Document No: AUDIT REPORT ON THE ANNUAL FINANCIAL STATEMENTS OF MUNICIPALITY OF KAMENICA FOR THE YEAR ENDED 31 DECEMBER 2017

Transcription

1 Document No: AUDIT REPORT ON THE ANNUAL FINANCIAL STATEMENTS OF MUNICIPALITY OF KAMENICA FOR THE YEAR ENDED 31 DECEMBER 2017 Prishtina, May 2018

2 The National Audit Office of the Republic of Kosovo is the highest institution of economic and financial control which, according to the Constitution and domestic laws, enjoys functional, financial and operational independence. The National Audit Office undertakes regularity and performance audits and is accountable to the Assembly of Kosovo. Our Mission is through quality audits strengthen accountability in public administration for an effective, efficient and economic use of national resources. We perform audits in line with internationally recognized public sector auditing standards and good European practices. The reports of the National Audit Office directly promote accountability of public institutions as they provide a base for holding managers of individual budget organisations to account. We are thus building confidence in the spending of public funds and playing an active role in securing taxpayers and other stakeholders interests in enhancing public accountability. The Auditor General has decided on the audit opinion on the Annual Financial Statements of the Annual Financial Statements of Municipality of Kamenica, in consultation with the Assistant Auditor General, Valbon Bytyqi, who supervised the audit. The report issued is a result of the audit carried out by Erëmira Bytyqi-Pllana, team leader and Hysen Boqolli and Mexhit Ferati, team members under the management of the head of audit department Mujë Gashi. NATIONAL AUDIT OFFICE-St. Musine Kokollari, No. 87, Prishtina 10000, Kosova Tel: +383(0) /

3 TABLE OF CONTENTS Executive Summary Audit Scope and Methodology Annual Financial Statements and other External Reporting Obligations Financial Management and Control Progress in implementing recommendations Good Governance Annex I: Explanation of the different types of opinion applied by NAO Annex II: Prior and Earlier Year Recommendations Annex III: Letter of confirmation

4 Executive Summary Introduction This report summarises the key issues arising from our audit of the 2017 Annual Financial Statements of Municipality of Kamenica, which determines the Opinion given by the Auditor General. The examination of the 2017 financial statements was undertaken in accordance with the International Standards on Supreme Audit Institutions (ISSAIs). Our approach included such tests and procedures as we deemed necessary to arrive at an opinion on the financial statements. The applied audit approach is set out in our External Audit Plan dated 06/11/2017. Our audit focus has been on: The Annual Financial Statements Financial Management and Control Prior and earlier year Recommendations The level of work undertaken by the National Audit Office to complete the 2017 audit is determined depending of the quality of internal controls implemented by the Management of the Municipality of Kamenica. The National Audit Office acknowledges Municipality s Senior Management and Staff for cooperation during the audit process. Opinion of the Auditor General Unmodified Opinion with emphasis of matter The Annual Financial Statements for 2017 present a true and fair view in all material aspects. Emphasis of matter We draw your attention to the fact that assets and contingent liabilities were not disclosed correctly in the Annual Financial Statements. For more, please refer to Section 1.2 of this report. Annex I explains the different types of Opinions applied by the National Audit Office. 4

5 Key Conclusions and Recommendations The Emphasis of Matter reflects weaknesses in controls to confirm accurate disclosure of assets. and contingent liabilities. The Mayor should analyse the reasons behind the emphasis of matter in 2017 and identify actions required to enable fair and true presentation of assets and contingent liabilities in 2018 (see audit opinion). Although internal controls operated effectively in some areas - evident weaknesses were noticed in the area of revenues, management of projects, procurement, area of payments, and assets management. The Mayor should carry out a review of procurement management process and financial management and control, as well as strengthen controls where failures in the process have been identified (See issues 2 and 10) The process of implementation of recommendations has not been addressed as required for the development and improvement of the organization. The Mayor should implement a rigorous process to ensure that prior year recommendations are actively addressed, where key issues/progress is reported to the management on a monthly basis (see Issue 11) Governance arrangements related to accountability, risk management and management reporting require further improvement. The Mayor should ensure that issues arising from the area of overall governance are addressed with responsibility and increased caution (see issues 12-13). Management response to audit 2017 The Mayor has considered and agreed on the audit findings and conclusions and has committed to address all given recommendations. 5

