropolitan municipalities District and local municipalities Municipal entities

162


Overall, the majority of all categories of auditees required more than 120

days to collect debts. All metros collected their debts after 120 days and six

(64%) of the local and district municipalities collected their debts after 120

days. Municipal entities were fairly spread across all intervals; however, 38%

of their debts were included in the interval of more than 120 days.

The analysis of debt collection indicates that local government’s debt-

collection period exceeds the industry norm of 30 days. The controls and

mechanisms in place to collect debts timeously were inadequate and

ineff ective, which was further highlighted by the high percentages in

impairment of debts and the majority of debts in the interval of more than

120 days. The excessive impairment of debts also highlighted the culture

of non-payment for services by consumers, with revenue not collected as a

consequence, therefore negatively impacting on consistent quality service

delivery.

The root causes of the poor collection of debts were mainly attributable to

a lack of consequences for offi cials who were responsible for not meeting

collection targets and poor monitoring mechanisms. Debt-management

systems were also not fully eff ective and there was a danger that debts may

be overstated and thus not collectible. This was refl ected in the excessive

impairment of debts at municipalities.


The leadership of municipalities and municipal entities should develop

and implement a debt-collection strategy, which should be supported

by clearly defi ned, documented and consistent policies and procedures

that guide collectors through the collection process and instruct them

on how to respond to particular situations. Given the attitude of citizens

– the attitude of entitlement – municipalities should consider adopting

a more friendly system of colleting the debts as positive compliance

may be more sustainable than the one achieved through duress. The

municipal leadership and councils should ensure that credit control and

debt management policies are updated, adequate capacity exists to

implement the policies, and the requirements of the policies are strictly

enforced. In addition, the daily recording and reconciling of transactions

should be adequately supervised and monitored, and there should be

strict consequences for non-adherence.

5.2.3 Creditor management

In accordance with section 65(2)(e) of the MFMA, “all money owed by

the municipality must be paid within 30 days of receiving the relevant

invoice or statement, unless prescribed otherwise for certain categories of

expenditure”.

5.2.3.1 Creditor-payment period

The following fi gure shows the average number of days that it takes the

diff erent categories of auditees in the province to pay suppliers, which

refl ects on how long an auditee holds onto its cash.

Figure 39

Creditor-payment period

74

125

68 70

Overall Metropolitan

municipalities

District and local

municipalities

Municipal

entities

Average days

163


Overall, it takes auditees 74 days (2.4 months) on average to pay creditors. Metros take 125 days (4.1 months) to pay their creditors. The average payment

period for district and local municipalities was slightly better at 68 days (2.2 months) and for municipal entities it was 70 days (2.3 months).

The delayed receipt of payments by suppliers, who provided goods and services to municipalities, may also lead to reluctance on the part of suppliers to

do business with local government, or an infl ated cost of doing business to compensate for delays and ineffi ciencies in creditors’ payment.

5.2.3.2 Creditor-payment intervals

The following fi gure expands on the creditor-payment analysis and shows the extent of municipalities, per category of municipality, which pay their

creditors within the indicated creditor-payment intervals.

Figure 40

Creditor-payment intervals

0 to 30 days 30 to 60 days 60 to 90 days 90 to 120 days More than 120 days

26%

33%

27%35%

15%

8%8%13%

33%29% 35%

67%

8%24%

56%

11%

Creditor-payment intervals

Overall Metropolitan municipalities District and Local municipalities Municipal entities

164


The payment of creditors within 30 days is a requirement of the MFMA;

however, very few auditees were capable of consistently meeting this

requirement. The analysis above shows the extent of this challenge, which

led to non-compliance fi ndings with regard to payment of creditors within

30 days. The details of the fi ndings are refl ected in section 2.4. Most district

and local municipalities (56%) paid their creditors within 60 days and three

(33%) within 90 to 120 days. One (33%) metro and nine (35%) municipal

entities paid their creditors within 30 days; and two (67%) of the metros

and nine (35%) of the municipal entities paid their creditors after 120 days.

Late payment of creditors could be linked to the recovery of debts. With

debtors not paying in time, there were reduced cash fl ows at the auditees.

This required auditees to maintain large amounts of cash reserves in order

to meet current liabilities. Creditors’ management is a key component of

the working capital requirement of local government and needs to be

monitored and managed holistically, together with debtors and inventory

management.

5.2.3.3 Debt-collection period (after impairment) versus creditor-payment period

The following fi gure compares the debt-collection periods and creditor-

payment periods, indicating in number of months the diff erence between

the average periods taken to collect from consumers and to pay suppliers.

Figure 41

Debt-collection period (after impairment) versus creditor-payment period

74

57

125

68 60

83

5270

Overall Metropolitan

municipalities

District and local

municipalities

Municipal

entities

Debt-collection period

Creditor-payment period – average days

Debt-collection period – average days (after impairment)

Overall, municipalities took 17 days longer to collect debtors than they

took to pay creditors. Metropolitan municipalities took longer than other

categories (42 days), while district and local municipalities only took eight

days longer. The trend was similar across all three categories; municipal

entities took 18 more days to collect.

