free state Kimi Makwetu Auditor-General

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3 free state MFMA The information and insights presented in this flagship publication are aimed at empowering oversight structures and local and provincial government leaders to focus on those issues that will result in reliable financial statements, credible reporting on service delivery and compliance with legislation. 1 This publication also captures the commitments that leaders have made to improve audit outcomes. I wish to thank the audit teams from my office and the audit firms that assisted with the auditing of local government for their diligent efforts towards fulfilling our constitutional mandate and the manner in which they continue to strengthen cooperation with the leadership of the province. Kimi Makwetu Auditor-General

4 HIGHLIGHTS 2 A total of 33% of auditees received disclaimed opinions and 22% received qualified opinions on their financial statements (Section 1) A total of 41% of auditees received unqualified opinions by correcting material misstatements found in their financial statements during the audit process (Section 2) Non-compliance with key legislation remained high at 100% of auditees (Section 5) Procurement processes were not competetive or fair; contract management was inadequate; tender documents were missing; and irregular expenditure increased and remains at high levels (Section 5) At 100% of auditees consultants are relied on for financial reporting (Section 7) Auditees financial health has deteriorated (Section 9) Internal controls for leadership and financial and performance management stagnated. Basic controls and disciplines require attention (Section 11) Political and administrative leadership were slow to address the root causes of poor audit outcomes (Section 12)

5 FREE STATE CLEAN AUDITS MUNICIPALITY No municipality in the Free State achieved a clean audit Municipal ENTITY No municipal entity in the Free State achieved a clean audit

6 Contents 4 foreword 5 Introduction 9 The government and its strategies 10 Historical overview of local government initiatives 11 overview 13 Summary of our message 14 Characteristics of each of the categories of audit outcomes 16 audit outcomes, root causes and the impact of role players Overall audit outcomes Audit outcomes for Financial statement areas qualified Annual performance report Compliance Human resource management Use of consultants in the areas of financial and performance reporting Conditional grants Financial viability Information technology systems Key controls Root causes The level of assurance provided and the impact of these role players on audit outcomes Conclusion 56 annexures 57 glossary of terms, acronyms and abbreviations 63 Glossary of key terminology used in this report 64 Acronyms and abbreviations 70

7 foreword 5

8 FOREWORD 6 It is with pleasure that I present to the Free State Legislature and municipal councils my general report on the audit outcomes of the local government for the financial year ended 30 June My definition of a clean audit is an unqualified audit outcome without findings on compliance and performance information. No municipality or municipal entity in the province was able to achieve a clean audit opinion, which is of serious concern. The then Minister of Cooperative Governance and Traditional Affairs used the financial year as a baseline when launching operation clean audit in 2009, which entailed all municipalities achieving unqualified audit outcomes by This milestone has also not been achieved. The overall picture of audit outcomes in the current year is not much different from the previous year. Although the audit results of six auditees improved, these improvements were overshadowed by financial statements that were subject to material audit adjustments and high unauthorised and irregular expenditure. The audit results of two auditees regressed. The metro (and the entity) improved to an unqualified audit opinion with findings. During the 2010 door-to-door visits by the then auditor-general, the premier made a commitment on behalf of local government to go back to basics and strengthen the internal control environment to improve audit outcomes. However, this commitment was not honoured due to the slow response by management at 89% of the auditees. The quality of financial information submitted for audit remained poor, with 96% of auditees making audit adjustments to their financial statements even though most of the appointed chief financial officers (61%) were qualified. Leadership has taken no visible action to improve this situation and address the root causes of audit findings. Instead, they continue to throw money at the problem and have appointed consultants at a cost of R130 million ( : R116 million) for financial reporting. As in the previous year, the impact of the municipal support group (task team) was insignificant due to the limited number of members and the extent of the challenges in local government. Another concern remains that very few municipalities were able to avoid findings on predetermined objectives. Only 15% of municipalities ( : 15%) generated useful and reliable performance reports. It should be noted that one municipality ( : 1) did not submit a performance report in the current year. This emphasises the fact that most municipalities do not give predetermined objectives and compliance the focus and attention required. The financial health of the province has deteriorated since the previous year. The province faces severe cash flow constraints, resulting in late payments to creditors. If the current situation is not addressed, this will have a significant impact on service delivery. All auditees (100%) had material findings on compliance. The main reason was a lack of formal consequence management at 74% of auditees ( : 100%) to deal with contraventions or poor performance. The movement in consequence management was a result of some leadership taking action against poor performers. The high levels of unauthorised and irregular expenditure (R2,33 billion and R934 million respectively) is of concern. I am also particularly concerned about the high level of supply chain management transgressions that are driven by uncompetitive or unfair procurement processes,

9 conflicts of interests and internal control failures. This not only translates into high irregular expenditure, but also provides very little assurance that value for money was received from the acquisition of goods and services. These transgressions are largely the result of: an unwillingness to comply with legislation; 67% of auditees not having a head of supply chain management appointed at yearend; and the lack of performance management. Information technology service continuity controls need attention as financial systems form the basis of financial and performance reporting. A lack of controls could negatively impact audit outcomes. Furthermore, security management and user access management controls need to be improved to make the financial systems less susceptible to fraud. Notwithstanding a commitment by the province to address the skills shortages, key positions showed significant vacancies and instability at 67% of auditees. In addition, officials appointed in key positions and the staff supporting them lacked appropriate competencies at 78% of auditees. This was evident from the material misstatements in the financial statements and performance reports, as well as the level of non-compliance reported. The challenge remains for the province to build a public service characterised by transparent financial and performance reporting. This should be led by municipal managers with the councils support and oversight. Municipal managers must appreciate ethical and professional behaviour, and have zero tolerance for the indecisive execution of controls and deviation from legislation. A performance management system needs to flow from measuring the strategic objectives to measuring the performance of each municipal employee. This will ensure that staff are held accountable for poor performance or transgressions. In support, the Office of the Premier must strengthen intergovernmental relations in conjunction with the oversight of the two coordinating departments the Department of Cooperative Governance and Traditional Affairs and the Provincial Treasury and the South African Local Government Association, all of which have a direct bearing on municipal functions. The premier has made various commitments to improve audit outcomes based on the recommendations contained in this report, including having municipalities get back to basics, which the Provincial Treasury will monitor. My staff and I remain committed to working with the municipal and provincial leadership to further improve governance and accountability, so as to build public confidence in the local government sector and in the province s ability to account for public resources in a transparent manner. I wish to thank the audit teams from my office and the audit firms that assisted for their diligent efforts towards fulfilling our constitutional mandate and the manner in which they continue to strengthen cooperation with the leadership in the province. Auditor-General Pretoria June

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11 INTRODUCTION 9

12 Response of the Free State provincial administration with specific reference to local government The government and its strategies The Constitution of South Africa is the supreme law of the country. It provides the legal foundation for the existence of the republic, sets out the rights and duties of its citizens, and defines the structure of the government. The spirit and aim of the Constitution is best summarised in the preamble, where it pronounces the ultimate goal - Improve the quality of life of all citizens and free the potential of each person. This foundation of our society, the Constitution, appoints government as the facilitator and enabler of this goal. This illustration depicts the basic operations of government that give effect to the Constitution. Section establishes municipalities with the executive and legislative authority vested in its municipal council Section objectives of local government: 1 Metro R6,711 billion budget 10 Constitution Section 40(1) - government constitutes the national, provincial and local spheres, which are distinctive, inter-dependent and interrelated Section 41(1)(c) - all spheres of government must provide effective, transparent, accountable and coherent government for the country as a whole Constitution to provide democratic and accountable government for local communities to ensure the provision of services to communities in a sustainable manner to promote social and economic development to promote a safe and healthy environment to encourage the involvement of communities and community organisations in the matters of local government 4 District municipalities R511 million budget 19 Local municipalities R9,302 billion budget MTSF The Medium term strategic framework (MTSF) serves as government s strategic plan for The MTSF sets out the actions that government will take and targets to be achieved over the next five years. State of the province address 2015 The Back to Basics Strategy in the Free State was launched in October The implementation of this strategy will ensure that we get the basics right, breathe new life into our municipalities and improve service delivery. The Back to Basics strategy focuses on five pillars, namely: Putting people and their concerns first; Creating conditions for decent living; Demonstrating good governance; Ensuring sound financial management and Building and maintaining sound institutional and administrative capabilities We have aligned our Municipal Support Programme with the Back to Basics Strategy. We will continue to support all district and local municipalities to strengthen their governance, financial and institutional management as this will directly improve our people s interaction and engagement with the local government sector. Together with our municipalities, provincial government launched the Enviromobi platform to enhance service delivery and a public education drive is underway to enable communities to understand and use this platform.

13 Historical overview of local government initiatives Operation clean audit 2014 Back-to-basics programme 2015 On 22 September 2009, responding to the findings of a government study into the problem areas of service delivery, leadership, financial management and matters of governance, the Minister of Cooperative Governance and Traditional Affairs (CoGTA) launched operation clean audit During his address to Parliament, the minister highlighted the particular focus on local government as the closest to the coalface of service delivery. He summarised the pre status as follows: The then DPLG, did not support provincial departments. As a result, the link and support between municipalities and provinces was weak and not sustainable. Thus, service delivery, governance and financial management were severely affected. Technically, when a system of governance and financial management is poor due to lack of support, without a doubt service delivery will be negatively affected. More importantly, in some provincial departments and municipalities, there is lack of both administrative and political leadership. The initiative aimed at ensuring that by 2014, all municipalities and provincial government departments in South Africa would achieve clean audits on their financial statements and that they would further maintain systems for sustaining quality financial statements and management information. In this address the following milestones were set: By 2011 no municipality will receive adverse and disclaimed audit opinions. By 2012 at least 60% of municipalities must achieve unqualified audit opinions By 2013 this must increase to 75% of municipalities that achieve unqualified audits. By 2014 we must have 100% of clean audits. President Jacob Zuma, in his State of the nation address delivered on 17 June 2014, articulated government s concerns about the improvements needed at local government level: We would like our people s experience of local government to be a pleasant one. Against this background, the Ministry of CoGTA is pursuing the back-to-basics approach to address challenges faced by local government, strengthen municipalities and instill a sense of urgency towards improving citizens lives. At a very basic level, municipalities are expected to: put people and their concerns first and ensure constant contact with communities through effective public participation platforms. create conditions for decent living by consistently delivering municipal services of the right quality and standard. This includes planning for, delivering and maintaining infrastructure and amenities, and managing the budget. ensure that there are no failures in services and, where these occur, urgently restore services. be well governed and demonstrate good governance and administration - cut wastage, spend public funds prudently, hire competent staff, ensure transparency and accountability. ensure sound financial management and accounting, and prudently manage resources to sustainably deliver services and bring development to communities. build and maintain sound institutional and administrative capabilities, administered and managed by dedicated and skilled personnel at all levels. 11 The AGSA has a constitutional mandate and, as the supreme audit institution (SAI) of South Africa, exists to strengthen our country s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. In support of CoGTA s operation clean audit, the AGSA intensified interactions with both the political and administrative leadership on the outcomes of their municipalities, the root causes underpinning the unfavourable outcomes and the need for a strong control environment entrenched in daily, weekly and monthly processes. The previous auditor-general also embarked on a door-to-door campaign, where he visited each municipality in the country with a message of support and where he highlighted that it is possible to obtain clean administration if there is true political will to change and if the leadership actively strives for quality and sustainability in executing its duties. The AGSA is committed to being a critical supporter of the back-to-basics initiative.

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15 OVERVIEW 13

16 Senior management Municipal managers/ chief executive officers Mayors Internal audit units Audit committees Treasury, cooperative governance department, premier s office Municipal councils Municipal public accounts committees Legislature/NCOP, public accounts committee and Portfolio committees on local government Summary of our message Figure 1a: Overview of the audit message Movement in audit outcomes Assurance levels First level of assurance Second level of assurance Third level of assurance 7% 45% 30% 30% 11% 4% 18% 37% 22% 78% 14 33% 33% 52% 4% 4% 7% 40% 48% 45% 44% 11% 30% 33% 44% 37% auditees 27 auditees 27 auditees 27 auditees 56% 48% 48% 56% 59% 67% 56% 63% 100% Unqualified with findings Adverse with findings Qualified with findings Disclaimed with findings Provides assurance Provides some assurance Provides limited/ no assurance 1 2 To improve the audit outcomes, the key role players need to

17 Figure 1b: Overview of the audit message Leadership Key controls Financial and performance management Governance Quality of submitted financial statements Risk areas Quality of submitted performance reports Root causes Slow response by management (accounting officer and senior management) 56% 89% 4% 7% 4% 11% 4% 96% 4% 88% 12% Key officials and support staff lack appropriate competencies 89% (24) 78% 74% 52% 41% 52% 52% 41% 41% Supply chain management Financial health Lack of consequences for poor performance and transgressions 74% 89% 4% 7% 77% 4% 19% 78% (21) Commitments 100% 15 52% 55% 44% 44% 48% 48% Good Concerning Intervention required Human resource management 56% 40% 4% Information technology 46% 46% Good Concerning Intervention required 8% The following critical commitments, which could directly impact improved outcomes, were reaffirmed by the premier on behalf of the new provincial Troika: Municipalities need to get back to 74% basics, (20) which will be monitored by the Provincial Treasury. Decisive action will be taken where the level of qualifications and competencies of municipal managers and chief financial officers is not translating into an improved level of internal controls. Consequences will be implemented for poor performance and transgressions, against all employees give attention to the key controls, the risk areas and the root causes.