6 1 Audit Scope and Methodology Introduction The National Audit Office (NAO) is responsible for carrying out a Regularity Audit which involves the examination and evaluation of Financial Statements and other financial records and expression of opinions on: Whether the financial statements give a true and fair view of the accounts and financial affairs for the audit period; Whether the financial records, systems and transactions comply with applicable laws and regulations; The appropriateness of internal controls and internal audit functions; and All matters arising from or relating to the audit. Audit work undertaken reflected our audit risk assessment for Municipality of Kamenica. We have analysed Municipality s business to the extent to which management controls can be relied upon when determining the overall testing required to provide the necessary level of evidence to support the AG s opinion. The following sections provide a more detailed summary of our audit finding with emphasis on observations and recommendations in each area of review. Our procedures included a review of the internal controls, accounting systems and related substantive tests and related governance arrangements to the extent considered necessary for the effective performance of the audit. Audit findings should not be regarded as representing a comprehensive statement of all the weaknesses that exist, or all improvements which could be made to the systems and procedures operated. 6

7 2 Annual Financial Statements and other External Reporting Obligations Introduction Our audit of the Annual Financial Statements (AFS) considers both compliance with the reporting framework and the quality and accuracy of information recorded in the AFS. We also consider the Declaration made by the Chief Administrative Officer and Chief Financial Officer when the draft AFS are submitted to the Ministry of Finance. The declaration regarding presentation of the AFS incorporates a number of assertions relating to compliance with the reporting framework and the quality of information within the AFS. These assertions are intended to provide the Government with the assurance that all relevant information has been provided to ensure that an audit process can be undertaken. 2.1 Audit Opinion Unmodified Opinion with Emphasis of Matter We have audited the AFS of the Municipality of Kamenica for the year ended on 31 st of December 2017, which comprise of the Statement of Cash Receipts and Payments, Budget Execution Statement and the Explanatory Notes of the Financial Statements. In our opinion, the Annual Financial Statements for the year ended on 31 st of December 2017 present a true and fair view in all material respects in accordance with International Public Sector Accounting Standards (cash based Accounting), Law no.03/l-048 on Public Finance Management and Accountability (as amended and supplemented) and Regulation no.01/2017 on Annual Financial Reporting of Budget Organisations issued by the Ministry of Finance. Basis for the opinion Our audit was conducted in accordance with International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the AFS section of our report. We believe that the obtained audit evidence is sufficient and appropriate to provide a basis for the opinion. 7

8 Emphasis of Matter We draw your attention to the fact that disclosures on capital assets register and contingent liabilities in the annual financial statements were not fully accurate, due to following issues: Despite the progress made in assets recording, capital assets in the AFS were overstated by 29,141, due to incorrect recording of goods and services, and subsidies in the accounting register of assets. This issue was emphasised in previous year s report; Furthermore, assets in a value of 17,600, which were under construction (on-going investments), were not included in the register of assets over 1,000, whereby assets accounting register disclosed in the AFS was understated; and Contingent liabilities were overstated by 72,584 due to non harmonization of the correct data between the legal office and the finance office. Our opinion is not qualified for this issue. Responsibility of Management and Persons Charged with Governance for AFS The Mayor of Municipality of Kamenica is responsible for preparation and fair presentation of financial statements in accordance with International Public Sector Accounting Standards Financial Reporting under the Modified Cash based Accounting and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. This includes the application of Law number 03/L-048 on Public Finance Management and Accountability (as amended and supplemented). The Mayor is responsible to ensure the oversight the Municipality s financial reporting process. Auditor General s Responsibility for the Audit of the AFS Our responsibility is to express an opinion on the AFS based on our audit. We conducted our audit in accordance with ISSAIs. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAIs will detect any material misstatement that might exist. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could influence the decisions taken on the basis of these AFS. An audit involves performing procedures to obtain evidence about the financial records and disclosures in the AFS. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement in the AFS, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s 8

9 preparation of the financial statements in order to design audit procedures that are appropriate in the entity s circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the presentation of the financial statements. 2.2 Compliance with AFS and other reporting requirements Municipality is required to comply with a specified reporting framework and other reporting requirements. We considered: Compliance with MoF Regulation no.01/2017 on the Annual Financial Reporting of Budget Organisations; Requirements of LPFMA no. 03/ L-048, (as amended and supplemented); Compliance with Financial Rule no.01/2013 and 02/2013; Requirements of Organic Laws for Local Governance; Requirements of Law on Budget for 2017; Action Plan on implementation of recommendations; and Requirements of Financial Management and Control (FMC) procedures. In the context of AFS, we have no issues to raise, except for the ones described in the Emphasis of Matter. Given the above, the Declaration made by the Chief Administrative and Financial Officer upon submission of the AFS to the Ministry of Finance can be considered correct. In the context of other external reporting requirements we have no issues to raise. 9