165


The results refl ected the time delay between turning receipts from

consumers into payments to suppliers and are indicative of how much cash

reserves municipalities require to sustain their operations and to manage

working capital eff ectively and economically, as required by section 65(2)

(h) of the MFMA.

The lag in cash infl ows from consumers versus cash outfl ows to suppliers

is not considered signifi cant; therefore, the risk of using specifi c-purpose

conditional grants to fund operations is reduced.


The eff ectiveness and effi ciency of creditor-payment period is likely to be

achieved through decisive control and commercial practices rather than

reliance on legal rights or similar procedures. Since payment period is

calculated from the time invoices reach fi nance department, management

should ensure that activities that take place between the front desk and

fi nance departments are adequately managed. Therefore, the municipal

leadership should implement systems and processes to ensure that

transactions with suppliers are recorded promptly, are properly reconciled

and paid on time. The governance structures should provide assurance to

the leadership and the council that the strategies used to mitigate the risks

of late payment are adequate.

5.2.4 Financial performance, position and cash management

The following fi gure refl ects the number of municipalities, per category

of municipality, where revenue for the year exceeded expenditure (net

defi cit), where current assets were less than current liabilities at year-end

(net current liability position) and where the year-end bank balance was in

overdraft.

Figure 42

Financial performance, position and cash management

10

13

4

125

5

1 1

7

3

8355



Municipal entities

Financial performance, position and cash management

Net defi cit – yes Net current liability – yes Bank overdraft – yes

Overall, 10 auditees realised a net defi cit, 13 auditees realised net current

liabilities and four auditees had bank overdrafts. Municipalities with current

liabilities exceeding current assets may have diffi culty meeting suppliers’

demands for payment. Combined with other factors, such as the negative

results from operations (net defi cit position) and an overdraft bank

balance, it points to ineffi cient and ineff ective operational management.

These municipalities may experience cash fl ow problems and may fi nd it

necessary to use a portion of their conditional grant funding for payment

of liabilities, adversely impacting future activities and service delivery.

166



Weak controls over use of taxpayers’ monies which mostly lead to net

defi cit, net current liabilities and bank overdrafts should be curbed by

eff ective implementation of the fundamentals of key controls – such as

adequate reviews, supervisions, segregation of duties and adherence to

laws and regulations, including internal policies and procedures – by all

staff and senior management. Municipal management should consider

the development of capability within fi nance units to monitor and forecast

infl ows and outfl ows. The political leadership and municipal managers

should actively monitor their actual expenditure against budgets, based

on credible monthly reports. They should also take eff ective action where

it becomes apparent that defi cits may be incurred, as this could place the

fi nancial sustainability of their institutions in doubt.

5.2.5 Concluding comments

Sound fi nancial health is imperative to ensuring the eff ective operation of

local government. Auditees should therefore periodically assess it in order

to establish fi nancial condition of municipalities and municipal entities.

Performing a regular, timely fi nancial condition analysis will provide

municipal leadership with invaluable information on the current and

future state of the auditees. Similar to the above analysis, it will highlight

potential fi nancial problems and provide information necessary for timely

corrective action. Taking action to address weaknesses and strengthen

fi nancial health will ensure that resources are available to fund the level

and quality of services expected by taxpayers.

A solid foundation of control and accountability requires a system of

checks and balances that provides reasonable assurance that the entity’s

transactions are appropriately recorded and reported, its assets protected,

its established policies followed, and its resources used economically

and effi ciently for the purposes intended. The above analyses reveal

that local government in Gauteng faces challenges that may aff ect its

ability to provide uninterrupted services to the citizens in the foreseeable

future. These challenges therefore need to be addressed adequately and

timeously.

The fi nancial health of municipalities in Gauteng depends on their ability

to earn revenue and spend it eff ectively and effi ciently. It is a requirement

of the MFMA that the accounting offi cer must take 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 to ensure proper funding of

expenditure and capital projects. It is evident from the fi nancial analysis

that the trend of overspending of operational budgets, underspending on

capital projects and conditional grants, and poor management of debts

and creditors places at risk service delivery expectations of citizens as

determined in the integrated development plans.

To ensure that there is improvement in local government fi nancial

management and that the council’s priorities are achieved, the support of

the political leadership is critical in driving fi nancial improvement initiatives

through engagements with the citizens. Furthermore, until adequate and

modern budget and fi nancial management practices are embedded in

the province at local government level, the risks of poor working capital

management and poor budget management will continue to threaten

service delivery.

167

GLOSSARY

ACRONYMS AND ABBREVIATIONS

ANNEXURES

168


Accounts payable (also

referred to as creditors)

Money owed by the auditee to companies,

organisations or persons who have supplied

goods and services.

Accounts receivable/

Receivables (also referred

to as debtors)

Money owed to the auditee by companies,

organisations or persons who have received

goods or services from the auditee.

Adverse audit opinion

The fi nancial statements contain material

misstatements that are not confi ned to

specifi c amounts, or the misstatements

represent a substantial portion of the


AssetAny item belonging to the auditee,

including property, plant, cash, and debt.