18 Financial statements Characteristics of each of the categories of audit outcomes Table 1 summarises the characteristics of auditees that fall within the different categories of audit outcomes over the following pages. This summary is provided to achieve the following: Assist the reader to understand the different audit outcomes. Emphasise that auditees with an unqualified audit opinion with findings still have serious weaknesses that should be dealt with. Explain why auditees with qualified and disclaimed opinions are failing. Table 1: Characteristics of auditees within the different categories of audit outcomes Area Best practices for clean audits (0) Unqualified with findings (12) Qualified with findings (6) Disclaimed with findings (9) 16 Produce financial statements free from material misstatement. Eleven auditees (92%) produced financial statements with material misstatements, but corrected these during the audit process. The most common areas in which auditees made corrections were: property, infrastructure and equipment cash flow statements contingent liabilities and commitments receivables payables other disclosure notes. Auditees produced financial statements with material misstatements, and they were unable to correct all of them before the financial statements were published. The most common areas in which auditees could not correct the material misstatements were: revenue (four auditees) receivables (four auditees) expenditure (three auditees) property, infrastructure and equipment (two auditees). Auditees could not provide us with evidence for most of the amounts and disclosures in the financial statements. We were unable to conclude or express an opinion on the credibility of their financial statements. The most common areas in which auditees could not correct the material misstatements or provide the required evidence were: revenue (nine auditees) expenditure (nine auditees) property, infrastructure and equipment (nine auditees) receivables (eight auditees).

19 Key controls Compliance with key legislation Annual performance report Area Best practices for clean audits (0) Measure and report on performance (in the annual performance report) in accordance with the predetermined objectives in the integrated development plans (IDPs) and service delivery and budget implementation plans (SDBIPs) and in a manner that is useful and reliable Unqualified with findings (12) Qualified with findings (6) Disclaimed with findings (9) All auditees prepared an annual performance report. One auditee (8%) had no findings and another auditee (8%) obtained good outcomes only because the auditee corrected the misstatements identified during the audit. The annual performance reports of 10 auditees (84%) were not useful and/or reliable. All auditees prepared an annual performance report. Two auditees (33%) had no findings on their annual performance reports. The annual performance reports of four auditees (67%) were not useful and/or reliable. One auditee did not prepare an annual performance report. The annual performance reports of eight auditees (100% of those that have submitted) were not useful and/or reliable. Comply with key legislation 12 auditees (100%) did not comply with key legislation. 6 auditees (100%) did not comply with key legislation. 9 (100%) did not comply with key legislation. Have good controls and/or are working on the areas that need further attention to achieve clean audit status The auditees had good controls in some areas but attention should be paid to the basic controls. A limited number of auditees had good controls in the following areas: Effective leadership culture (33%) Good human resource controls (8%) Effective audit action plans (8%) Proper record keeping (8%). None of the auditees had good controls in the following areas: Information and communication technology (ICT) controls Strong daily and monthly controls Review and monitor compliance. The basic controls were weak. With the exception of one auditee with good ICT controls, no auditees had good controls. The overall regression in key controls explains why auditees with qualified audit opinions with findings are unable to improve their audit outcomes. The weakest controls were in the following areas: Review and monitor compliance (100% needed intervention) Daily and monthly controls (83% needed intervention) Human resource controls (83% needed intervention). The basic controls were weak. We assessed the status of controls at most of these auditees as intervention required. The overall stagnation in key controls is aligned to the stagnation in audit outcomes. The stagnation in key controls is also indicative of management s slow response to addressing the root cause of audit findings. The weakest controls were in the following areas: Proper record keeping (100% needed intervention) Review and monitor compliance (89% needed intervention) Daily and monthly controls (89% needed intervention). 17

20 Assurance providers Area Best practices for clean audits (0) Unqualified with findings (12) Qualified with findings (6) Disclaimed with findings (9) 18 Key role players work together to provide assurance on the credibility of the financial statements and performance reports and to ensure compliance with key legislation. These auditees understand that assurance on the credibility of the information in the financial statements and performance reports come primarily from the actions of management/ leadership and their governance partners internal audit units and audit committees. Their political leadership provides strong monitoring and oversight and hold the administration to account. All role players did not provide the required level of assurance. As a result, the financial statements and annual performance reports prepared, reviewed and signed off by the auditees senior management and municipal managers/chief executive officers were materially misstated. The internal audit units and, in most cases, the audit committees also did not add to the credibility of these reports, while monitoring and oversight by the political leadership did not have the desired results. These role players also did not insist on strong controls to ensure compliance with key legislation and to prevent, detect and correct material misstatements. The auditees where role players provided full assurance were limited as depicted below: Senior management (8%) Municipal managers/chief executive officers (8%) None of the role players provided the required level of assurance. The role players only provided some or limited/no assurance. The auditees where role players provided limited or no assurance: Senior management (100% provided limited/no assurance) Municipal managers/chief executive officers (83% provided limited/no assurance) Mayors (67% provided limited/no assurance) Internal audit (83% provided limited/no assurance) Audit committee (67% provided limited/no assurance) Municipal councils (83% provided limited/no assurance) Municipal public accounts committees (83% provided limited/no assurance). The contributions to assurance by the role players at these auditees were minimal. The role players that provided the least assurance were at the first and third level of assurance: Senior management (100% provided limited/no assurance) Municipal managers/chief executive officers (89% provided limited/no assurance) Mayors (89% provided limited/no assurance) Municipal councils (89% provided limited/no assurance) Municipal public accounts committees (100% provided limited/no assurance) Internal audit units at 67% of auditees provided limited/no assurance The audit committees at 78% of auditees provided limited or no assurance. Mayors (17%) Internal audit units (0%) Audit committees (25%) Municipal councils (0%) Municipal public accounts committees (0%).

21 Key officials Area Best practices for clean audits (0) Unqualified with findings (12) Qualified with findings (6) Disclaimed with findings (9) There are limited vacancies in key positions. There is stability at the level of municipal manager/chief executive officer, chief financial officer and head of the supply chain management (SCM) unit. The competencies of these officials are assessed and most have already achieved the competency requirements prescribed by the regulations These vacancies in key positions were the highest at the auditees in this category: Municipal manager/chief executive officers four (33%) Chief financial officer two (17%) Head of the SCM unit seven (58%) There was little stability, with chief financial officers being in this position for an average of 25 months. Most officials assessed achieved the minimum competency requirements prescribed by legislation. A head of the SCM unit (20%) did not meet the minimum competency requirements. In addition, the minimum competency requirements have not yet been assessed or there was a limitation to verifying the information of two municipal managers (25%), three chief financial officers (30%) and two heads of the SCM units (40%). There were no vacancies in the municipal manager position but vacancies were identified in the following key positions: Chief financial officer one (17%) Head of the SCM unit five (83%) There was little stability, as chief financial officers were in this position for an average of 20 months. All officials assessed achieved the minimum competency requirements prescribed by legislation. The competency of one municipal manager and one chief financial officer has not yet been assessed. Vacancies in key positions at auditees in this category were almost the same as in the other categories: Municipal manager two (22%) Chief financial officer one (11%) Head of the SCM unit six (67%) These auditees had the least stability, with chief financial officers in this position for an average of seven months. Most of the appointed officials assessed at these auditees had not achieved the minimum competency requirements. This included three municipal managers (43%), three chief financial officers (38%) and three heads of SCM units (100%). The minimum competency requirements of a municipal manager (14%) and two chief financial officers. (25%) have not yet been assessed. 19

22 Use of consultants 20 Area Best practices for clean audits (0) Auditees use consultants for financial reporting services, but use them effectively. They appoint the consultants in time, provide them with the required records and documents, and manage the process effectively Unqualified with findings (12) Qualified with findings (6) Disclaimed with findings (9) Auditees used consultants widely for financial reporting services, but 92% still produce financial statements with material misstatements. These material misstatements were corrected through the audit process. Twelve auditees (100%) in this category were assisted by consultants at a cost of R58 million (including R8,8 million paid by COGTA for financial reporting). Consultants assisted four of these auditees (33%) with performance information at a cost of R2 million. Auditees need to strengthen their practices in the following areas when managing consultants: Performance management and monitoring was weak at 42% of the auditees (5) Skills were not transferred at 33% of the auditees (4) Planning and appointment processes were inadequate at 17% of the auditees (2) Auditees used consultants widely for financial reporting services. All six auditees in this category (100%) were assisted by consultants at a cost of R11 million (including R0,5 million paid by COGTA for financial reporting). All auditees (100%) had poor audit outcomes in spite of using consultants. Where the findings were within the consultants area of responsibility (four auditees) the main reasons were: The consultants were appointed too late at 50% of the auditees (2). Poor project management by 25% of the auditees (1). The records and documents that consultants needed to perform their services could not be provided to them at 25% of the auditees (1). Consultants assisted two of these auditees (33%) with performance information at a cost of R3 million Auditees weak practices were widespread in the following areas when managing consultants: Skills were not transferred at 100% of the auditees (6) Performance management and monitoring was weak at 50% of the auditees (3) Planning and appointment processes were inadequate at 17% of the auditees (1). Auditees used consultants widely for financial reporting services. All nine auditees in this category (100%) were assisted by consultants at a cost of R61 million (including R20,7 million paid by COGTA for financial reporting). All auditees (100%) had poor audit outcomes in spite of using consultants. Where the findings were within the consultants area of responsibility (six auditees) the main reasons were: The records and documents that consultants needed to perform their services could not be provided to them at 33% of the auditees (2). The consultants did not deliver on their contracts at 33% of the auditees (2). Poor project management by 17% of the auditees (1). The consultants were appointed too late at 17% of the auditees (1). Consultants assisted four of these auditees (44%) with performance information at a cost of R1 million. Auditees showed the weakest practices when managing consultants: Skills were not transferred at 89% of the auditees (8) Performance management and monitoring was weak at 89% of the auditees (8) Planning and appointment processes were inadequate at 56% of the auditees (5)

23 Use of grants Area Best practices for clean audits (0) The municipalities effectively use the municipal systems improvement grant (MSIG) and the financial management grant (FMG), which are aimed at improving financial and performance management They are also able to use their municipal infrastructure grants (MIG) effectively. Unqualified with findings (12) Qualified with findings (6) Disclaimed with findings (9) Municipalities in this category spent most of their municipal systems improvement grant (MSIG) and financial management grant (FMG) as 97% of these grants were spent during the year. Spending on grants is indicative of the capacity and discipline to plan, budget, monitor and report on service delivery. Targets were reported as achieved for 100% of the MSIG and 92% of FMG spent. However, credible financial reporting has not been achieved as reported in the area of financial statements. The weaknesses in the control environments of these municipalities also affected their effective use of the municipal infrastructure grant (MIG): The municipalities in this category used their grants with less effect when compared to the targets achieved: 1% of the MSIG and FMG was not spent. For 17% of the MSIG and 17% of FMG spent targets were either not achieved, not assessed, or a limitation existed 94% of MIG was spent; however, for 23% of the money spent targets were either not achieved, not assessed or a limitation existed. Municipalities in this category did not use their grants effectively. Only 11% of the MSIG and FMG were not spent; however, for 62% of the MSIG and 38% of FMG spent the targets were either not achieved, not assessed or a limitation existed. 15% of the MIG was not spent. Furthermore, for 84% of the money spent the targets were either not achieved, not assessed or a limitation existed. 21 2% of the grants were not spent For 13% of the money spent the targets were either not achieved, not assessed, a limitation existed or the money was used for another purpose.