10 2.3 Recommendations related to Annual Financial Statements Related to abovementioned issue is given the following recommendation: Recommendation 1 The Mayor should ensure that an analysis is undertaken to determine the causes of the Emphasis of Matter, and take specific actions to address causes systematically in order to eliminate errors upon disclosure of assets and contingent liabilities to confirm their accurate evaluation. In addition, the Mayor should ensure that effective processes are in place to confirm that the 2018 AFS production plan formally addresses all compliance issues related to the AFS and includes Management review of the draft AFS with specific focus on high risk areas and/or areas where errors have been identified in previous years. The Declaration made by the Chief Executive Officer and Chief Financial Officer should not be signed unless all necessary checks have been applied to the draft AFS. 10

11 3 Financial Management and Control Introduction Our work related to Financial Management and Control (FMC) reflects the detailed audit activities undertaken on Revenue and Expenditure Systems within Budget Organisations. Specifically, the focus of the audit was Budget management, Procurement issues, Human Resources as well as Assets and Liabilities. Financial Management and Control Conclusion The Municipality of Kamenica had spent 93% of the final budget for 2017, which signifies a good budget execution at the general level. Nevertheless, due to insufficient collection of revenues, there was setbacks in capital projects and delays in their implementation. In the context of financial systems, controls over revenues are generally appropriate and effective, though additional mechanisms are needed to respond to their collection of receivables to a greater extent. In addition, controls over a range of expenditure areas require further improvement in order to prevent improper execution of payments. Key areas where further improvements are needed are management of capital projects, management of payments, increase of revenues, including management of municipal property and assets management. 3.1 Budget Planning and Execution We have considered the sources of budget funds, spending of funds and revenues collected by economic categories. This is highlighted in the following tables: Table 1. Sources of budgetary Funds (in ) Description Initial Budget Final Budget Outturn 2016 Outturn 2015 Outturn Sources of Funds 7,640,425 8,196,331 7,674,953 7,945,340 7,816,036 Government Grant -Budget 6,741,244 6,881,621 6,848,247 7,142,934 6,900,558 Carried forward from previous year 2-372, , , ,619 Own Source Revenues 3 899, , , , ,594 Domestic Donations - 11,068 3,973-4,465 External Donations - 32,384 30,399 16,163 16,800 1 Final budget the budget approved by the assembly which was subsequently adjusted for by the Ministry of Finance. 2 Own Source Revenues unspent in previous year carried forward into the current year. 3 Receipts used by the entity for financing its own budget. 11

12 The final budget compared to the initial budget had increased by 2,243,441. This increase resulted due to revenues carried forward from the previous year in the amount of 372,077, domestic and foreign donations in the amount of 43,452, allocation of funds by the Government due to lack of budget for wages and salaries in the amount of 70,376 and utilities in the amount of 70,000, due to outstanding liabilities of the previous year. Municipality of Kamenica in 2017 has spent 93% of the final budget or 7,674,953. However, budget execution is some categories remains unsatisfactory. We have provided explanations below on the current position. Table 2. Spending of funds by economic categories - (in ) Description Spending of funds by economic categories Initial Budget 7,640,425 Final Budget 8,196, Outturn 2016 Outturn 2015 Outturn 7,674,953 7,945,340 7,816,036 Wages and Salaries 6,766,498 6,856,801 6,722,121 6,743,433 6,609,654 Goods and Services 600, , , , ,706 Utilities 140, , , , ,095 Subsidies and Transfers 9,125 36,730 31, , ,121 Capital Investments 124, , , , ,460 Explanations for changes in budget categories are given below: The increase of the budget for capital investments in the amount of 256,829 was as a result of revenues carried forward in the amount of 213,886, and domestic and foreign donors in the amount of 43,452. Despite the budget increase of capital expenditures, only 63% of the budget was spent. Compared to the previous year, current year s expenditures had decreased by 14%. Poor execution in this this category is due to delays in execution of some projects, delays in initiating procurement procedures, and due to inefficiency in revenue collection, as 87% of capital investments were planned to be spent from revenues; The increase of the budget for salaries and wages by 90,303 resulted primarily due to revenues carried forward in the amount of 19,926, and the amount of 70,376 allocated by the Government to finance salaries at the end of the year. This resulted as these expenditures were planned to be covered from own source revenues which were not collected. At the end, collection against the budget was at 98%; The final budget of goods and services was increased by 72,329. The increase of budget for goods and services includes revenues carried forward from the prior year in the amount of 71,820 and the amount of 509 which had remained from external donors from prior years. However, the implementation was only 66%, as 88% of this category was planned to be spent from revenues, while due to insufficient collection of revenues has 12