Asset impairment

The reduction in value of an asset below its

normal value at which it can be converted

into cash through sale or other means.

Assurance

A positive declaration that is intended to

give confi dence. Through the audit report,

we provide assurance on the credibility

of auditees’ fi nancial and performance

information as well as auditees’ compliance

with legislation. Other role players in local

government also contribute to assurance

and confi dence by ensuring that internal

controls are implemented. Such assurance

providers include various auditee offi cials,

committees and internal audit units,

oversight structures and coordinating or

monitoring departments.

Capital budget

The estimated amount planned to be spent

on capital items in a particular fi nancial

period; for example, fi xed assets such as

land and buildings with long expected

lives and that produce income or support

operations.

Cash fl ow

The fl ow of money from operations:

incoming funds are revenue and outgoing

funds are expenses.

Clean audit outcome

The fi nancial statements are free from

material misstatements (in other words, a

fi nancially unqualifi ed audit opinion) and

there are no material fi ndings on reporting

on performance objectives or non-

compliance with legislation.

Commitments (in

fi nancial statements)

The cost of goods and services to be

received in the following year, which the

auditee has already agreed to purchase in

the current year.

Commitments (from role

players)

Initiatives communicated to us by role

players in local government to improve the

audit outcomes.

Conditional grants

Money transferred from one sphere of

government to another, subject to certain

services being delivered or on compliance

with specifi ed requirements.

Consolidated fi nancial

statements

Financial statements that refl ect the

combined fi nancial position and results of

a municipality and those of the municipal

entities under its control.

GLOSSARY of key terminology used in the report

169


Contingent liabilityA potential liability, the amount of which

will depend on a future event.

Current assets

These assets are made up of cash and other

assets, such as inventory or debt, which

will be traded, used or converted into cash

in less than 12 months. All other assets

are classifi ed as non-current, and typically

include property, plant and equipment as

well as long-term investments.

Disclaimer of audit

opinion

The auditee provided insuffi cient evidence

in the form of documentation on which to

base an audit opinion. The lack of suffi cient

evidence is not confi ned to specifi c

amounts, or represents a substantial portion

of the information contained in the fi nancial

statements.

Financial and

performance

management

The management of resources to achieve

the fi nancial and service delivery objectives

of the auditee. (This is one of the three key

overall drivers of internal control that should

be addressed to improve audit outcomes.)

Financially unqualifi ed

audit opinion

The fi nancial statements contain no material

misstatements. Unless we express a clean

audit outcome, fi ndings have been raised

on either reporting on predetermined

objectives or non-compliance with

legislation, or both these aspects.


expenditure

Expenditure that was made in vain and

could have been avoided had reasonable

care been taken. This includes penalties

and interest on late payments as well as

payments for services not utilised or goods

not received.

General ledgerA record of all the fi nancial transactions of

the auditee.

Going concern

The presumption that an auditee will

continue to operate in the foreseeable

future, and will not go out of business

and liquidate its assets. For this to happen,

the auditee must be able to raise enough

resources to stay operational.

Governance

The governance structures (audit

committees) and processes (internal audit

and risk management) of an auditee. (This

is another of the three key overall drivers of

internal control that should be addressed to

improve audit outcomes.)

Human resource (HR)

management

The management of an auditee’s

employees, or human resources, which

involves adequate and suffi ciently

skilled resources as well as the adequate

management of staff performance and

productivity.

Information technology

(IT)

The computer systems used for recording

and reporting fi nancial and non-fi nancial

transactions.

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 the networks, operating systems

and application systems that generate and

prepare fi nancial information.

IT service continuity

The processes managing the availability

of hardware, system software, application

software and data to enable auditees to

recover or establish information system

services in the event of a disaster.

170


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 fi nancial

reporting, the eff ectiveness and effi ciency of

operations, and compliance with applicable

legislation. It consists of all the policies

and procedures implemented by auditee

management to assist in achieving the

orderly and effi cient 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 fi nancial and

service delivery information.

Inventory Goods held for resale or for internal use.

Irregular expenditureExpenditure 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, fi nancial

and performance management, and

governance. (These three components are

also defi ned individually in this glossary.)

Leadership

The administrative leaders of an auditee,

such as municipal managers and senior

management. (This is also one of the three

key overall drivers of internal control that

should be addressed to improve audit

outcomes.) It can also refer to the political

leadership (including the mayor and the

council) or the leadership in the province

(such as the premier).

LiabilityShort-term and long-term debt owed by

the auditee.

Material fi nding

An audit fi nding on reporting on

predetermined objectives or non-

compliance with legislation that is

signifi cant enough in terms of its value, its

nature or both its value and its nature that it

requires to be reported in the audit report.

Material misstatement

A misstatement that is signifi cant enough

to infl uence the opinions of users of

the reported information. Materiality is

considered in terms of either the rand

value or the nature and cause of the

misstatement, or both these aspects.

Misstatement

Incorrect or omitted information in the

fi nancial statements or annual performance

report.

Modifi ed opinion A qualifi ed, adverse or disclaimer of opinion.