24 Supply chain management Area Best practices for clean audits (0) Unqualified with findings (12) Qualified with findings (6) Disclaimed with findings (9) 22 Auditees have no material instances of non-compliance with SCM legislation. Their irregular expenditure levels are low as a result of their good SCM practices In total, nine of these auditees (75%) did not materially comply with SCM legislation. Only one (8%) had good SCM practices. The irregular expenditure levels were high as a result of poor SCM practices. Eleven auditees incurred irregular expenditure of R362 million (39%) while being responsible for the majority (58%) of the provincial municipal budget. At six auditees (55%), the municipal manager and council did not investigate the irregular expenditure of the previous year to determine if anyone was liable for the expenditure. In total, 100% of these auditees did not materially comply with SCM legislation. These auditees were responsible for 12% (R110 million) of the total irregular expenditure. This is a high rate of irregular expenditure considering that auditees in this category represent only 22% of the total number of auditees in the province and are only responsible for 7% of the provincial municipal budget. The lack of investigation was more pronounced as at five auditees (83%), the municipal manager and council did not investigate the irregular expenditure of the previous year to determine if anyone was liable for the expenditure. In total, 100% of these auditees did not materially comply with SCM legislation. We experienced limitations in performing the SCM audits at seven (78%) of these auditees. The irregular expenditure levels were high as a result of bad SCM practices and could have been higher without the audit limitations. These auditees contributed the most to irregular expenditure at 49% (R462 million), while being responsible for 35% of the provincial municipal budget. The lack of investigation was most common in this category as at eight auditees (89%), the municipal manager and council did not investigate the irregular expenditure of the previous year to determine if anyone was liable for the expenditure.

25 AUDIT OUTCOMES, ROOT CAUSES AND THE IMPACT OF KEY ROLE PLAYERS 23

26 24 1. Overall audit outcomes The Free State local government sphere consists of 24 municipalities and seven municipal entities. The municipalities are made up of one metro, four district municipalities and 19 local municipalities. The municipalities operate on a budget of R16,524 billion (operating expenditure: R13,493 billion and capital expenditure: R3,031 billion). The following four municipal entities are not included in this report as they are dormant: Fezile Dabi District Municipality Trust (received a clean audit opinion) Metsimaholo Mayoral Trust (received a qualified audit opinion) Krynaauwlust Farming Trust (audit outstanding since and a disclaimer of opinion is expected for all outstanding years until , when the trust was dissolved) Setsoto Integrated Dairy (audit outstanding for three years and the backlog audit only commenced in ). We have completed the audits of all 24 municipalities and three municipal entities (other than the four entities mentioned above) and their outcomes are reflected in this report. Where municipalities have municipal entities under their control, the audit opinion on their financial statements is that of the consolidated financial statements. The outcomes of the three municipal entities are also included in all the statistics. Seven-year analysis ( vs ) Figure 2: Seven-year outlook on audit outcomes 45% (12) 22% (6) 33% (9) 33% (9) 30% (8) 30% (8) 37% (10) 18% (5) 52% (14) 7% (2) 11% (3) 4% (1) MFMA 78% (21) auditees 27 auditees 27 auditees 27 auditees Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Figure 2 shows that none of the auditees were able to achieve clean audits (unqualified opinions with no findings), which is of serious concern. There is no real evidence of any auditee having taken decisive steps or having progressed in giving attention to basic control disciplines over the past seven years. Although the number of disclaimed audit opinions has reduced, significantly low levels of basic controls are prevalent across the province, which is a clear warning that serious work is needed to bring about improved audit outcomes. Disclaimers of opinion, qualified opinions and a limited number of unqualified opinions still characterise the lack of transparency and governance over financial management controls in the province. Where there are improvements, these are isolated to certain operational areas and are a result of continuous material adjustments to financial statements during the audit process. Improvements also tend to be overshadowed by poor financial health, poor performance reporting and the continued unwillingness to comply with legislation that underlines the poor control environment.

27 Likewise, the key controls relating to leadership and financial and performance management stagnated over the past seven years, which cast doubt on the sustainability of the isolated progress made thus far. Auditees that have obtained an unqualified audit opinion with findings seem to stagnate at this level. This underlines the serious unwillingness to comply with legislation and transparent performance reporting that prevent auditees from moving to clean audit outcomes. It is also of concern that some auditees with unqualified audit opinions are major contributors to unauthorised and irregular expenditure. During the 2010 door-to-door visits by the AGSA, the premier made a commitment on behalf of local government that the province would go back to basics to improve audit outcomes. However, based on the above, this commitment was not honoured by the province. The overall picture of audit outcomes will not improve until all leadership structures take firm steps to decisively reverse the situation by ensuring that consequence management is implemented and the required level of assurance is provided by all assurance providers. We have had numerous intensive interactions with both the political and administrative leadership over this period. Topics included the audit outcomes of their municipalities, the root causes underpinning unfavourable outcomes and the need for a strong control environment entrenched in daily, weekly and monthly processes. During these engagements our consistent message has been that it is possible to obtain clean administration if there is a real will to change and if the leadership actively strives for quality and sustainability in executing its duties. This can be achieved by: Ownership - political and administrative leadership must take full ownership of the internal control environment. Skills - investment in appointing skilled staff. Discipline - daily disciplines must be instilled that ensure excellence in financial management, service delivery execution and compliance with legislation. Credibility - leadership must set a tone and implement processes to ensure the credibility of all the municipalities reports. Performance management systems - implementing performance management systems with clear and decisive consequences for poor performance. Governance - internal audit, audit committees and municipal public accounts committees (MPACs) need to ensure that all their activities are coordinated and contribute to the credibility of information. All levels of leadership have been slow in responding to these messages and recommendations. 2. Audit outcomes for The municipal audit outcomes shown in figure 2 reflect a net improvement in four audit outcomes from the previous year. Six auditees improved and two regressed. However, the stagnation in key controls is not aligned to the improvement in audit outcomes. The improvements were only possible as a result of audit adjustments and the use of consultants. Furthermore, there have been limited or no improvements in compliance, irregular and unauthorised expenditure remains significantly high and findings on the annual performance reports are not addressed. These are further indications of the poor state of internal controls in local government. Figure 3: Audit outcomes of municipalities per budget (excluding municipal entities) 38% (9) 24% (6) 38% (9) Audit outcomes Unqualified with findings Audit outcomes converted into the expenditure (budget) that they represent Qualified with findings 58% (R9,616 billion) 7% (R1,124 billion) 35% (R5,784 billion) Budget - Rand value Disclaimed with findings While 38% of the audit outcomes were unmodified (unqualified with findings on compliance or performance reporting) the fact that modified outcomes (qualified/disclaimed) still represented 62% of the outcomes remains a reason for concern. This concern is elevated when translating the outcomes into the budgets managed by these municipalities. 25

28 26 Although 58% of the provincial budget was managed by municipalities that obtained unqualified audit opinions, the majority of these municipalities reported irregular and unauthorised expenditure, which could raise a concern that funds might not always have been used in an economical, effective and efficient manner and is indicative of a poor control environment. In addition, all of these auditees used consultants to assist in preparing their financial statements, which were also subject to material audit adjustments. Submission and quality of financial statements Municipalities are required by the Constitution and various other legislation to be transparent and accountable for the public resources that have been provided to them. Municipalities are required to prepare financial statements according to the applicable accounting framework and relevant legislation. These financial statements must constitute transparent reports by being reliable, accurate, credible and supported by underlying records. Although there has been an improvement in submitting financial statements for audit over the past five years, their quality remains poor. The poor quality of financial statements submitted was the most common finding on compliance, reported at 96% of auditees (26). This is a similar non-compliance level to the previous year (100%: 27 auditees). The impression created is that financial statements are only prepared for compliance rather than to improve the processes of financial reporting that supports the quality of the annual financial statements being submitted. Figure 4: Quality of financial statement submitted for audit 96% (26) Outcome if NOT corrected 4% (1) 55% (15) Outcome after corrections 45% (12) Figure 4 illustrates that only one auditee, Lejweleputswa Development Agency, did not have to effect material adjustments to its financial statements during the audit process. Had adjustments not been effected, the 45% of unmodified opinions (12 auditees), would have stood at a mere 4%. While this questions the sustainability of audit outcomes, it is also an indication of an over-reliance on the audit process to identify and correct material misstatements instead of improving the basic key control disciplines. These significant adjustments to recorded balances are a clear indication of a breakdown in the control environment. Movement in the outcomes Figure 5: Movements in audit outcomes Movement Audit outcome Unqualified with findings = 12 Qualified with findings = 6 Improved Unchanged Regressed Mangaung Metro Metsimaholo Setsoto Tokologo Centlec Naledi Lejweleputswa District Thabo Mofutsanyana District Dihlabeng Nketoana Tswelopele Maluti-a-Phofung Water Lejweleputswa Development Agency Xhariep District Kopanong Masilonyana Mohokare Mafube Maluti-a-Phofung Mantsopa Disclaimed with Matjhabeng findings Moqhaka = 9 Nala Ngwathe Phumelela Colour of name indicates audit opinion from which the auditee has moved. Improvements Fezile Dabi District Letsemeng 1 Financially qualified (qualified, adverse, disclaimed with findings) Financially unqualified (unqualified with findings) Five auditees improved from qualified to unqualified audit opinions with findings, resulting in 12 auditees having unqualified audit outcomes. While it is commendable that the metro (and the entity) improved to attain unqualified audit opinions, more work is needed to comply with regulations and transparent

29 performance reporting, and to prevent occurrences of irregular and unauthorised expenditure. At most auditees where improvements were noted, the progress could be attributed to the mayor enhancing oversight and to management responding to financial issues raised during the audit. It should be noted that adjustments made during the audit process and the use of consultants contributed significantly to the improvements and, had this not been allowed, the picture would have been vastly different Another notable improvement is Naledi, which improved from a disclaimer of opinion to a qualified audit opinion. This was mainly due to the assistance provided by consultants throughout the year in financial record management and the compilation of the financial statements. The leadership at these auditees still have a great deal of work to do to ensure that clear focus is given to the basic control disciplines and that they are nurtured and institutionalised. The current improvements are only an indication that these disciplines are starting to emerge. The leadership should take firm steps to decisively address non-compliance with key legislation and defective performance reporting by ensuring that consequence management is implemented for all transgressions. Unchanged Nineteen auditees were unable to improve their audit outcomes. Seven auditees maintained an unqualified audit opinion with findings. This is, however, the audit outcome where most auditees stagnate. These municipalities became complacent at having attained an unqualified audit opinion and, despite the real danger of regressions, continually failed to respond to our audit findings. There seems to be a great focus by auditees to obtain an unqualified audit opinion. However, the same drive is absent when addressing findings on the annual performance report and compliance with legislation, which would limit unauthorised, irregular and fruitless and wasteful expenditure as well as improve their financial viability. The lack of decisive and rigorous leadership, disregard for good governance principles, and a lack of basic values governing public administration entrenched the stagnation of the eight disclaimed opinions. These municipalities again failed to provide supporting documentation for a significant number of transactions and balances in their financial statements. This created an environment that did not support accountability and was susceptible to loss through fraudulent transactions. Had the political and administrative leadership responded to our messages over a number of years, this situation could have been avoided. Regressions Despite trying to reach the goal of sound financial management and accountability across the province, two municipalities regressed in their outcomes. It was clear that these municipalities failed to properly analyse the control weaknesses in the daily financial activities and implement appropriate follow-up actions to address the root causes previously reported. In these cases, it is necessary for the provincial executive to apply measures that would ensure that role players are held accountable for any regressions. Municipal districts The province s outcomes varied from one district to the next. District municipalities had not only to coordinate development and delivery throughout the district, but also needed to play a vital supporting role in the financial management of their local municipalities. These responsibilities included the following: Coordinate the development of the district and service delivery Play a supporting role in financial management Set the example in accountability and reporting Share best practices and assist to embed them in their local municipalities Ensure that daily financial and performance management are embedded Improve internal control, governance and accountability of local government Assist local municipalities where there is a lack of skills. 27

30 Mangaung Xhariep Lejweleputswa Thabo Mof Overall Fezile Dabi 28 Figure 6: Audit outcomes per municipal district Unqualified with no findings Improved Xhariep Letsemeng Kopanong Mohokare Naledi Unqualified with findings Lejweleputswa Lejweleputswa Development Agency Masilonyana Matjhabeng Nala Tokologo Tswelopele Stagnant or little progress Qualified with findings Regressed 2 2 Fezile Dabi Mafube Metsimaholo Moqhaka Ngwathe Disclaimed with findings Mangaung Centlec Thabo Mof Dihlabeng Maluti-A-Phofung Maluti-A-Phofung Water Mantsopa Nketoana Phumelela Setsoto District Municipality/ Metro 1 3. Financial statement areas qualified The purpose of the annual audit of the financial statements is to provide the users with an opinion on whether the financial statements fairly present, in all material respects, the key financial information for the reporting period in accordance with the financial framework and applicable legislation. The audit provides the users with reasonable assurance on the degree to which the financial statements are reliable and credible, on the basis that the audit procedures performed did not identify any material errors or omissions in the financial statements. We use the term material misstatement to refer to such material errors, omissions or limitations. The misstatements detected during the audit were reported to management; however, 15 auditees (55%) were not able to make the necessary corrections or provide the required supporting documentation to avoid receiving a modified opinion on their financial statements. The main reasons for not making the corrections were: a lack of adequate systems to identify and accurately record all transactions in the appropriate accounts the unavailability of supporting documentation for transactions and balances recorded in the financial statements. a general lack of effective monthly reporting. An analysis of the outcomes per district is shown in figure 6. The district municipalities did not effectively execute their roles by assisting the local municipalities. District municipalities also failed to set the example in the province as none of them obtained clean audit outcomes despite their limited functions. District municipalities should become centres of excellence to support and assist local municipalities. They can make a positive contribution towards improving local government s internal control, governance and accountability. This challenges all district leaders to realise their potential and take the lead in restoring local government accountability. Furthermore, district municipalities should become service hubs by employing engineers that can be deployed to assist local municipalities where technical shortcomings exist. Establishing specialist units at a district level will attract the skills desired to ensure that infrastructure assets are properly maintained and promote uninterrupted service delivery.