13 resulted in low budget execution in this category. Meanwhile, the level of outstanding liabilities from this category was 45,034; The utilities budget had increased by 108,840 as a result of revenues carried forward in the amount of 38,840, from allocation of funds by the Government of Kosovo in the amount of 70,000, due to outstanding liabilities dating from 2016 in the amount of 38,840. Execution in this category was at 94%; and Subsidies and transfers in the final budget had increased by 27,605 as a result of revenues carried forward. Execution compared to the budget was at 86%. Issue 2 - Budget execution Finding Municipality had not managed to execute the budget for capital investments and goods and services according to the plan and intended projects. Although at the general level, budget execution was at 93%, at the categories level such as capital investments (63%) and goods and services (66%), execution was relatively low. This was because the management had not made a realistic planning of revenues (a significant part of capital investment expenditures and goods and services were planned to be covered from own source revenues) and had not conducted regular analysis on budget progress. In addition, payments in the amount of 8,555 were carried out from capital investments, even though by nature these expenditures belong to the category of goods and services. This took place due to inadequate planning and budgeting. Risk Due to unrealistic planning and insufficient execution in respective categories results in non-achievement of Municipality s objectives and in carrying current year liabilities over to the following years. Misclassification of expenditures leads to inaccurate presentation of expenditures to the AFS, overstatement of expenditures in the category of capital investments against the under spending in the category of goods and services. Recommendation 2 The Mayor should conduct a comprehensive assessment of causes behind poor execution in relevant categories, and ensure adequate budget planning in line with projects aimed, and regularly monitor budget performance. 13

14 3.2 Revenues Municipality during 2017 has collected revenues in the amount of 635,564 or 71% of the planned budget ( 899,181). Revenues sources are: property tax in the amount of 260,373, fees from construction permits, administrative fees, and other revenues in the amount of 375,191. From the table below we see that initially there was an upward trend from 2015 to 2016 by 15%, after which there is a decrease by 9% in the current year compared to the previous year. This decrease was due to lack of sufficient mechanisms for collection of revenues. Table 3. Own Source Revenues (in ) Description Initial Budget Final Budget 2017 Receipts 2016 Receipts 2015 Receipts Own source revenues 899, , , , ,686 Total 899, , , , ,686 Issue 3 Failure to verify existing data related to taxable properties Finding Risk According to the AI 03/2011, Article 13, municipal property tax office is obligated to verify 1/3 of registered properties. Out of 10,676 invoiced properties, Municipality had verified only 521 of them, or 4%. According to municipal officials, the reason why 1/3 of the property was not verified was due to insufficient number of employees engaged in this activity. Failure to verify properties may result in incomplete information on current taxable property and in understatement of revenues from this category. Recommendation 3 The Mayor should ensure that are taken necessary measures to verify 1/3 of property tax properties, so that property tax data is complete and benefits from this revenue maximized. 14

15 3.3 Salaries and Wages Salaries and Wages are paid through a centralized system. Controls operating locally by the municipality relate to: checking of payments, signing payroll lists; verification of possible changes that may appear between the forms; budget review for this category and reconciliations with the treasury. The final budget for the category of salaries and wages was 6,856,801, while expenditures were 6,722,121 or 98% of the final budget. Issue 4 - Special services agreements without recruitment procedures Finding Risk During 2017 in the Municipality through special services agreements had been engaged 22 employees. Although under the Law on Civil Service, Article 12, for such engagements is implemented a simplified recruitment procedure, but the Municipality had not applied such procedures upon selection of these employees. In addition, special services agreements relate to regular positions and not with specific works requirements. Failure to follow recruitment procedures when entering into contracts for specific services increases the risk of engaging inadequate individuals to deliver required services. This also does not ensure equal treatment for all potential competitors. Recommendation 4 The Mayor should ensure that agreements for special services are entered into after application of simplified recruitment procedures, through public announcement and only in case of specific job requirements, and not for regular positions. 15

16 3.4 Goods and Services and Utilities The final budget for goods and services and utilities in 2017 was 921,176, out of which was spent 679,805 or 74% of the final budget. The largest part relates to utilities, fuel, outsourced services, travel expenses, and maintenance and repairs. Issue 5 - Advance payments for utilities Finding Risk The Financial Rule 01/2013, Article 22, determines the steps for processing of payment, where initially the invoice is received and then payment is processed. While testing the payment for electricity expenditures in the amount of 52,651, the total amount of invoices was 48,185, while the amount of 4,466 was not supported by invoices as it was a prepayment of estimated electricity expenditures. According to financial officers, they had prepaid the electricity in order to use the funds allocated by the Government at the end of the year and due to forecasts of budget difficulties to cover these expenditures in the following year. Paying utilities in advance without invoices, but only based on expenditure forecasts, can result in improper payments and without legal coverage. Recommendation 5 The Mayor should ensure the strengthening of controls over payments, so that payments are processed only with complete support of invoices and their accurate verification. 3.5 Subsidies and Transfers The final budget for subsidies and transfers was 36,729, out of which in 2017 were spent 31,600 or 86% of the budget. They relate to social welfare, health assistance, cultural activities and scholarships. Recommendations We have no recommendations in this area 16