Net current liability

The amount by which the sum of all money

owed by an auditee and due within one

year exceeds amounts due to the auditee

within the same year.

GLOSSARY of key terminology used in the report

171


Net defi citThe amount by which an auditee’s spending

exceeds its income.

Operational budget

A short-term budget, usually prepared

annually, based on estimates of income

and expenses associated with the auditee’s

operations, such as administration and

salaries.

Payroll A list of employees and their wages.

Property, plant,

infrastructure and

equipment

Assets that physically exist and are expected

to be used for more than one year, including

land, buildings, leasehold improvements,

equipment, furniture, fi xtures and vehicles.

Qualifi ed audit opinion

The fi nancial statements contain material

misstatements in specifi c amounts, or there

is insuffi cient evidence for us to conclude

that specifi c amounts included in the

fi nancial statements are not materially

misstated.

Reconciliation

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.

Reporting against


(PDOs)

Reporting by auditees in their annual

performance reports on their actual

achievements against the performance

objectives they had set at the beginning

of the period. The performance objectives

mostly relate to service delivery.

Root causes

The underlying causes or drivers of audit

fi ndings; in other words, why the problem

occurred. Addressing the root cause helps

ensure that the actions address the real

issue or opportunity, thus preventing or

reducing the incidents of recurrence, as

opposed to simply providing a one-time or

short-term fi x.

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.

172


AFS annual fi nancial statements

AG auditor-general (the person)

AGSA Auditor-General of South Africa (the institution)

APAC Association of Public Accounts Committees

b R’billion (rand)

BCP business continuity plan

CEO chief executive offi cer

CFO chief fi nancial offi cer

CIDB Construction Industry Development Board

CIO chief information offi cer

CoGTADepartment of Cooperative Governance and Traditional

Aff airs

DM district municipality

DPSA Department of Public Service and Administration

DRP disaster recovery plan

GITO government information technology offi cer

GP Gauteng

GRAP Generally Recognised Accounting Practice

HR human resources

IDP integrated development plan

IT information technology

k R’thousand (rand)

LM local municipality

LP Limpopo

m R’million (rand)

ME municipal entity

MEC member of the executive council

metro/M metropolitan municipality

MFMAMunicipal Finance Management Act, 2003 (Act No. 56 of

2003)

MPAC municipal public accounts committee

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

NCOP National Council of Provinces

NT National Treasury

PAA Public Audit Act, 2004 (Act No. 25 of 2004)

PDO predetermined objective

ACRONYMS and abbreviations

173


PPAC provincial public accounts committee

PPPFAPreferential Procurement Policy Framework Act, 2000

(Act No. 5 of 2000)

SALGA South African Local Government Association

SARS South African Revenue Service

SCM supply chain management

SCOPA Standing Committee on Public Accounts

SDBIP service delivery and budget implementation plan

SITA State Information Technology Agency

SLA service level agreement

VAT value-added tax

174


Num

ber

Auditee

2011-12

audit

outcome

2010-11

audit

outcome

Financial

statement

qualifi cation

areas

Findings on

predetermined

objectives

Findings on areas of compliance

Findings

on specifi c

focus areas

Unauthorised. irregular as well as fruitless and wasteful expenditure Root causes

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws

and

regu

lati

ons

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws

and

regu

lati

ons

Non

-cur

rent

ass

ets

Curr

ent a

sset

s

Oth

er d

iscl

osur

e it

ems

Reve

nue

Repo

rted

info

rmat

ion

not u

sefu

l

Repo

rted

info

rmat

ion

not r

elia

ble

Info

rmat

ion

not s

ubm

itte

d in

tim

e fo

r

audi

t

No

annu

al p

erfo

rman

ce re

port

Mat

eria

l mis

stat

emen

t/lim

itat

ions

in

subm

itte

d AF

S

Una

utho

rise

d, ir

regu

lar a

s w

ell a

s fr

uitl

ess

and

was

tefu

l exp

endi

ture

Annu

al fi

nanc

ial s

tate

men

ts a

nd a

nnua

l

repo

rt

Expe

ndit

ure

man

agem

ent

Proc

urem

ent m

anag

emen

t

Oth

er c

ompl

ianc

e fi

ndin

gs

Proc

urem

ent a

nd c

ontr

act m

anag

emen

t

HR

man

agem

ent a

nd c

ompe

nsat

ion

IT c

ontr

ols

Unauthorised expend-

itureIrregular expenditure


expenditure

Key

posi

tion

s va

cant

or k

ey o

ffi c

ials

lack

ing

appr

opri

ate

com

pete

ncie

s

Cons

eque

nces

for p

oor p

erfo

rman

ce a

nd

tran

sgre

ssio

ns

Resp

onse

by

polit

ical

lead

ersh

ip in

addr

essi

ng th

e ro

ot c

ause

s of

poo

r aud

it

outc

omes

Mov

men

t

Amount

R

Mov

emen

t

Amount

R (m)

Mov

emen

t

Amount

R (m)