31 Figure 7: The most common financial statement qualification areas Revenue Receivables Expenditure Property, infrastructure, plant and equipment Findings addressed from previous year Improved 9 Stagnant New finding Regressed Repeat finding Figure 7 illustrates the areas of the financial statements that were most commonly qualified. The slow movement in addressing qualifications is due to the political leadership and management not responding adequately to our message to embed controls, particularly those relating to preparing monthly financial statements and implementing action plans to address the root causes of audit findings. Revenue (13 auditees) and receivables (12 auditees) remain an area of concern. The systems and controls are not adequate to properly account for revenue. Incorrect billing throughout the year due to the lack of controls over meter readings led to the high number of municipalities with qualifications on revenue and receivables. We also identified differences on the system between the valuation roll and property values against which rates are charged. Sufficient appropriate audit evidence was not provided to confirm that debtors were valid and owed the municipality, as long outstanding debtors were not followed up. The regression in the number of auditees with qualifications on expenditure was mainly due to incorrect classifications and inadequate supporting documentation for the expenditure incurred. The causes of incorrect classification include capital expenditure that is incorrectly classified as operational expenses or an incorrect classification between various expenditure line items. Although property, infrastructure and equipment improved from 15 auditees last year to 11 auditees this year, it remains a concern as auditees still did not get their asset registers right. This is despite significant investments in consultants over a number of years. Way forward To ensure that the financial statements improve, the leadership must create an environment that facilitates accurate and complete financial reporting to assist chief financial officers and consultants to meet their deliverables. Furthermore, municipalities should: 4. address the vacancies and lack of competencies at the chief financial officer level and in the finance units by appointing competent personnel. Intensive training programmes should be implemented to up-skill existing staff to enhance their competence in their daily functions. This is not limited to financial staff, but includes the appointment of qualified engineers and technicians to assist with the condition assessment of assets, which filters through to the asset register. clearly assign roles and responsibilities to staff in the finance units. implement a performance management system for all officials with clear consequence management for poor performance and transgressions. ensure that the control environment is strengthened by introducing key oversight controls. Preparing reliable monthly and quarterly financial statements, as well as daily and monthly reconciliations, will ensure that transactions, balances and disclosures are accurately and completely recorded. Local government needs to get back to basics to improve its audit outcomes and make it sustainable. In this way, it will not rely on the audit process to improve audit outcomes by making material adjustments. Annual performance report To facilitate transparency, responsiveness and accountability, municipalities should have an effective performance reporting system. The public should have access to performance information that indicates what has been achieved with the amounts allocated to municipalities. 29

32 30 Service delivery initiatives in the local government sector are determined by public participation in developing and/or updating municipal IDPs and SDBIPs. These plans should form the basis for the allocation of budgets each year. Municipalities are required to measure their service delivery against the performance indicators and targets set for each of their predetermined performance objectives, and to report on this in their annual performance reports. We audit the annual performance reports to determine whether the information in these reports is useful and reliable. Submission of the annual performance report for auditing Of the 27 auditees, 26 (96%) submitted an annual performance report for audit ( : 96%). During the current year, Phumelela did not submit a performance report ( : Mafube and : Kopanong, Masilonyana and Nala). Although the submission of annual performance reports improved, the quality was poor as only three (12%) were of the required standard and did not require adjustments during the audit process to avoid findings ( : 2 [8%]). One auditee avoided findings after it made material adjustments to the annual performance report. The quality of performance reports was poor because the leadership did not use them as a tool to monitor and drive service delivery. The poor quality of performance reports is analysed further below Movement in outcomes on the annual performance report Figure 8 shows the number of municipalities with material findings on the quality of their annual performance reports over the past three years, together with the number of municipalities with findings on usefulness and reliability. Since Phumelela ( : Mafube) did not submit an annual performance report it has been excluded from the analysis on usefulness and reliability. Figure 8: Movement in outcomes of annual performance reports and findings on usefulness and reliability % (4) 15% (4) 8% (2) Budget R0,75 billion (5%) 73% (19) [ : 22 (85%)] Usefulness 27%(7) [ : 4] The following auditees had no material findings: Thabo Mofutsanyana district Xhariep district Kopanong Nketoana Budget R15,62 billion (95%) 85% (22) 85% (22) 92% (22) Reliability 73% (19) [ : 21 (81%)] 27%(7) [ : 5] It must be noted, however, that the provision of basic services such as water, sanitation, electricity and refuse removal did not form part of the key performance indicators (KPIs) at Kopanong. This was due to a lack of oversight when preparing the IDP and SDBIP as the municipality did not have a director responsible for performance information to drive the process. Therefore it is not

33 possible to determine the progress made in terms of the MTSF indicators and targets to provide service delivery. At Nketoana, however, the provision of basic services is a KPI. The targets for providing basic water, sanitation and refuse removal have all been achieved. This is aided by the fact that the municipality has six engineers and 20 staff to support them. Work is still required to improve the quality and credibility of the annual performance reports. Over the past four years we have conducted numerous sessions at which recommendations on improving the quality of these reports were discussed. The leadership has generally been slow to respond to these messages. However, where the messages were taken seriously, the quality of the annual performance reports have improved. This points to the risk that municipalities prepare annual performance reports to comply with legislation rather than to use them as tools to drive their business and continually improve service delivery. Findings on usefulness and reliability Usefulness refers to setting objectives, indicators and targets in the planning document, and how they are reported in the annual performance report. We measured the usefulness of the reported information against the criteria of presentation, consistency, relevance and measurability. Figure 8 shows that there was an improvement in the usefulness of performance information as seven auditees ( : four) provided performance information that was useful to achieving their KPIs: The reason the other 19 auditees could not report on performance indicators that were useful is the manner in which these targets were set. Auditees did not set specific, measurable, attainable, realistic and time-bound (SMART) goals. This led to performance criteria that could not be measured properly to determine whether the required level of performance had been achieved or progress had been made towards the required level of performance at any point in time. Furthermore, these auditees often set performance targets that were not relevant to their mandate or core function, which is service delivery. As a result, even though they achieved their planned targets, they made no difference in the lives of the communities they serve by improving the quality of the services they deliver. The usefulness of targets and indicators also impacts the auditees ability to collect information about actual performance and the reliability of actual reported performance. It is imperative that the usefulness of the planned objectives, indicators and targets as contained in the IDPs and SDBIPs receive urgent attention as they provide the foundation for measuring municipal performance. The most common findings on usefulness were the following: Reported performance information was not consistent with planned objectives, indicators/measures and targets Indicators/measures were not well defined Indicators/measures were not verifiable. Reliability refers to the accuracy, completeness and validity of the actual reported performance against the planned objectives, indicators and targets. Figure 8 shows that there was an improvement in the reliability of performance information as seven auditees ( : 5) could provide adequate supporting documentation that corroborated the indicators reported. Findings on reliability result from municipalities not adequately considering the evidence required to prove performance when setting their objectives, indicators and targets, and not providing appropriate evidence to support their actual reported performance. The most common finding on usefulness was that reported performance information was not valid, accurate and complete. The credibility and quality of performance reports has a direct impact on the effective, efficient and economical allocation of resources to service delivery initiatives by councils. Figure 8 shows that the municipalities that were unable to provide credible performance reports managed R15,77 billion (95%) of the total local government budget within the province. There is a risk that these municipalities in-year monitoring, oversight and decision-making processes could have been based on information that was not credible. This could have had a negative impact on the manner in which services were delivered. Compliance with legislation relating to the annual performance report Findings relating to managing strategic planning and performance were reported at 78% of municipalities (21) and were the fourth most common non-compliance area reported. This is a stagnation compared to the previous year where this area was reported at 81% of municipalities (22). A lack of appropriate performance and reporting systems and a failure to set measurable indicators and targets were the most common findings relating to this compliance area. Way forward For citizens to reap the benefits of a well-functioning local government, municipal councils must empower themselves with credible performance information. They should therefore implement the following: Take ownership of developing and maintaining proper systems and processes for managing and reporting service delivery information. This implies that the council must scrutinise all service delivery plans (including the IDP, SDBIP, and budget), regularly monitor credible in- 31

34 32 year service delivery reports and ensure that corrective action is taken when actual performance is below expectations. MPACs, audit committees and internal audit units should assist councils to make informed decisions by providing assurance that planning documents and in-year reports on actual performance are credible. In addition, these committees, together with council, should exercise inyear oversight of performance to ensure that money is used for its intended purpose and that the anticipated return on investment is achieved. Council and the administrative leadership should ensure that government priorities contained in the State of the nation and State of the province addresses that affect municipalities are included in their planning documents (IDPs and SDBIPs). The Provincial Treasury and the provincial CoGTA, in collaboration with the National Treasury and national CoGTA, should assist municipalities to improve the usefulness of their performance information by setting standard KPIs for basic services that can be included in the SDBIPs of the local government sector. The leadership should pay attention to performance planning, reporting and monitoring if the back-to-basics initiative is to succeed. The initiative was introduced by the minister of CoGTA and is based on the principles of public participation, service delivery, good governance, sound financial management and building administrative and institutional capacity in municipalities. The National Treasury and the national CoGTA should research the possible implementation of computerised systems to facilitate standardised predetermined objectives reporting. Status of compliance with key legislation and movement Compliance with key legislation stagnated from the previous year (100%) as most auditees were unwilling to comply with legislation. The auditees focused on having a financially unqualified audit opinion instead of executing the business processes according to legislation throughout the year. The effect of these high levels of non-compliance is quantified by the R934 million in irregular expenditure, R2,33 billion in unauthorised expenditure and R272 million in fruitless and wasteful expenditure incurred by auditees. Irregular expenditure at 73% (19), unauthorised expenditure at 77% (17) and fruitless and wasteful expenditure at 75% of auditees (18) was not investigated to determine whether any person was liable. This is a clear indication that there were no consequences for transgressions, and therefore no deterrent for incurring these types of expenditure. It is of concern that 58% of the auditees (7) that have achieved financially unqualified opinions still have more than 10 material findings on compliance with legislation. This is an indication that they are still a long way from obtaining clean opinions. Figure 9 shows the most common compliance areas, other than those relating to annual financial statements and performance and strategic management, which are already dealt with in sections 2 and 4 respectively. Figure 9: Most common compliance areas reported for unauthorised, irregular as well as fruitless and wasteful expenditure, and consequence, procurement and contract management Prevention of unauthorised, irregular and/or fruitless and wasteful expenditure 93% (25) 5. Compliance Municipalities are required to deliver services to their communities according to the legislative prescripts applicable to them. The applicable legislation is based on the principles of good governance, accountability and transparency and regulates the stewardship of the public resources at their disposal. We annually audit and report on compliance with legislation applicable to financial matters, financial management and other related matters. 85% (23) Management of procurement and or contracts 89% (24) 85% (23) Consequence management 74% (20) 70% (19) Stagnant or little progress Regressed

35 Unauthorised, irregular as well as fruitless and wasteful expenditure Figure 10: Trends in unauthorised, irregular as well as fruitless and wasteful expenditure The Municipal Finance Management Act, No 56 of 2003 (MFMA), requires accounting officers to take reasonable steps to prevent unauthorised, irregular as well as fruitless and wasteful expenditure. A persistent disregard for strengthening this control may create opportunities for fraudulent transactions. Unauthorised expenditure R2,330 billion R2,265 billion 1 Where municipalities are unable to prevent such expenditure, the MFMA requires the amounts to be disclosed in the financial statements and investigated to determine liability. Where liability can be proven, the accounting officer must take disciplinary and/or criminal action against the liable employees and must institute procedures for the recovery of funds. Only after a committee of council certifies that such expenditure is not recoverable may it be written off. Irregular expenditure R934 million R910 million R2,538 billion 1 Figure 10 shows the three-year trend of unauthorised, irregular as well as fruitless and wasteful expenditure that should have been prevented by municipalities, while figure 11 shows that unauthorised, irregular as well as fruitless and wasteful expenditure totalling R7,28 billion has not been investigated and dealt with as required by the MFMA. Consequently, municipalities have not determined whether any of this expenditure resulted in money being wasted or if fraud was committed. Fruitless and wasteful expenditure R1,202 billion R272 million R183 million R190 million 1 Footnote 1 Reconciliation to the amount in the previous year s general report is as follows: Unauthorised Irregular Fruitless and wasteful Previous year s amount R2,033 billion R1,060 billion R118 million Add Nala outstanding in previous year R98 million R29 million R11 million Add/deduct restatements of previous year s figures R134 million (R179 million) R54 million Total restated amount R2,265 billion R910 million R183 million 33