17 3.6 Capital Investments The final budget for capital investments was 381,625. Of them, in ,427 was spent. They relate to the construction and maintenance of roads, business buildings, sanitation and water supply. Issue 6 Setbacks in implementation of the contract with a co-financing agreement Finding Risk Under the contract, Construction of sewage network in the neighbourhood New Malësia in village of Rogoqica with the value of 63,230, a cofinancing agreement between the Ministry of Environment and Spatial Planning (MESP), signed in September 2016 with a dynamic plan of 80 working days, the amount of 55,000 was supposed to be financed by the MESP, and the amount of 8,230 by the Municipality. MESP had paid only the first instalment in the amount of 31,900 in 2016, and had not provided any more funds for this project. Although the Municipality as a contractor was obliged to conclude the contract, this project was not concluded by the end of the year. In addition, performance security for this contract had expired. Failure to implement the project initially as a result of non-payment by MESP, and later due to lack of measures by the Municipality, has resulted in prolongation of this project whereby were not obtained foreseen benefits that are in favour of citizens. This also creates budgeting difficulties for the following years and potentially exposes the Municipality to lawsuits. Recommendation 6 The Mayor should ensure that specific measures are taken regarding implementation of projects that have suffered a setback, and to further strengthen controls over the oversight of projects, so that they are completed according to the dynamic plan. Issue 7 - Lack of complete documentation for implementation of projects Finding Risk According to the Law on Construction, Articles 14 and 29, upon construction is required to provide relevant documentation such as construction permit and inspective oversight. In two following projects, Asphalting of parking lots and sidewalks, as well as Water Supply in Kopernice, Kololeq and Shipashnicë works were carried without the said documentation. Initiating projects without completing the documentation as required under the Law on Construction can affect the quality and results in setbacks of implementation of projects. Recommendation 7 The Mayor has to ensure that the projects are supported with necessary documentation in accordance with requirements of the law on construction, initially by obtaining the construction permit, inspective oversight during the execution and at the end of the project to obtain the permit for use. 17

18 3.7 Capital and Non-Capital Assets Municipality had recorded municipal assets according to the recommendation given, however, there were still deficiencies in assets accounting register, which issue we have addressed at the chapter Audit Opinion - Emphasis of matter. In addition, other deficiencies were also encountered which we are presenting below. Issue 8 Inventorying and non-reconciliation with assets registers Finding According to regulation 02/2013 on non-financial assets, Article 18, inventorying of assets is done in order to verify the accuracy, quality and physical condition of non-financial assets. The committee had inventoried assets, but this report had not been compared with assets registers in order to identify the differences. Furthermore, the committee had only inventoried assets under 1,000, and has not included all assets of the Municipality, including assets over 1,000. Risk Failure to fully inventory all assets causes deficiencies in assets management and reporting, at the same time by risking the misuse or loss of assets. Recommendation 8 The Mayor should ensure that the inventorying process includes all municipal assets and after the completion of this process, the inventorying results are compared to the general assets register so that the potential differences are identified and then presented in assets registers. 3.8 Receivables At the end of 2017, Accounts Receivable (AR) were 2,018,490, out of which the amount of 1,381,980 was from property tax, the amount of 465,840 from municipal tax; the amount of 67,650 from construction permits, the amount of 91,000 from leasing public spaces, and the amount of 12,020 from rent. The total value of AR represents a fairly high value considering the fact that revenues planned were only in the amount of 899,181 and collection 635,564. Issue 9 - Lack of mechanisms for collecting receivables Finding Municipality had not taken active measures to collect receivables, as a result they increased by 358,270 or 22% compared to the previous year ( 1,660,220). Increases has been almost all ARs categories. This is due to the lack of established mechanisms by the Municipality to increase their collection. 18