1 City of Johannesburg Metro N R N R R N R R N R R R R N R 3,213 235,529 0,112

2 City Power Johannesburg R R R R R R R R 10,249 0,016

3 Johannesburg Water R R A R A R

4 Pikitup Johannesburg R A R N N N A R 571,749 12,886

5 Johannesburg Development Agency (Soc) Ltd R A N A A N 1,812 0,021

6 Roodepoort Civic Theatre R R R R R A R N 4,235 0,006

7 Metropolitan Trading Company N R R R R A R N R 1,548 0,006

8 Joburg Theatre (SOC) Ltd N

9 Johannesburg Fresh Produce Market A A A A R R N 13,222

10 Johannesburg Social Housing Company A

11 Johannesburg Tourism Company N R N N R N R 0,105

12 Johannesburg Zoo R R A N N N 0,502

13 Johannesburg City Parks A N N N N R 2,193

14 Joburg Property Company A R N N N N 14,216 0,016

15 Johannesburg Metropolitan Bus Services N R R R A R R 49,356 0,026

16 Johannesburg Roads Agency N R R R N R R 160,571 42,367 0,319

17 Ekurhuleni Metro A R A N R R R N R 573,988 112,511

18 East Rand Water Care Company R R R R R 69,577

19 Brakpan Bus Company (Pty) Ltd A R R N R N R 0,828

20 Ekurhuleni Development Company SOC (Pty) Ltd N N N N A R A 0,060

ANNEXURE 1: Auditees' audit outcomes, areas qualifi ed, fi ndings on predetermined objectives, non-compliance, specifi c focus areas and root causes

Legend (Audit

outcomes)

Unqualifi ed with no fi ndings

Unqualifi ed with

fi ndings

Qualifi edwith

fi ndings

Adversewith

fi ndings

Disclaimerwith

fi ndings

Audit not fi nalised at

legislated dateNew Finding Legend

(Findings)Addressed

(A)New (N)

Repeat (R)

Legend(Movements) Improved Unchanged Regressed Legend

(Root causes) Good Concerning Intervention required

175


Legend (Audit

outcomes)


Unqualifi ed with

fi ndings

Qualifi edwith

fi ndings

Adversewith

fi ndings

Disclaimerwith

fi ndings

Audit not fi nalised at

legislated dateNew Finding Legend

(Findings)Addressed

(A)New (N)

Repeat (R)

Legend(Movements) Improved Unchanged Regressed Legend

(Root causes) Good Concerning Intervention required

Num

ber

Auditee

2011-12

audit

outcome

2010-11

audit

outcome

Financial

statement

qualifi cation

areas

Findings on

predetermined

objectives

Findings on areas of compliance

Findings

on specifi c

focus areas

Unauthorised. irregular as well as fruitless and wasteful expenditure Root causes

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws

and

regu

lati

ons

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws

and

regu

lati

ons

Non

-cur

rent

ass

ets

Curr

ent a

sset

s

Oth

er d

iscl

osur

e it

ems

Reve

nue

Repo

rted

info

rmat

ion

not u

sefu

l

Repo

rted

info

rmat

ion

not r

elia

ble

Info

rmat

ion

not s

ubm

itte

d in

tim

e fo

r

audi

t

No

annu

al p

erfo

rman

ce re

port

Mat

eria

l mis

stat

emen

t/lim

itat

ions

in

subm

itte

d AF

S

Una

utho

rise

d, ir

regu

lar a

s w

ell a

s fr

uitl

ess

and

was

tefu

l exp

endi

ture

Annu

al fi

nanc

ial s

tate

men

ts a

nd a

nnua

l

repo

rt

Expe

ndit

ure

man

agem

ent

Proc

urem

ent m

anag

emen

t

Oth

er c

ompl

ianc

e fi

ndin

gs

Proc

urem

ent a

nd c

ontr

act m

anag

emen

t

HR

man

agem

ent a

nd c

ompe

nsat

ion

IT c

ontr

ols

Unauthorised expend-

itureIrregular expenditure


expenditure

Key

posi

tion

s va

cant

or k

ey o

ffi c

ials

lack

ing

appr

opri

ate

com

pete

ncie

s

Cons

eque

nces

for p

oor p

erfo

rman

ce a

nd

tran

sgre

ssio

ns

Resp

onse

by

polit

ical

lead

ersh

ip in

addr

essi

ng th

e ro

ot c

ause

s of

poo

r aud

it

outc

omes

Mov

men

t

Amount

R

Mov

emen

t

Amount

R (m)

Mov

emen

t

Amount

R (m)

21 Germiston Phase II Housing Company SOC (Pty) Ltd N R A 0,035

22 Lethabong Housing Institute SOC NPC R N N A 0,003

23 Pharoe Park Housing Company SOC (Pty) Ltd N N R A 0,024

24 City of Tshwane N R R N A R R R A R 488,022 114,025 8,252

25 Housing Company Tshwane R N R R N A A 0,008

26 Metsweding Economic Development Agency N N N N N N N N N N 0,096

27 Sandspruit Works Association R A R R N N A R N 7,263

28 Tshwane Economic Development Agency (TEDA) R

29 Sedibeng District R A R N A A R R

30 Emfuleni A A A R R N N R R N R N R 4,118 2,366

31 Lesedi R N R N N A N N N R R 7,066 0,089

32 Midvaal R A A R N R

33 West Rand District R N N R A R A N 0,852

34 Merafong City N N R R N N N R 16,442 13,952

35 Mogale City A N R R R N N N N R 49,377 72,585

36 Randfontein R N A R R R R N R R R N R 21,933 17,540 4,224

37 Westonaria N N N R N R N N N N N N N R 2,398 0,023

38 West Rand Development Agency R R N R 1,517

ANNEXURE 1: Auditees' audit outcomes, areas qualifi ed, fi ndings on predetermined objectives, non-compliance, specifi c focus areas and root causes