36 34 Figure 11: Previous year s unauthorised, irregular and fruitless and wasteful expenditure not dealt with Unauthorised expenditure Irregular expenditure Fruitless and wasteful expenditure R1,747 billion R406 million Unauthorised expenditure R5,127 billion Unauthorised expenditure is expenditure that was not incurred according to the approved budget. Of the unauthorised expenditure of R2,33 billion incurred in , 100% was a result of overspending the approved budget. Auditees identified and disclosed only 36% of the unauthorised expenditure. It is of concern that management does not prevent and detect unauthorised expenditure. Only three municipalities did not incur unauthorised expenditure: Fezile Dabi district, Lejweleputswa district and Thabo Mofutsanyana district. Nala did not disclose any unauthorised expenditure; however, as it did receive a qualification on the completeness of unauthorised expenditure, the full extent could not be determined. At 17 municipalities (77%) the unauthorised expenditure reported in the previous year was not investigated to determine whether any officials could be held liable. This amounts to R5,127 billion of unauthorised expenditure not investigated. The lack of investigation undermines accountability and promotes a culture of tolerance for transgressions of legislation. Non-cash items such as depreciation and the impairment of property, infrastructure and equipment, and receivables are included in the approved municipal budgets. The incorrect estimation of these non-cash items accounted for R1,599 billion of the unauthorised expenditure (69%) incurred by local government in the province during The depreciation was underestimated because municipalities did not maintain full records of property, infrastructure and equipment throughout the year. In most cases the records relating to assets were only updated at the year-end. Therefore, depreciation was under-recorded during the year, leading to unauthorised expenditure when the depreciation was calculated for the financial statements. This correlates to the qualifications on property, infrastructure and equipment, and the adjustments made as a result of the audit process. Similarly, the impairment of debtors is only undertaken when preparing the financial statements, which results in incorrect estimations for budget purposes. The lack of adequate budget processes, credible in-year reports and monitoring of expenditure incurred during the year were the main factors that gave rise to unauthorised expenditure. The significant unauthorised expenditure incurred by municipalities puts further pressure on the province s severe cash flow constraints as detailed in section 9 on financial viability. Proper budgeting is needed to ensure that non-cash items are covered by budgeted revenue. This will ensure that in future, the municipalities have adequate resources to replace depleted infrastructure assets. Furthermore, daily and monthly disciplines need to be implemented and monitored to ensure that cash flow and budget management are effective in preventing unauthorised expenditure. Irregular expenditure with a focus on supply chain management Irregular expenditure is expenditure that was not incurred in the manner prescribed by legislation. Such expenditure does not necessarily mean that money was wasted or that fraud had been committed, but is rather an indicator that legislation is not followed. This includes legislation aimed at ensuring that procurement processes are competitive and fair. It is the role of council to investigate all irregular expenditure to determine whether it constitutes misconduct, fraud or losses that should be recovered and, where deemed necessary, to recover these expenditures. Almost all irregular expenditure (99%) was the result of not following SCM prescripts. During the audit of compliance with the requirements of SCM legislation, we tested awards consisting of 552 contracts with an approximate value of R2,809 billion, as well as quotations with an approximate value of R99,7 million. Figure 12 shows the number of auditees with SCM findings as well as the number of auditees with material findings on compliance reported in their respective audit reports.

37 Figure 12: Status of supply chain management Figure 13: Findings on supply chain management 4% (1) 4% (1) Uncompetitive or unfair procurement processes 7% (2) 85% (23) 7% (2) 11% (3) Inadequate contract management 15% (4) 59% (16) Awards to employees, councillors and other state officials 33% (9) 37% (10) Awards to close family members of employees and councillors 30% (8) 26% (7) 89% (24) 85% (23) Limitation on planned scope of audit of awards 22% (6) 15% (4) With findings With material findings auditees 27 auditees With no findings With findings With material findings Although the number of auditees with material findings stagnated as indicated in figure 12, the overall number of findings regressed as depicted in figure 13. This resulted in an increase in irregular expenditure, which has an alarmingly high value. Only the Lejweleputswa Development Agency had no findings on SCM in the current and previous year. Due to the small size of the entity, they had a limited number of transactions. Improved Stagnant or little progress Regressed Figure 13 shows the number of auditees with findings in the key SCM risk areas that we audit and provides an indication of the movement from the previous year. The SCM transgressions that give rise to irregular expenditure are driven by conflicts of interest and not following SCM controls. These transgressions are characterised by the political and administrative leadership not leading by example and/or not setting a tone that results in a low tolerance for deviations from controls (a lack of consequences for transgressions). Persons with conflicts of interest may unfairly influence the outcomes of awards in favour of a particular supplier. Conflict of interest awards to councillors, employees, their close family and persons employed by the state amount to R165,2 million (233 awards) for the year under review. Included in this amount are awards to the value of R71,3 million (176 awards) to employees, councillors and other state officials and awards to the value of R93,9 million (57 awards) made in favour of close family members of the councillors and employees. Awards to employees, councillors and other state officials are specifically prohibited by legislation. Awards to close family members of employees and 35

38 36 councillors are not specifically prohibited, but legislation requires disclosure by both the supplier and employee of the interest. It also requires municipalities to have processes to ensure fair, transparent and cost-effective procurement that guarantee the effective, efficient and economical use of resources. All awards to close family members and employees are required to be disclosed in the financial statements. As much as 93% of the number of awards to close family members of employees and councillors did not meet one or more of these requirements. Findings on uncompetitive or unfair procurement processes relate to specific procurement processes that should have been followed. The most common findings in this area related to procurement without obtaining three written quotes, procurement from suppliers without proof that their tax affairs were in order and the declaration of interest not being submitted by providers. Another common finding is procurement without inviting competitive bids and/or deviations that were not justified. Contract management refers to how contracts are managed after they are awarded. The most common findings related to the lack of performance monitoring by contractors, contracts being amended or extended without tabling the reasons in council and the failure to register construction projects with the Construction Industry Development Board within 21 days. Payments on contracts that were amended or extended without approval are the main cause of irregular expenditure related to non-compliance with contract management legislation. These overpayments negate the benefits derived from a competitive bidding process and may be due to incentives provided by suppliers. This requires further investigation. Awards to the value of R125,7 million (127 awards) requested for audit were not submitted due to limitations imposed by management. As a result, the findings in this section of the report and the irregular expenditure reported may not be complete. The possibility that these awards were deliberately withheld to conceal fraudulent transactions cannot be ruled out and requires further investigation as per the MFMA. The contribution of these risk areas to the SCM-related irregular expenditure, which amounts to R925 million (99%) of the total irregular expenditure of R934 million during the year, is estimated as follows: Non-compliance with procurement process requirements R518 million (56%). Procurement without a competitive bidding or quotation process or noncompliance with legislation on contract management R407 million (44%). We did not investigate the irregular expenditure, as that is the role of the accounting officer and oversight bodies. We determined through our normal audits that R836,8 million (90,5%) represented goods and services that were received despite the normal processes governing procurement not being followed. However, goods and services of R0,8 million (0,1%) were not received at Xhariep district. At Masilonyana, it could not be determined whether goods and services with a value of R0,6 million (0,1%) was received due to a limitation of scope. The balance of R86,7 million was not audited, and therefore we cannot confirm that goods and services had been received; however, no risk existed to indicate that it was not received. A further risk is that these transgressions are the result of either a lack of competence or an incentive to award contracts to related parties where the benefit of goods and services may not be fully realised. The high incidence of findings of uncompetitive or unfair procurement processes (25 auditees) is of particular concern and should be investigated further. Irregular expenditure in the province increased by R24 million (3%) when compared to the restated amount, which remains a concern. At R934 million, it amounts to 7% of the province s local government budget (excluding employee-related costs). All auditees, except the Thabo Mofutsanyana district, incurred irregular expenditure. In total, 86% of the irregular expenditure was a result of non-compliance in the year under review, while the rest (14%) was expenditure resulting from transgressions in previous years. Auditees identified only 34% of the reported irregular expenditure, with the rest being identified during the audit process. This means that auditees still do not have adequate processes to prevent and detect irregular expenditure. If auditees could detect irregular expenditure, then it could be prevented. The problem of auditees relying on the auditors to identify irregular expenditure as they do not have systems to do so is not sustainable and places undue pressure on audit fees and reporting deadlines. The cumulative balance of irregular expenditure included the current year s irregular expenditure that should have been prevented and the previous years irregular expenditure that had not yet been dealt with as required by legislation. At the end of the year, this amounted to R2,681 billion, which is reconciled as follows: Opening balance R2,248 billion Less: written off R0,501 billion Balance not dealt with R1,747 billion Incurred during year R0,934 billion Closing balance R2,681 billion Our audits also identified that at 19 auditees (73%), the accounting officer and/or oversight bodies did not investigate the previous year s irregular expenditure to determine whether any person was liable for the expenditure.

39 Consequently, auditees did not determine whether the irregularities constituted fraud or whether any money had been wasted. Investigation is of utmost importance as we identified the following possible fraud indicators: A trend of often using the same preferred supplier Possible fictitious quotations submitted by suppliers False declarations of interest Auditees deliberately not following the SCM processes and purchasing goods that are not needed, which questions whether value for money was received. One of the main reasons for incurring irregular expenditure is that credible procurement plans were not developed, which then filtered through to project plans. As a result, auditees did not follow adequate procurement processes, which resulted in crisis management, e.g. invalid deviations. Other reasons included a disregard for procurement processes by officials, a lack of controls over SCM processes, SCM officials not being trained and vacancies in SCM units. The lack of consequences supports these actions. Eighteen auditees (67%) did not have a head of SCM appointed at year-end and, in most instances, the position had been vacant for over two years. As a result, there was a lack of transparency during procurement processes that hampered competitiveness. It is the municipal manager s responsibility to implement systems and processes that ensure compliance with ethical business practices. The repeat and new material findings on SCM, as well as the high occurrence of irregular expenditure, show that much work needs to be done to build the ethical culture required to ensure sustained compliance with SCM prescripts. Fruitless and wasteful expenditure Fruitless and wasteful expenditure is expenditure that was made in vain and that would have been avoided had reasonable care been taken. Fruitless and wasteful expenditure of R272 million was incurred at 26 auditees and related mostly to penalties and interest on late payments that could have been avoided. Only the Lejweleputswa district did not incur any fruitless and wasteful expenditure. The significant increase in fruitless and wasteful expenditure, by 49% since the previous year, is mainly due to the increase in interest on overdue accounts, including significant amounts owed to Eskom. This is an indicator of the poor state of financial health in the province as detailed in section 9. At 18 auditees (75%) the previous year s fruitless and wasteful expenditure was not investigated by the municipal manager and council to determine if any person was liable for the expenditure. This amounts to R406 million in fruitless and wasteful expenditure not investigated. Accounting officers (municipal managers) and oversight bodies (MPAC and councils) should insist on credible in-year reporting to monitor and better control this type of expenditure during the year. All fruitless and wasteful expenditure should be properly investigated and recovered from officials where possible. Way forward The findings on unauthorised, irregular, fruitless and wasteful expenditure, and compliance with legislation were due to weak control environments. Good governance and sound financial management will ensure that local government resources are used in an economical, effective, efficient and transparent manner for the benefit of citizens. The following recommendations should be implemented to strengthen the control environment: 6. The political and administrative leadership should set a tone of zero tolerance for transgressions of legislation and conflicts of interest. Decisive action should be taken against those that breach the requirements of legislation. Credible procurement plans, which then filter through to project plans, should be drafted, approved and implemented. The plan should be followed to avoid unjustified deviations from procurement processes due to poor planning. Audit committees and internal audit units should assist by identifying breaches of legislation and reporting these breaches to the leadership for action to be taken against those responsible. Councils and their MPACs should investigate all the unauthorised, irregular as well as fruitless and wasteful expenditure that has not been dealt with to determine liability. Once liability has been established, the actions required by section 32 of the MFMA should be enforced Oversight role players (council and MPAC) must hold accounting officers and senior management accountable for providing the desired level of assurance that will result in improved audit outcomes. Human resource management Human resource management is effective if adequate, sufficiently skilled staff are in place, and if staff performance and productivity are properly managed. The effectiveness of human resource management is critical as it has a direct bearing on building and maintaining sound institutional and administrative capabilities. 37