19 Risk Failure to apply specific measures regarding the collection of ARs has led to their increase and at the same time were not incurred expenditures that were planned to be financed with revenues. Recommendation 9 The Mayor should review the reasons behind the failure to collect ARs and ensure that are established effective mechanisms for their collection. Mayor should also initiate a revaluation process whereby all accounts will be analysed in terms of age, significant amounts, realistic opportunities for their collection and exercising of legal measures for their collection. Issue 10 Failure to announce an auction upon lease use of municipal property Finding Risk According to Law 04L/144, Article 5, the procedures for allocation for short-term use of municipal immovable property shall be conducted through an open public competition. The Municipality had not announced a public announcement for short-term use of kiosks or other public properties during Consequently, due to unlawful use of these properties, Municipality had not invoiced them, whereby has not collected potential revenues from leasing these properties. Failure to apply measures for lease of these properties results in underestimation of receivables from lease of public spaces. Recommendation 10 The Mayor should ensure that are taken measures to ensure that prior to leasing kiosks and other municipal properties is announced a public announcement, so that regular invoicing can be done. 3.9 Outstanding Liabilities The statement of outstanding liabilities owed to suppliers at the end of 2017 was 55,322. These liabilities were carried forward to be paid in Compared to the previous year, the value of outstanding liabilities was 76,807, and at the end of this year they had decreased by 28%. This is because the Government at the end of the year had covered liabilities from the previous year. Recommendation We have no recommendations in this area. 19

20 4 Progress in implementing recommendations Our audit report of the AFS for 2016 of the Municipality of Kamenica resulted in 13 recommendations. Municipality had prepared an Action Plan stating how it will implement recommendations received. However, this action plan was not followed by specific steps and practical options to address these recommendations by persons responsible. By the end of our audit, out of the 13 recommendations given for 2016, only one was implemented, eight were in the process, while four were not implemented. In addition, out of 13 recommendations carried over from 2015, only one was implemented in 2017, ten were in the process, while two were not implemented. For a more detailed description of recommendations and how they are addressed, see Annex II. Issue 11 - Low level of implementation of recommendations from previos and earlier year Finding Due to lack of a formal monitoring over the implementation of recommendations given by the Auditor General, only a small number of recommendations have been fully implemented, while the majority are in the process of implementation, including recommendations from earlier years. This indicates lack of focus by persons responsible to apply specific measures related to their implementation, which come as a result of weaknesses identified in the Municipality. Continuous failure to implement recommendations, indicates that management s controls and other financial systems have not operated sufficiently and this has resulted in: Improper disclosure of assets and contingent liabilities in the financial statements; Delays in implementation of projects and misclassification of expenditures; and Poor management of receivables and municipal properties. Risk Failure to fully implement recommendations increases the risk of continuous presence of the same shortcomings and can result in constant ineffectiveness of controls, and poses difficulties in managing challenges in order to meet objectives, or even lead to financial losses. Recommendation 11 The Mayor should ensure that implementation of action plan is monitored constantly and reported on monthly or quarterly basis on the progress achieved in this regard. Recommendations that are not implemented according to timeframes should be reviewed with a short period of time by the Mayor, and to take proactive actions against obstacles encountered during the implementation. 20

21 5 Good Governance Introduction Good Governance implies basic principles of accountability, effectiveness of controls, risk management, independence of internal audit, coordination of NAO with internal audit and good governance with public assets. A key tool supporting effective governance is the implementation of audit recommendations as this demonstrates that Management are seeking to develop existing processes and controls. The level of compliance with FMC requirements by Budget Organizations is monitored by the selfassessment checklists completed by all BOs, which are submitted at the end of the year to the Ministry of Finance. Specific areas of our governance-related reviews have been the accountability and risk management process, while the other components are handled within the chapters or subchapters above. Overall Governance Conclusion In the governance related to operational and financial activities in the Municipality there are still areas where important actions are needed. Effective responses towards the implementation of external audit recommendations, developments over the risk management processes, management of capital projects and municipal assets, as well as implementation of internal audit recommendations, are some of the areas that the Municipality should give priority to in order to have a more effective governance. As part of strategic plans, Municipality has the Municipal Development Plan and the Urban Development Plan , but does not have a strategic plan for establishment of timeframes for achievement of objectives and their monitoring, by calculating the costs for its implementation. In addition, although the project for zone mapping was planned it was not initiated during Municipality had managed to fulfil the requirement of MoF on submission of the self-assessment questionnaire, however in terms of risk management, Municipality has not yet managed to prepare a list of risks wherein would be identified key points of risks that relevant departments face and responses to risks identified. One of the key elements of effective governance is implementation of recommendations given by external audit. The effective response to the implementation of recommendations is not satisfactory. This section has been handled in more detail in the chapter Progress in implementing recommendations. 21