176


Num

ber

2011-12 2010-11 2011-12 fi nancial statement qualifi cation areas

2011-12 fi ndings

on predetermined

objectives

2011-12 fi ndings on areas of non-compliance

2011-12 fi nd-

ings on specifi c

focus areas

Auditee

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws a

nd re

gula

tion

s

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws a

nd re

gula

tion

s

Non

-cur

rent

ass

ets

Curr

ent a

sset

s

Liab

iliti

es

Capi

tal a

nd re

serv

es

Othe

r dis

clos

ure

item

s

Reve

nue

Expe

ndit

ure

Una

utho

rised

, irr

egul

ar a

s wel

l as f

ruit

less

and

was

tefu

l exp

endi

ture

Aggr

egat

e m

isst

atem

ents

Repo

rted

info

rmat

ion

not u

sefu

l

Repo

rted

info

rmat

ion

not r

elia

ble

Info

rmat

ion

not s

ubm

itte

d in

tim

e fo

r aud

it

No

annu

al p

erfo

rman

ce re

port

Mat

eria

l mis

stat

emen

t/lim

itat

ions

in

subm

itte

d AF

S

Una

utho

rised

, irr

egul

ar a

s wel

l as f

ruit

less

and

was

tefu

l exp

endi

ture

Annu

al fi

nanc

ial s

tate

men

ts a

nd a

nnua

l

repo

rt

Asse

t and

liab

ility

man

agem

ent

Budg

ets

Expe

ndit

ure

man

agem

ent

Fina

ncia

l mis

cond

uct

Audi

t com

mit

tees

Inte

rnal

aud

it u

nits

Reve

nue

man

agem

ent

Stra

tegi

c pla

nnin

g an

d pe

rfor

man

ce

man

agem

ent

Tran

sfer

and

cond

itio

nal g

rant

s

Proc

urem

ent m

anag

emen

t

HR

man

agem

ent

Othe

r

Proc

urem

ent a

nd co

ntra

ct m

anag

emen

t

HR

man

agem

ent a

nd co

mpe

nsat

ion

IT co

ntro

ls

Financial audits


1 City of Johannesburg Metro

2 Ekurhuleni Metro

3 City of Tshwane


4 Sedibeng District

5 West Rand District


6 Emfuleni

7 Lesedi

8 Merafong City

9 Midvaal

10 Mogale City

11 Randfontein

12 Westonaria

Municipal entities

13 Brakpan Bus Company (Pty) Ltd

14 City Power Johannesburg

15 East Rand Water Care Company

16 Ekurhuleni Development Company SOC (Pty) Ltd

17 Germiston Phase II Housing Company SOC (Pty) Ltd

ANNEXURE 2: Five-year audit outcomes with fi ndings comparison

Legend (Audit outcomes)


Unqualifi ed with fi ndings

Qualifi edwith fi ndings

Adversewith fi ndings

Disclaimerwith fi ndings

Audit not fi nalised

at legislated dateNew Legend

(Movements) Improved Unchanged RegressedLegend(Root

causes)Finding

177


Num

ber

2011-12 2010-11 2011-12 fi nancial statement qualifi cation areas

2011-12 fi ndings

on predetermined

objectives

2011-12 fi ndings on areas of non-compliance

2011-12 fi nd-

ings on specifi c

focus areas

Auditee

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws a

nd re

gula

tion

s

Audi

t opi

nion

Pred

eter

min

ed o

bjec

tive

s

Com

plia

nce

wit

h la

ws a

nd re

gula

tion

s

Non

-cur

rent

ass

ets

Curr

ent a

sset

s

Liab

iliti

es

Capi

tal a

nd re

serv

es

Othe

r dis

clos

ure

item

s

Reve

nue

Expe

ndit

ure

Una

utho

rised

, irr

egul

ar a

s wel

l as f

ruit

less

and

was

tefu

l exp

endi

ture

Aggr

egat

e m

isst

atem

ents

Repo

rted

info

rmat

ion

not u

sefu

l

Repo

rted

info

rmat

ion

not r

elia

ble

Info

rmat

ion

not s

ubm

itte

d in

tim

e fo

r aud

it

No

annu

al p

erfo

rman

ce re

port

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18 Housing Company Tshwane

19 Joburg Property Company

20 Johannesburg City Parks

21 Joburg Theatre (SOC) Ltd

22 Johannesburg Development Agency (Soc) Ltd

23 Johannesburg Fresh Produce Market

24 Johannesburg Metropolitan Bus Services

25 Johannesburg Roads Agency

26 Johannesburg Social Housing Company

27 Johannesburg Tourism Company

28 Johannesburg Water

29 Johannesburg Zoo

30 Lethabong Housing Institute SOC NPC

31 Metropolitan Trading Company

32 Metsweding Economic Development Agency

33 Pharoe Park Housing Company SOC (Pty) Ltd

34 Pikitup Johannesburg

35 Roodepoort Civic Theatre

36 Sandspruit Works Association

37 Tshwane Economic Development Agency (TEDA)

38 West Rand Development Agency

ANNEXURE 2:Five-year audit outcomes with fi ndings comparison

Legend (Audit outcomes)