40 The overall human resource management control environment within auditees stagnated due to continued instability and vacancies in key positions, and the lack of a competent workforce. This highlights the fact that the lack of improvement in human resource management is a root cause that hampers improvement in audit outcomes. Figure 15: Municipalities with vacancies at year end Municipal managers and chief executive officers (6) 15% (4) 7% (2) 38 Management of vacancies Figure 14 shows the correlation between the average number of months that key officials (municipal managers/chief executive officers and chief financial officers) had been in their positions and the auditees audit outcomes. It is evident that instability in key positions contributed to auditees being unable to attain clean audits, as municipal managers/chief executive officers and chief financial officers were in their positions for an average of less than two years. Stability in key positions is, however, only the foundation required to build a sound control environment that is conducive to oversight and accountability. It is critical to fill all positions, including the vacancies, with competent and skilled individuals who can adequately manage and mitigate the risks within the control environment and promote the efficient and economic delivery of services. This should be complemented by zero tolerance for transgressions and poor performance. Figure 14: Stability in key positions (municipal manager/ chief executive officers and chief financial officers) per audit outcome Chief financial officers (4) Heads of SCM (18) Vacant for less than 6 months 7% (2) 4% (1) 7% (2) Vacant for 6 months or more Figure 16: Average vacancy period (months) Municipal managers (6) 8 months 63% (17) Improved Regressed Chief financial officers (4) 15 months Heads of SCM (18) 20 months 23 months 23 months 16 months Unqualified with findings Qualified with findings Disclaimed with findings The number of vacancies within leadership positions and the average vacancy period are depicted in figures 15 and 16. Significant vacancies within key positions, or staff supporting these key positions, were identified at 67% of auditees. Although vacancies in the positions of municipal manager/chief executive officer and chief financial officer were not significant at year-end, as depicted in figure 15, stability is a concern as indicated in figure 14. Of greater concern is that the average tenure of chief financial officers was seven months at the disclaimed auditees. This places severe pressure on the auditees ability to perform all tasks adequately. We are concerned about the six vacant municipal manager and chief executive officer positions at year end and the instability in these positions. These vacant posts are filled by officials in an acting capacity. However, these acting officials

41 also have to fulfil the duties of their own posts. Vacancies for extended periods and instability at this level do not serve the interests of accountability. The significant number of vacancies in the head of SCM position filters through to the significant number of findings on SCM and the high occurrence of irregular expenditure. Contract end dates and their subsequent renewal have an impact on the positions filled. If not managed properly, it can negatively impact the municipalities performance, the audit process and, ultimately, the audit outcome. Competencies and qualifications of key positions The MFMA requires officials to meet prescribed competency levels in financial management and SCM. This is supported by the Municipal regulations on minimum competency levels, which sets the required levels of competence for accounting officers, senior managers, finance officials and other officials responsible for municipalities SCM. The financial management and governance competencies ensure that chief financial officers are able to prepare credible and accurate financial reports on municipalities accounts. As illustrated in figure 17, most officials have obtained the required qualifications and, with the exception of heads of SCM, there is a high level of compliance with the minimum competencies regulations. Although most (61%) chief financial officers are qualified and meet the minimum competencies requirements, we are concerned that these competencies did not translate into credible financial statements. This picture is even worse if we consider that 11 of the 12 unqualified outcomes were achieved through audit adjustments as part of the audit process and the use of consultants. In addition, all auditees appointed consultants to assist with the preparation of their financial statements. This is an indication that chief financial officers did not exercise adequate leadership by ensuring that basic daily and monthly key controls were implemented and monitored and that staff knew and understood their roles and responsibilities. Furthermore, they did not implement adequate performance and consequence management to hold staff accountable where staff did not perform their responsibilities or performed poorly. Consequence management also needs to be exercised by the accounting officers where chief financial officers are not performing their duties. The competencies of staff supporting the chief financial officer are also of concern as support staff have an impact on improvements in the effective operation of basic daily and monthly controls. The lack of appropriate competencies was identified as a main root cause of the slow progress towards clean audit outcomes at 78% of the auditees. The head of SCM position is a major area of concern as only three heads of SCM are fully competent, while 18 posts are vacant. This is one of the reasons for the high recurrence of SCM findings and irregular expenditure. Of further concern is that most municipalities that had heads of SCM still incurred irregular expenditure, which indicates poor performance management and a lack of consequences. Figure 17: Achievement of minimum competencies 76% (16) Municipal manager/ceo (21 filled positions) 78% (18) 67% (14) 61% (14) Required qualification level met Chief financial officer (23 filled positions) 78% (7) 33% (3) Head of SCM (9 filled positions) Minimum competencies obtained Note: The graph above indicates the required minimum competencies obtained. Below is an analysis of the remaining officials: Municipal manager/chief Chief financial officer executive officer Competencies not assessed/limitation; we were therefore unable to conclude whether all competencies were obtained Head of SCM Minimum competencies not obtained Other skills-related matters Vacancies and the competencies of key officials do not only affect financial administration, but also service delivery as there is a shortage of skilled technical staff (engineers) in the province. Twelve auditees (44%) did not have any engineering staff, while at eight auditees (30%) only some of the engineering positions had been filled. The four districts did not budget or appoint engineers. Districts have the opportunity to become service hubs by employing 39

42 40 engineers that can be deployed to assist local municipalities where technical shortcomings exist. The shortage of skilled technical staff had an impact on service delivery as the infrastructure to deliver services was not adequately maintained or upgraded. This further filtered to the auditees abilities to render proper services to their communities. Adequate succession planning was not in place to ensure that skilled and experienced technical staff were retained or replaced. The provincial leadership s commitment in the previous year to allocate interns to municipalities in an attempt to address skills shortages in the finance units was only partially honoured as CoGTA only seconded a limited number of interns. The interns were mostly used to assist internal audit, for crisis management and to fill vacancies. They were not allocated skilled officials for mentoring or training. As a result, the interns were not rotated within the finance unit to obtain exposure to the various disciplines of municipal finance. Performance management As indicated in section 12, a lack of consequences for poor performance and transgressions was identified as a root cause of poor audit outcomes at 74% of auditees. When officials are not accountable for their actions, the perception is created that poor performance and unacceptable behaviour and their results are acceptable and tolerated. Where a shortage of skills was identified as the cause of poor performance, appropriate training should be given to empower staff to perform their duties effectively. Although the majority of municipalities did have performance contracts for senior management, they were not actively and regularly monitored, or used as a tool to drive good performance. Furthermore, there was no performance management system for employees other than senior managers at 15 auditees (56%), which did not provide an enabling environment for effective accountability. Way forward As indicated above effective human resource management is a key driver in building a sound financial and performance control environment that is conducive to oversight and accountability. It is therefore critical that the following areas relating to consequence management, management of vacancies and maintaining a skilled and qualified workforce are addressed: To have a meaningful and sustained improvement in the control environment, municipalities should continue to ensure stability in key positions. The process of creating stability within key positions should also entail a thorough analysis of the current staff establishment of municipalities and their alignment to the strategic objectives of municipalities in particular. 7. Leadership should ensure that vacant posts have proper job descriptions and are filled in time with competent and skilled staff. A particular focus should be on the head of SCM position. Councils should ensure that performance agreements are signed with the municipal managers and section 57 managers, and that regular inyear performance monitoring takes place. Where performance is not at the level required, appropriate corrective measures should be taken. Where officials have been equipped with the relevant qualifications and competencies, performance management processes should be implemented in line with the staff development process. Councils should also monitor the performance of municipal managers throughout the year. Council should, however, ensure that this monitoring is done based on accurate and credible information. The credibility and accuracy of the reports submitted to council should be assured by council committees such as MPAC and the audit committees. Leadership should prioritise appointing skilled technical staff to assist with improving service delivery. Use of consultants in the areas of financial and performance reporting Our audit included an assessment of the work performed by consultants at municipalities. Although we acknowledge the need to appoint consultants to assist the public service, this must be needs-driven, with an emphasis on value for money, proper planning and monitoring, and the transfer of skills. Local government relied heavily on consultants, with no requisite investment in their own skills. They did not focus on improving the internal control environment through the effective operation of daily and monthly controls. Of concern is that consultants have taken more ownership than management to assist with the audit process at certain auditees. All 27 auditees made use of consultants for financial reporting. During the current year, R130 million (including R30 million paid by COGTA) ( : R116 million including R36 million paid by COGTA) was spent on consultants for financial reporting purposes. Of this amount, R9 million was funded through the MSIG and the FMG. The financial reporting services provided by consultants included preparing financial statements and related accounting processes such as preparing and reconciling the fixed asset register to the general ledger, preparing key account reconciliations and processing transactions into the general ledger. All these services are functions that should have been performed by the chief financial officers and their finance teams.

43 Ten auditees had material uncorrected misstatements in areas that were within the consultants scope of work. Only 10 auditees made use of consultants, at a cost of R6 million, to assist them with their performance reporting. The consultants performance reporting services included assistance with preparing the IDPs, SDBIPs and the annual performance report. These are functions that should have been done by the municipal manager and his senior management team. Six auditees had material uncorrected misstatements in areas that were within the consultants scope of work. The Provincial Treasury has prepared a contract template for municipalities to assist them in appointing consultants with proper terms of reference. However three municipalities did not make use of this template as they appointed consultants without any terms of reference. In addition, six auditees appointed consultants without adequate terms of reference as they did not use the entire template. Figure 18: Reasons for using consultants Financial reporting 48% (13) 11% (3) Performance reporting 20% (2) All auditees (100%) used consultants for financial reporting during the year. Considering that preparing financial statements and the underlying financial records is one of the core responsibilities of a chief financial officer, it is of concern that consultants are still being used to discharge these functions even where chief financial officers have been appointed. This does not promote the efficient and effective use of public funds as the chief financial officer, the officials in the finance units and the consultants are all paid for the same service. Figure 19: Vacancies at finance units of auditees that used consultants 53% (12) 17% (4) 30% (7) % (11) 60% (6) 20% (2) Vacancy rate between 15 and 30% Vacancy rate above 30% Vacancy rate below 15% * All these auditees had chief financial officers Lack of skills Lack of skills and vacancies Vacancies As indicated in figure 18, the main reason for the high use of consultants is a combination of a lack of skills and the vacancies within municipalities for both financial and performance reporting. This is consistent with the reasons given in the previous year. Twenty three auditees (86%) had filled their chief financial officer positions at year-end. As only 61% of these chief financial officers were deemed competent, consultants were necessary to compensate for the lack of skills and vacancies in the finance units. The lack of competencies and skills in the finance units was reported as a root cause at 78% of auditees. Figure 19 analyses the vacancies within the finance units of municipalities where consultants were used. Finance unit vacancy rates of above 15% at 11 municipalities are of concern as this had a negative impact on the control environment and financial reporting processes. The organograms of these units should be reviewed to ensure that they are still relevant. If they are still relevant, then chief financial officers should address their high vacancy rates and the time taken to fill vacant posts.

44 Figure 20: Impact of consultants Table 2: Reasons for the lack of impact of consultants: Audit outcomes Quality of annual performance reporting Reason for lack of impact Financial reporting Performance reporting 33% (9) 20% (2) Lack of records and documents 30% 33% Other auditee ineffectiveness 00% 33% Consultants appointed too late 30% 00% 22% (6) Poor project management by the auditee 20% 17% 45% (12) 80% (8) Consultant did not deliver 20% 17% Total 100% 100% 42 Unqualified with findings Qualified with findings Disclaimed No finding on performance information With findings on performance information Figure 20 shows that the use of consultants was not effective as they did not have a significant impact on the audit outcomes. Only six (22%) of the 27 auditees that made use of consultants for financial reporting improved their audit opinion. There were limited improvements in the outcomes of the 10 municipalities that used consultants for performance reporting. Of concern is the number of auditees that received qualified/disclaimed audit opinions even with the use of consultants. Based on these results, the funds used for the services consultants did not provide a substantial benefit. The reasons for the ineffective use of consultants are documented in table 2. As indicated in table 2, the largest contributor towards the ineffective use of consultants is a lack of records and documents by the auditee, followed by the late appointment of consultants and other auditee ineffectiveness. This indicates a lack of capacity by the municipalities to adequately plan for the efficient and effective use of consultants. As such, municipalities cannot ensure that they will derive sustainable benefits and that the overall control environment and the systems within the municipality are improved with the use of consultants. In addition, at 18 auditees that used consultants (67%), skills were not transferred. This is a result of either the contracts not specifying the transfer of skills as a requirement or, where it was specified, the transfer of skills not being monitored. Other findings included poor performance management and monitoring at 16 auditees (59%) and inadequate planning and appointment processes at eight auditees (30%). Way forward The following should be addressed to use consultants more effectively and gain the most out of their appointments: The justification and extent of services to be contracted should be considered at a provincial strategic level and should be approved by the various councils. This should include the costs of contracted services versus the costs of filling positions or up-skilling staff, as well as reasons for procuring the services of consultants where there is a fully staffed finance unit.