22 The Audit Committee (AC) has been operational and has held meetings, however, more qualitative work and greater efforts are required by this Committee in order to push the management to respond effectively towards implementation of recommendations given from external and internal audit. 5.1 Internal Audit System The Internal Audit Unit (IAU) operates with two members of staff - the Head of IAU and one auditor. The IAU had drafted its strategic plan and the annual work plan, wherein was planned to carry out 10 audits. We have taken into consideration the work of internal auditors, actions undertaken by senior management towards addressing the recommendations as well as engagements of the AC. We consider that IAU had successfully completed its plan by completing all planned audits, but further improvements are needed for a more useful functioning in this area. Issue 12 - Failure to implement internal audit recommendations Finding Risk Out of 27 recommendations given, only 10 were fully implemented, 11 were in the process of implementation, while six remain unimplemented. Recommendations given related in particular to the area of procurement and mainly covered the previous year. Failure to implement recommendations given indicates lack of readiness by the management to obtain benefits from the internal audit and assurance over the functioning of internal controls. Due to non-application of a risk-based will not be identified current weaknesses that result in inefficiency when providing assurance to the management related to the functioning of internal controls. At the same time, failure by the management to implement recommendations reduces effectiveness of internal controls and leads to repetition of identified weaknesses. Recommendation 12 The Mayor should ensure that the IAU plan applies an approach towards risk areas by constantly assisting operational activities, and that management has a higher focus on addressing of recommendations so that benefits from internal audit are greater. 5.2 Management Reporting, Accountability and Risk Management In order to have a proper planning, supervise the activities on a regular basis and allow effective decision-making, the Management needs to have regular reports. Accountability as a process is the acceptance of responsibilities, holding persons into account for their actions and disclosing results in a transparent way. Whereas, risk management is a process related to identification, 22

23 analysis, evaluation and actions/measures taken by the Management to control and respond to risks threatening the Organization. Although, a range of internal controls are applied by Management to ensure that systems and operate as intended, we have noticed that the measures applied are not sufficiently effective and therefore do not provide an effective and timely response to the identified operational problems. Issue 13 Weaknesses in management controls and risk management Finding Due to non-establishment of adequate mechanisms over the collection of revenues, there was a setback in implementation of capital projects and also liabilities towards the suppliers have increased. This was afterwards resolved by the Government s decision to transfer the funds to finance these liabilities. Furthermore, non-initiation of procurement procedures, project delays, advance payments without the support of invoices, were not addressed timely and properly by the management. There were still deficiencies in the area of assets management, as inventorying had not included all municipal assets and no comparisons were made with assets registers. In addition, registers were not accurate yet due to non-recording or incorrect recording. Management does not have regular analysis of budget performance, and does not have regular reports on operational activities. In addition, Municipality does not have risks register drafted according to FMC requirements in order to identify risks at the department level and to take measures to manage them. Risk Insufficient accountability requirements and poor financial reporting reduce the effectiveness of financial management. This results in weaknesses in the budget process and reduces management s ability to respond to financial challenges on time. It also reduces the effect of budgetary controls and poses a risk of irregular expenditures. Accordingly, this may also result in provision of poor quality services. Recommendation 13 The Mayor should ensure that a review is carried out to determine the form of financial and operational reporting to the senior management. Budget performance, including revenues and expenditures, as well as the procurement plan should be subject to regular reporting and review by the management. In addition, in order to reduce the impact of risks at acceptable levels, Municipality should draft a risks register with all adequate measures/actions in order to have under control exposed threats. 23

24 Annex I: Explanation of the different types of opinion applied by NAO (extract from ISSAI 200) Form of opinion 147. The auditor should express an unmodified opinion if it is concluded that the financial statements are prepared, in all material respects, in accordance with the applicable financial framework. If the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement, or is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, the auditor should modify the opinion in the auditor s report in accordance with the section on Determining the type of modification to the auditor s opinion If financial statements prepared in accordance with the requirements of a fair presentation framework do not achieve fair presentation, the auditor should discuss the matter with the management and, depending on the requirements of the applicable financial reporting framework and how the matter is resolved, determine whether it is necessary to modify the audit opinion. Modifications to the opinion in the auditor s report 151. The auditor should modify the opinion in the auditor s report if it is concluded that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement, or if the auditor was unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. Auditors may issue three types of modified opinions: a qualified opinion, an adverse opinion and a disclaimer of opinion. 24