Unqualifi ed with fi ndings

Qualifi edwith fi ndings

Adversewith fi ndings

Disclaimerwith fi ndings

Audit not fi nalised

at legislated dateNew Legend

(Movements) Improved Unchanged RegressedLegend(Root

causes)Finding

178


ANNEXURE 3:Assessment of auditees’ key controls at the time of the audit

Leadership Financial and performance Governance

Auditee Movement

Eff ective

leadership

culture

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governanceMovement

Proper

record

keeping

Processing

and

reconciling

controls

Reporting ComplianceIT system

controlsMovement

Risk

management

Internal

audit

Audit

committee

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 C F P C F P C F P C F P C


City of Johannesburg Metro 1 1 1 3 3 3 2 3 2 2 3 2 2 2 2 2 3 2 3 3 2 2 3 2 3 3 2 3 3 3 2 3 2 1 1 1 3 2 2 2 2 2Ekurhuleni Metro 1 1 1 2 1 2 2 2 2 2 2 2 1 1 1 2 2 2 2 2 2 2 2 2 3 1 3 2 2 3 2 2 2 1 1 1 2 2 2 2 2 2Tshwane Metropolitan

Municipality1 1 1 3 2 1 2 2 1 3 2 2 1 2 2 3 1 1 2 3 1 2 1 1 3 3 1 2 1 3 2 2 1 1 1 1 1 2 1 1 2 1


Sedibeng District 1 1 1 1 2 2 2 2 2 3 3 3 2 2 2 2 2 2 1 1 1 1 2 2 2 2 2 1 1 1 2 2 2 1 2 2 1 1 1 2 2 2West Rand District 1 1 1 3 1 3 1 1 1 1 1 1 1 1 1 3 1 1 2 1 1 3 1 1 3 2 2 2 2 2 3 1 1 3 1 1 1 1 1 1 1 1Local municipalities

Emfuleni 2 2 2 3 3 3 2 2 2 2 2 2 2 3 2 2 3 3 1 3 2 3 3 3 3 3 3 3 3 3 3 3 3 2 2 2 2 1 2 2 1 2Lesedi 1 1 1 2 2 2 2 2 2 2 2 2 3 3 3 3 2 2 1 3 1 2 2 2 2 3 3 3 3 3 3 1 2 2 2 2 1 1 1 3 3 3Merafong City 1 1 1 1 2 2 2 2 2 2 1 1 1 1 1 1 1 1 2 2 1 2 1 1 2 3 3 2 2 3 2 1 1 2 1 1 1 1 1 1 2 2Midvaal 1 1 1 2 2 2 2 1 2 1 1 1 2 2 2 1 1 1 2 1 2 2 1 2 2 2 2 2 2 2 2 2 2 1 1 1 2 2 2 2 2 2Mogale City 1 1 1 2 3 3 1 1 1 2 1 1 1 3 3 3 1 1 2 1 1 2 1 1 2 3 3 2 1 2 2 1 1 1 1 1 1 1 1 1 1 1Randfontein 2 2 2 3 3 3 2 2 3 1 1 1 3 3 2 3 3 3 3 3 2 2 3 3 3 3 3 3 3 3 3 3 3 3 2 2 3 3 3 3 3 3Westonaria 2 2 2 3 3 3 2 2 2 2 2 2 2 3 3 2 2 2 3 3 3 2 2 2 3 3 3 3 3 3 2 2 2 2 2 2 3 3 3 2 2 2Municipal entities

Brakpan Bus Company (Pty) Ltd 2 2 2 3 2 3 2 2 3 1 1 3 2 2 1 1 2 2 1 1 1 2 1 2 2 2 1 3 2 3 1 2 2 2 1 2 2 2 2 2 1 2City Power Johannesburg 1 1 1 3 1 3 1 1 1 1 1 1 2 1 2 1 1 1 1 1 1 2 1 2 3 1 3 2 1 2 1 1 1 1 1 1 2 1 2 2 1 2East Rand Water Care Company 3 1 3 2 1 3 2 1 2 2 1 3 3 1 3 3 1 3 3 2 3 1 1 1 2 2 2 3 1 3 2 2 2 3 3 3 1 1 1 2 2 2Ekurhuleni Development

Company SOC (Pty) Ltd2 3 3 2 3 3 2 2 2 1 1 1 2 3 2 1 1 1 2 3 2 2 3 2 2 3 3 2 3 3 1 1 1 1 1 1 2 2 2 2 2 2