45 8. The accounting officers should ensure that there are adequate and effective processes to manage the effective use of consultants. Transfer of skills should be included as a requirement in all contracts with consultants. This should be monitored to ensure that it is executed in terms of the contract and that sufficient time and resources are allocated to enable skills transfer. Conditional grants Government s vision and priorities are articulated in the MTSF, where the focus is on providing sustainable and reliable access to basic services including electricity, water, sanitation and refuse removal. In support of these goals, grants are provided to municipalities to upgrade their infrastructure (MIG) and build their institutional capacity (MSIG and FMG). This is meant to enable municipalities to improve coordination, accountability and performance management. These grants are conditional and may only be used for the purposes stipulated. Figure 21: Municipal infrastructure grant Figure 21 shows that 89% of the MIG was spent, yet only 42% of the planned targets relating to this grant were achieved. The risk is that municipalities spent the MIG without due regard to value for money, the economical delivery of services and compliance with SCM regulations. This is evident in figure 13, where 74% of auditees are identified as having inadequate contract management. Also of concern is that when the infrastructure has been completed, it is not properly maintained as discussed in section 9 of this report. This had a negative impact on the municipalities ability to deliver services to their communities and had implications for their financial viability, as additional funding will be required to achieve the original planned targets. The following auditees underspent their MIG funds by more than 10%: Dihlabeng (12%) Mafube (53%) Mohokare (22%) Additionally, unspent conditional grants at these three municipalities exceed cash and cash equivalents by R19,8 million, R21,5 million and R7,8 million respectively. This is a clear indication that some of these grants are being used to fund operational expenditure. Ngwathe could not provide any supporting documentation for spending R72 million in MIG funds. The total unspent conditional grants at this auditee exceeded cash and cash equivalents by R98,8 million. Five auditees did not have MIG projects as part of their performance indicators in the annual performance report. One auditee did not achieve its performance targets for spending MIG funds and two auditees did not use the full allocation for its intended purpose. 43 Municipal entities, district municipalities and the metro did not receive MIG funds. Where auditees did not include MIG projects in their performance reports or where allocations were not used for their intended purpose, the funds have been included in the classification not achieved/not assessed/limitation.

46 Figure 22: Analysis of MSIG and FMG spending Figure 23: Analysis of outcomes where targets were reported as achieved by municipalities Grants spending Areas of spending Targets achieved Status of financial and performance reporting for targets achieved R59,8 million to 24 auditees 4 auditees underspent by more than 10% 12% 13% R20,4 million 40% 35% Investment in Information systems Administrative systems for implementation of the ward participation system Limitation Other MSIG 26% (6) 74% (17) 100% (17) R56,3 million Spent Not spent 11% 22% R35,9 million 21% 46% Capacity building through appointment of interns Training Financial management reporting and upgrade of financial systems support 1 MFMA support plans and other FMG 25% (6) 75% (18) 100% (18) 1 44 Achieved Not achieved/ not assessed/ limitation Poor credibility of financial and/or predetermined objectives reporting Twenty-four municipalities received funds from the FMG and 23 received the MSIG (Mangaung metro did not receive the MSIG). The three entities: Centlec, Lejweleputswa Development Agency and Maluti-a-Phofung Water, did not receive the FMG or MSIG. Figure 22 shows how municipalities spent these grants and the capacity building areas on which they were spent. These areas were specifically selected by the National Treasury to ensure that municipal institutional capacity is strengthened. Where properly implemented, this should promote good governance and transparent and accurate reporting that will result in viable, sustainable and developmental municipalities that deliver effective services. Figure 23 shows how many of the targets set for the MSIG and FMG have been achieved and the impact that achieving these planned targets had on credible financial and/or predetermined objectives reporting. Credible financial reporting is only deemed to be achieved with clean audits, as no material adjustments to the financial statements or annual performance report would be necessary. For each of these grants, six auditees either did not include MSIG or FMG projects in their performance reports, did not use the allocations for their intended purpose or did not provide supporting documentation for spending the grants (limitation). Auditees used these grants mainly to fund operating activities rather than for their main purpose, which was to create employment with a view to sustainable capacity. Figure 23 highlights the importance of using the grant for the purpose of creating sustainable and sound financial management and not to fund operating expenditure. Most of the funding from these grants (94%) was spent; however, the targets achieved did not match the spending (MSIG 74% and FMG 75%). This

47 correlates to the levels of non-compliance with SCM requirements and the high levels of irregular expenditure reported on in section 5. Although R9 million in grants had been spent on consultants, the quality of the annual performance reports and annual financial statements submitted by auditees did not improve. The inability of municipalities to achieve the set targets prevents them from obtaining the full benefit and impact of the grant. Even though it is acceptable in terms of the grant conditions to use the funds for stipends to interns, most municipalities appointed interns as a result of vacancies and/or a lack of competencies within the municipalities. As a result, these interns did not have people to coach them. Employing interns did not make an impact, since the number of auditees with material adjustments to their financial statements did not improve from the previous year. Therefore, the role of the interns appointed and their influence on the financial audit outcomes should be revisited. They should not be seen as the solution but as a pipeline for skills development. 9. Financial viability Our audits included a high-level analysis of the auditees financial viability indicators to provide management with an overview of selected aspects of their current financial management status and practices. This analysis will enable timely identification and remedial action where the auditees operations may be at risk due to poor financial management. Furthermore, the assessment indicates whether the municipalities provide services to the citizens in a sustainable manner, as required by the constitution. The evaluation in figure 24 excludes auditees with disclaimers of opinion. This is because the information in the financial statements may not be reliable due to the significant limitations of scope, although going concern matters were raised. Therefore, this evaluation it is only based on 18 auditees. The evident regression in the financial well-being of local government is despite auditees having attained qualified or unqualified opinions. Underspending of both capital budgets by 56% of auditees (10) and conditional grants by 39% of auditees (7), placed pressure on municipalities being able to meet their service delivery obligations. Cash flows were under severe pressure due to poor payments by debtors, which reduced the cash available to pay suppliers. Due to the level of deterioration in the financial health of local and provincial government (as discussed in the PFMA General report) we saw the necessity of deeply analysing the financial viability of local government, including all 27 auditees. Figure 24: Findings on financial indicators More than 10% of debt irrecoverable 33% (6) 33% (6) 28% (5) Improved 44% (8) 39% (7) 44% (8) 67% (12) 72% (13) Stagnant or little progress 83% (15) Underspending of the capital budget by more than 10% Underspending of conditional grants by more than 10% Debtor-collection period more than 90 days Creditor-payment period more than 90 days A deficit for the year was realised A net current liability position was realised Overspending of the operating budget by more than 10% The year-end bank balance was in overdraft Regressed To deliver services to their residents and ensure the continuation of such services, municipalities need to carefully manage the money flowing in and the money being spent, as depicted in figure 25: 45

48 46 Figure 25: Cash flow management As part of our assessment, we evaluated the following four aspects that relate to this balancing act: Whether the financial position of auditees was sound Whether revenue collection was adequate to ensure a steady stream of income to finance service delivery activities (revenue management) Whether creditors were managed effectively (meeting financial obligations) Whether the spending patterns of auditees were sound. Financial Position: Financial health at a local government level deteriorated significantly during Only the Thabo Mofutsanyana district has maintained its position with no financial health concerns. This is consistent with the deterioration that has been reported at a provincial level. The net current liability position of the local municipalities (excluding the districts and entities), who are primarily responsible for service delivery, is R2,4 billion ( : R2,3 billion). Revenue Collection: In total, local municipalities are owed R9,1 billion ( : R6,9 billion) by consumers for services. However, of this amount, 75% ( : 79%) had been provided for as irrecoverable. Thus, only R2,3 billion ( : R1,4 billion) of this amount is expected to be recovered. Therefore, on average, only 25% of service debtors are deemed to be recoverable. It is doubtful whether the municipalities have the ability to collect all service revenue budgeted for the and financial years. During the current year, auditees had significant losses of water and electricity provided to communities, reported at R876 million ( : R980 million). It should be noted that four municipalities were not in a position to report on their water losses and four were not in a position to report on their electricity losses as there were no systems were to provide reliable information. Therefore these losses are likely to be understated. Water losses were due to burst water pipes, leaks and unmetered water sites. Electricity losses were due to line losses, tampering, theft and illegal connections. Management of creditors and financial obligations: To ensure financial viability, debts owed to the municipalities should be collected within 30 days. Additionally, in terms of legislation, creditors are to be paid within 30 days of receipt of invoices. Financial pressure is created by local municipalities taking an average of 585 days ( : 540 days) to collect amounts owed to them, while payments are made to creditors at an average of 254 days ( : 196 days), a period that is less than half that time. Additionally, local municipalities had contractual commitments of R1,2 billion ( : R1,4 billion), which were not included in the determination of the net current liability position of R2,4 billion. Amounts owed to Eskom total R1,5 billion as at 30 June Spending patterns: To compensate for this negative cash flow, some municipalities have resorted to using conditional grants to fund operating activities. Unspent conditional grants exceeded cash and cash equivalents at Dihlabeng, Kopanong, Mafube, Maluti-a-Phofung, Matjhabeng,

49 Mohokare, Ngwathe, Nketoana and Xhariep by R255 million ( : R129 million). Twelve auditees ( : 13) underspent their capital budgets by more than 10%. This could contribute to the communities lack of confidence that the municipality will deliver basic services like providing water and sanitation. The main reason for underspending capital budgets is the poor financial health and a shortage of skills in compiling tender specifications for capital projects as municipalities have a limited complement of engineers. Municipalities have infrastructure assets with a net book value of R29,3 billion. MFMA circular 71, issued by the National Treasury, prescribes that the maintenance expense should be 8% of the net book value of assets. Therefore R2,342 billion should have been spent on maintaining infrastructure assets. However, only R552 million (1,9%) had been spent for the year, creating a maintenance backlog of R1,8 billion. Preventative maintenance is currently limited; rather crisis management is used to solve problems after they have occurred. This will have a significant impact on the condition and useful life of assets in future, resulting in impairment and distribution losses, which will further negatively impact the financial viability and service delivery potential of local government. Way forward For local government to operate in a sustainable manner, the following should be implemented: Revenue enhancement strategies should be developed and implemented to ensure that municipalities are capacitated to generate their own revenue. Municipalities should consider including debt collection as part of their performance plans, and cascade this down to the individual performance agreements of senior managers. Improved collection patterns would assist in improving the financial viability of municipalities and will lead to increased funding being available for service delivery initiatives. Priority should be given to capacitating finance units with adequately skilled and competent people who will drive the revenue generation and collection strategies. This will ensure the financial sustainability of municipalities and improved cash flow management, including paying creditors on time. 10. Municipalities need to develop adequate local economic development strategies to generate economic activities in their areas. This will improve the standard of living of citizens and create sustainable revenue bases. Furthermore, the local economic development departments should be adequately capacitated with suitably qualified staff and adequate resources and support to implement the strategy. Strengthen controls and procurement management to stop irregular expenditure and ensure cost-effective and fair procurement. Change budget methods to ensure budgets are for critical services only. Budget properly to ensure that non-cash items are covered by budgeted revenue and the municipalities have adequate resources in future to replace depleted infrastructure assets. This will also assist in preventing unauthorised expenditure. Compile and implement infrastructure maintenance plans to ensure that proper and continuous services can be delivered to communities. This will also prevent the unwarranted deterioration of infrastructure and will limit distribution losses. Doing more with less can materialise if, among other cost saving initiatives, a concerted effort is made to curtail the extent and costs of using external service providers (consultants). Information technology systems Information technology (IT) controls ensure the confidentiality, integrity and availability of state information, enables service delivery and promotes national security. It is thus essential for good IT governance, effective IT management and a secure IT infrastructure to be in place. IT service continuity controls that do not operate effectively could negatively impact audit outcomes as financial systems forms the basis for financial reporting. Where security management and user access management controls are not operating effectively, the financial systems could be susceptible to fraud. Effective IT governance is essential for the overall well-being of an organisation s IT function and ensures that the organisation s IT control environment functions well and enables service delivery. An IT governance framework is being developed by a national coordinating and monitoring structure that was established by the minister of CoGTA. The framework is in draft format and currently undergoing a consultative process with the objective of achieving final approval and implementation during the financial year. Our audit also included an assessment of the IT controls that focus on security management, user account management and IT service continuity. There has 47