25 Determining the type of modification to the auditor s opinion 152. The decision regarding which type of modified opinion is appropriate depends upon: The nature of the matter giving rise to the modification that is, whether the financial statements are materially misstated or, in the event that it was impossible to obtain sufficient appropriate audit evidence, may be materially misstated; and The auditor s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements The auditor should express a qualified opinion if: (1) having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or (2) the auditor was unable to obtain sufficient appropriate audit evidence on which to base an opinion, but concludes that the effects on the financial statements of any undetected misstatements could be material but not pervasive The auditor should express an adverse opinion if, having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements The auditor should disclaim an opinion if, having been unable to obtain sufficient appropriate audit evidence on which to base the opinion, the auditor concludes that the effects on the financial statements of any undetected misstatements could be both material and pervasive. If, after accepting the engagement, the auditor becomes aware that management has imposed a limitation on the audit scope that the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor should request that management remove the limitation If expressing a modified audit opinion, the auditor should also modify the heading to correspond with the type of opinion expressed. ISSAI provides additional guidance on the specific language to use when expressing a modified opinion and describing the auditor s responsibility. It also includes illustrative examples of reports. Emphasis of Matter paragraphs and Other Matters paragraphs in the auditor s report 157. If the auditor considers it necessary to draw users attention to a matter presented or disclosed in the financial statements that is of such importance that it is fundamental to their understanding of the financial statements, but there is sufficient appropriate evidence that the matter is not materially misstated in the financial statements, the auditor should include an Emphasis of Matter paragraph in the auditor s report. Emphasis of Matter paragraphs should only refer to information presented or disclosed in the financial statements. 25

26 158. An Emphasis of Matter paragraph should: be included immediately after the opinion; use the Heading Emphasis of Matter or another appropriate heading; include a clear reference to the matter being emphasised and indicate where the relevant disclosures that fully describe the matter can be found in the financial statements; and indicate that the auditor s opinion is not modified in respect of the matter emphasised If the auditor considers it necessary to communicate a matter, other than those that are presented or disclosed in the financial statements, which, in the auditor s judgement, is relevant to users understanding of the audit, the auditor s responsibilities or the auditor s report, and provided this is not prohibited by law or regulation, this should be done in a paragraph with the heading Other Matter, or another appropriate heading. This paragraph should appear immediately after the opinion and any Emphasis of Matter paragraph. 26

27 Annex II: Prior and Earlier Year Recommendations Audit Component Recommendations carried forward from 2015 Implemented during Financial Statements 2.3 Prior Year Recommendations 2.4 FMC Self- Assessment Checklist The Mayor should ensure that effective processes are in place to confirm that the 2016 AFS production plan formally addresses all issues raised including significant risk on assets. This should also include management review of the draft AFS with specific focus on high risk areas and/or areas where errors have been identified. The Mayor should ensure that a revised action plan is implemented which clearly sets out a timetable for addressing the recommendations made by the AG with accountable staff members identified and with initial focus on those of greatest significance. The Mayor should ensure that a review of the processes for completing the self-assessment checklist and proactively addressing areas of weaknesses is implemented. A revised mechanism to confirm the accuracy of the return and to ensure supporting documentation supports the submission should be applied. Further on, regarding the municipal strategic objectives, the Mayor should assign a responsible team who drafts action plan for the applicable recommendations. Such documents should not remain on paper only. Under implementation during 2017 Even though there are improvements, there are still shortcomings related to disclosure of financial statements. The Municipality has drafted the action plan, however no rigorous measures were taken that would clearly define addressing of recommendations, as a result of which some of these recommendations were repeated. There is still no supporting documentation of completion of the self-assessment checklist. Not implemented 27

28 2.5.1 Risk Assessment Management Reporting 3.3 Budget Planning and Execution Other expenditures The Mayor should ensure that immediate responsibility for risk management is delegated to a respective Director who in coordination with Heads of the Unit will manage this process and regularly report on risks. The Mayor should ensure that a review is implemented to determine the format of financial reporting to senior management which is required to support effective business management and ensure that an appropriate solution is in place. The Mayor should ensure should ensure that budget performance is systematically monitored and that this identifies and addresses barriers to planned levels of budget execution. Where adjustments can be made to reduce operating expenses, the same are revised in order to be concentrated on capital projects. The Mayor should ensure that special service contracts are used only for the intended purpose, properly planned and in accordance with the law. We suggest that this practice is stopped as soon as possible. The Mayor should review the cases above and take appropriate measures. Further on, he should ensure that officers fully comply with the requirements arising from internal regulations on the use of official vehicles. The persons responsible for supervising the vehicle park should ensure that official vehicles are used only by authorised persons and travel vouchers are completed and approved by the management of the municipality. There are quarterly, semiannually and yearly reports from the finance directorate, however there are no regular formal reports by all directorates on operational activities. Budget performance was not sufficiently monitored, due to which expenditures in the category of capital investments and goods and services were not satisfactory. Continue recruitments of employees with special services contracts for regular positions, and without vacancy advertisement. Travel vouchers are completed, but there is no regular reporting to the transport unit on the use of official vehicles. No measures taken 28