Germiston Phase II Housing

Company SOC (Pty) Ltd2 1 2 2 1 2 2 2 2 2 2 2 1 1 1 1 1 1 2 1 1 2 1 2 3 1 3 2 1 3 1 1 1 2 2 2 2 2 2 2 2 2

Housing Company Tshwane 1 1 1 3 3 3 1 2 2 1 3 3 2 3 3 1 1 1 2 3 1 3 3 3 2 3 2 2 3 3 2 1 2 3 3 3 2 3 2 1 1 1Joburg Property Company 1 1 1 1 2 1 1 1 1 1 1 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 1 1 1 1 1 1 1 1 1 1 1 1Johannesburg City Parks 1 1 1 1 1 1 1 2 2 1 1 2 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 2 1 3 2 1 1 1 1 1 1 1 1 1 1 1Joburg Theatre (SOC) Ltd 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1Johannesburg Development

Agency (Soc) Ltd

179


ANNEXURE 3:Assessment of auditees’ key controls at the time of the audit

Leadership Financial and performance Governance

Auditee Movement

Eff ective

leadership

culture

Oversight

responsibility

HR

management

Policies and

procedures

Action

plans

IT

governanceMovement

Proper

record

keeping

Processing

and

reconciling

controls

Reporting ComplianceIT system

controlsMovement

Risk

management

Internal

audit

Audit

committee

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 C F P C F P C F P C F P C


Market

Johannesburg Metropolitan Bus

Services

Johannesburg Roads Agency

Johannesburg Social Housing

Company


Johannesburg Water

Johannesburg Zoo

Lethabong Housing Institute

SOC NPC


Metsweding Economic Develop-

ment Agency

Pharoe Park Housing Company

SOC (Pty) Ltd


Roodepoort Civic Theatre

Sandspruit Works Association

Tshwane Economic Develop-

ment Agency (TEDA)

West Rand Development Agency

Good In progress Intervention required

Improved Unchanged Regressed

Financial F Performance P Compliance C

180


ANNEXURE 4:Five-year audit outcome comparison

No. Auditee Audit outcome 2011-12 Audit outcome 2010-11 Audit outcome 2009-10 Audit outcome 2008-09 Audit outcome 2007-08


1 City of Johannesburg Metro Qualifi ed Qualifi ed Qualifi ed Financially unqualifi ed with no fi ndings New consolidation

2 Ekurhuleni Metro Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings New consolidation

3 City of Tshwane Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Qualifi ed New consolidation


4 Sedibeng District Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

5 West Rand District Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings New consolidation New consolidation


6 Emfuleni Financially unqualifi ed with fi ndings Qualifi ed Qualifi ed Qualifi ed Disclaimer

7 Lesedi Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

8 Merafong City Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Qualifi ed Qualifi ed

9 Midvaal Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

10 Mogale City Financially unqualifi ed with fi ndings Qualifi ed Qualifi ed Financially unqualifi ed with fi ndings Qualifi ed

11 Randfontein Qualifi ed Qualifi ed Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Qualifi ed

12 Westonaria Qualifi ed Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

Municipal entities

13 Brakpan Bus Company (Pty) Ltd Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

14 City Power Johannesburg Qualifi ed Qualifi ed Qualifi ed Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

15 East Rand Water Care Company Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Qualifi ed

16 Ekurhuleni Development Company SOC (Pty) Ltd Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Qualifi ed

17 Germiston Phase II Housing Company SOC (Pty) Ltd Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Qualifi ed

18 Housing Company Tshwane Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Disclaimer Disclaimer Disclaimer

19 Joburg Property Company Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

20 Johannesburg City Parks Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

181


ANNEXURE 4:Five-year audit outcome comparison

No. Auditee Audit outcome 2011-12 Audit outcome 2010-11 Audit outcome 2009-10 Audit outcome 2008-09 Audit outcome 2007-08

21 Joburg Theatre (SOC) Ltd Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

22 Johannesburg Development Agency (Soc) Ltd Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

23 Johannesburg Fresh Produce Market Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings

24 Johannesburg Metropolitan Bus Services Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

25 Johannesburg Roads Agency Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

26 Johannesburg Social Housing Company Financially unqualifi ed with no fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

27 Johannesburg Tourism Company Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings

28 Johannesburg Water Qualifi ed Qualifi ed Qualifi ed Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

29 Johannesburg Zoo Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

30 Lethabong Housing Institute SOC NPC Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Qualifi ed

31 Metropolitan Trading Company Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

32 Metsweding Economic Development Agency Qualifi ed New municipal entity New municipal entity New municipal entity New municipal entity

33 Pharoe Park Housing Company SOC (Pty) Ltd Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

34 Pikitup Johannesburg Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

35 Roodepoort Civic Theatre Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with no fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

36 Sandspruit Works Association Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings

37 Tshwane Economic Development Agency (TEDA) Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Qualifi ed Qualifi ed Qualifi ed

38 West Rand Development Agency Financially unqualifi ed with fi ndings Financially unqualifi ed with fi ndings Qualifi ed New municipal entity New municipal entity

182


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