50 48 been some improvement since the previous year in the number of auditees that had findings on IT controls. The most common findings were as follows: Security management: Security management findings were reported at 84% of municipalities, which is an improvement of 12% on the previous year. The improvement can be attributed to more municipalities designing adequate IT security management controls. However, important IT security policies and procedures were not in place to provide guidance on security measures such as access authorisation and other security parameters required to prevent unauthorised access to the IT environment and municipalities confidential data. Centralised patch management systems/processes were also not established to address vulnerabilities that could create security weaknesses, corrupt system performance and financial data, or cause system unavailability. User access management: User access management findings were reported at 88% of municipalities, which is an improvement of 8% on the previous year. The improvement can be attributed to more municipalities implementing user access management policies and procedures and ensuring that they operate effectively. Documented and approved user account management procedures were, however, not in place to govern the use of the application systems. Users access rights were not reviewed to ensure that they did not have full access to the systems or rights to perform multiple functions. Information technology service continuity: Service continuity findings were reported at 80% of the municipalities, which is an improvement of 12% on the previous year. The improvement can be attributed to more municipalities implementing adequate IT service continuity controls. There was, however, no evidence to confirm that backup tapes were tested to verify that they could be restored in the event of a disaster. Backup standards and procedures had not been designed to help manage the municipalities expectations and to provide specific guidance on the procedures and responsibilities involved in the data backup and restore process. Way forward Municipal managers and mayors are encouraged to ensure that policies are approved and implemented and that the progress made in resolving findings are monitored and tracked. Furthermore, they should draft and implement a skills development strategy/plan to ensure that critical skills and capacity are developed in the IT division and that technical support skills are transferred from service providers to employees to decrease their overreliance on third parties. Provincial CoGTA and the Provincial Treasury should assist municipalities in addressing their IT findings by providing appropriate support in the form of skilled personnel, grants and training. The South African Local Government Association (SALGA) should assist municipalities in improving the skills of their IT personnel by providing appropriate training to them. Government has realised that many of the IT systems used for financial management at municipalities do not have the functionality to support all the complex and sophisticated business environments of local government. This has been a contributory factor in the poor audit outcomes achieved. The standard chart of accounts project being implemented by the National Treasury is expected to improve the financial management systems of local government. 11. Key controls A key legislated responsibility of accounting officers, senior management and officials is to implement and maintain effective and efficient systems of internal controls. As part of our audits, we assessed auditees internal controls to determine the effectiveness of their design and implementation in ensuring reliable financial and performance reporting and compliance with key legislation. To make it easier to implement corrective action, we have categorised the principles of the different components of internal control under leadership, financial and performance management and governance.

51 Figure 26: Key Controls 4% 52% 44% 7% 41% 52% Good Leadership Concerning Financial and performance management 52% 48% 4% 52% 44% Intervention required Improved 11% 41% 48% Governance 4% 41% 55% Stagnant or little progress Figure 26 provides an overall assessment of the drivers of key controls and the movement since the previous year, based on the significant internal control shortcomings identified during the audits. Overall the leadership and financial and performance management controls stagnated, while there was a slight improvement in the governance control environment. The stagnation in key controls was not aligned to the improvement in audit outcomes. This was due to the improvements in audit opinions only being possible as a result of audit adjustments and the use of consultants, and not necessarily as a result of an improvement in the control environment, which casts doubt on the sustainability of the progress made. Furthermore, there was limited or no improvement in the occurrence of non-compliance; irregular and unauthorised expenditure remained significantly high; and findings on the annual performance reports were not addressed. These are all indicative of the poor state of internal controls in local government. The slow movement in these controls remains a cause for serious concern and underlines the need for the political leadership s intervention. Implementing the basic key controls has been our focused message for the past five years and formed the basis for numerous interactions. In addition, this has been reported on in detail in four previous general reports. That the key controls have not been implemented raises questions of how serious leadership is about turning financial, performance and compliancerelated administration around. These should have been part of the back-tobasics initiative, which was the sole commitment the political leadership made during the AGSA s door-to-door visits to municipalities in Way forward Poor financial and performance management controls impact not only the audit outcomes, but also service delivery. Good management of controls is the foundation for good service delivery and clean administration. To improve internal controls in a sustainable manner, the leadership must: take ownership of key controls and ensure that adequate basic daily, weekly and monthly controls and reconciliations are effectively implemented and monitored. ensure an adequate workforce by appointing staff with the required skills and by training existing staff. This is not limited to financial staff, but includes the appointment of qualified engineers and technicians. ensure that staff know and understand their roles and responsibilities. hold staff accountable if they do not perform their responsibilities or they perform poorly. This means that if a person has been in a position for a number of years or has the required skills/qualifications but is still unable to perform the basic controls (e.g. reconciliations), appropriate action must be taken by leadership. implement governance processes that focus on project management. Assign project managers from their own staff to take ownership of, and monitor, a project or action plan. guide the work plans of internal audit units and audit committees to focus on the key internal control challenges faced by auditees and provide the leadership with focused and prompt feedback on sustainably addressing these shortcomings. ensure that recommendations from internal audit units and audit committees are developed into actions plans that are adequately implemented and monitored to ensure improved outcomes. 49

52 Root causes Our audits included an assessment of the root causes of audit findings. These root causes are constantly reported to all levels of leadership. We constantly highlight that, should these root causes not be addressed, the errors will recur and sustainable improvement will not be possible. The repetitive nature of the identified root causes over the years shows that municipalities do not address the root causes as highlighted in our messages and recommendations, but rather focus on the symptoms of findings. This is not a sustainable practice and underlines the lack of progress towards clean audits in the province. Local government needs to start doing the right things for the right reasons, with the support of the political and administrative leadership, and not only throw money at the problem, e.g. by appointing consultants, which poses its own challenges. The information that follows summarises the three most common root causes of the audit outcomes, provides recommendations to address the root causes and identifies the role players responsible for addressing such root causes. Figure 27: Root causes to be addressed Slow response by management (accounting officer and senior management) 56% Key officials or staff supporting them lack appropriate competencies 74% Lack of consequences for poor performance and transgressions 74% 100% 78% 89% Improved Stagnant or little Regressed progress Slow response to our messages Slow response by management, the accounting officer and senior management Slow response by management was not one of the top three root causes in the previous year. However, this year it is the main root cause of audit findings. This is because the action plans were still inadequate and their implementation was not monitored. There is also no improvement in the assurance provided by management and no improvement in the basic internal controls. Leadership relies heavily on consultants to assist with financial reporting, and on the external audit process to identify and correct material misstatements in the financial statements. During our regular interactions with municipal managers and senior management over the past five years, we discussed the audit and management reports, audit findings, the status of key controls, the root causes that underpin the findings and audit status, as well any new risks we identify. We also obtain and follow up on these at subsequent interactions. Despite these interactions, the commitments by leadership to address our findings, and follow up interactions, 89% of the auditees management have not taken our messages of improving audit outcomes seriously. Management has not taken timely action to address our previously reported findings and root causes. The slow movement in improving key controls is indicative of the slow response by management. The increase in auditees with this root cause is of concern and points to leadership not being serious about obtaining sustainable solutions for the findings raised in our audit reports. It also raises questions about how serious management is to turn financial, performance and compliance-related administration around, and their disregard of section 62 of the MFMA: the accounting officer is responsible for managing the financial administration of the municipality. Municipal managers should take ownership of addressing our messages by making the appropriate commitments and translating these commitments into resourced action plans. Key officials and the staff supporting them lack appropriate competencies Competencies have mostly concentrated on minimum qualifications without developing officials in the management competencies required. Therefore, while some officials had been in their positions for a number of years, they still could not perform basic key controls relating to effective leadership and management. Key officials lacking the competencies to lead and manage has resulted in vacancies not being filled on time (e.g. head of SCM), and an over-reliance on consultants and the external audit process to improve financial and performance reporting. Where employees supporting key officials could not perform the basic key controls assigned to them, no steps were taken by management to address these shortcomings in competencies or to manage poor performance. At 78% of the auditees, key officials or the staff supporting them did not possess the appropriate competencies to perform their required roles and

53 responsibilities. Appointments were also made in positions for which there were no job descriptions at five auditees (19%), which made it unlikely that the appointees understood their roles and responsibilities. This also made it difficult to determine the level of competence needed to perform the job. In addition, auditees did not always assess the competencies and performance of staff supporting the chief financial officer, head of SCM and the manager responsible for reporting on performance information, which meant that they would not be aware of any shortcomings. Another concern is the shortage of technical staff (engineers), to ensure that adequate service delivery and maintenance is provided, and that the condition of infrastructure assets is assessed. An effective leadership culture needs to be instilled by monitoring the performance of all staff and implementing interventions such as ongoing training, development, coaching and mentoring to ensure that all staff have the competencies that their positions require. Furthermore, consequences should be implemented for poor performance and transgressions. Filling critical vacancies with competent staff (e.g. head of SCM and engineers) should be prioritised. Lack of consequences for poor performance and transgressions In the previous year, the lack of consequences was a root cause at 100% of auditees. It is a root cause at 74% of auditees in the current year. This is due to consequence and/or performance management being implemented at seven auditees: Mangaung metro, Lejweleputswa district, Thabo Mofutsanyana district, Matjhabeng, Centlec, Lejweleputswa Development Agency and Maluti-a- Phofung Water. Matjhabeng addressed the poor performance of the municipal manager, who subsequently resigned. The other six auditees all received unqualified audit opinions as their leadership set a tone of good performance, which led to fewer consequence management issues. Although there was a degree of improvement in consequence management, the resulting impact on the control environment was not yet visible as these improvements were too late in the financial year. Furthermore, consequences have not been implemented against any mayors or councils. Poor performance was not managed due to inadequate performance management systems. The continued failure to hold people accountable creates the perception that inappropriate behaviour such as an unwillingness to comply with laws and regulations, and incurring irregular expenditure, is acceptable. This, in turn, creates the environment for a lack of discipline around financial and performance reporting. Poor performance therefore needs to be addressed to improve the control environment, quality of financial statements, performance reports and, thus, overall audit outcomes. Poor performance will also affect the efficiency of service delivery to the citizens. Auditees need to ensure that a robust performance management system, which is linked to strategic planning documents, is implemented. Performance agreements must be implemented at all levels. These agreements should record the expected level of performance, provide for recognition of those employees who perform well and provide for consequences in the case of poor performance. It is very important that the political and administrative leadership are proactive in implementing performance reviews and following up poor performance. This will enforce a culture of accountability. 13. The level of assurance provided and the impact of these role players on audit outcomes Better audit outcomes have been delayed because basic key internal controls in day-to-day operations have not improved. This casts doubt on the sustainability of the progress made. The lack of improvement is due to the inadequate assurance provided by all levels of assurance providers. The direct impact is that where controls are not in place, credible information is not passed up the assurance chain and the other assurance providers are hampered in executing their responsibilities of providing assurance. Those responsible for the first level of assurance are responsible for the break in the value chain. 51

54 52 Figure 28: Assurance provided by key role players Senior management chief executive officer Mayors Treasury, cooperative governance department premier s office Municipal councils Municipal public accounts committees Legislature/ NCOP, public accounts committee and portfolio committees on local government First level of assurance Management/leadership 40% 56% Municipal manager/ 4% 4% 7% 48% 45% 48% 48% Provides assurance Improved assurance Second level of assurance Internal independent assurance and oversight Internal audit units 44% First level of assurance Senior management Audit committees 11% 30% 56% 59% Provides limited/ no assurance Little progress on assurance 33% 67% Third level of assurance External independent assurance and oversight Decreased assurance 44% 56% 37% 63% Provides some assurance 100% Senior management, which includes the chief financial officer, chief information officer and head of the SCM unit, provides assurance by implementing basic financial and performance controls. The assurance provided by role players at this first level of review regressed and only a very limited number of role players were able to fully provide the required level of assurance. Municipal managers and mayors relied on senior management to implement basic financial and performance management controls. These controls include the following: Ensure proper record keeping so that complete, relevant and accurate information is accessible and available to support financial and performance reporting. Implement controls over daily and monthly processing and reconcile transactions. Prepare regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information. Review and monitor compliance with legislation. Design and implement formal controls over IT systems. The poor internal control environments were not conducive to producing accurate and reliable information. There is a risk that the leadership has used information for decision-making that may not be credible. This can impact the quality of decision making. Going forward, the human resource management challenges outlined in this report should be addressed as a matter of urgency. This includes filling all critical vacancies with the appropriate skills and competencies and holding senior management accountable for the execution of their responsibilities through a strict system of performance management. Municipal manager Municipal managers are responsible for auditees internal controls, including leadership, planning, risk management, oversight and monitoring. While municipal managers depend on senior management for designing and implementing the required financial and performance management controls, they should create an environment that helps to improve such controls. They should also implement consequence management to ensure accountability. The level of assurance provided by municipal managers was not at the level required to create an environment conducive to credible decision-making. Some municipal managers were able to provide some assurance due to the assistance received from consultants and compensating controls that validated information. This is not a sustainable practice, however, as it addressed the symptoms rather than the root causes. The present weaknesses in effective leadership, planning, risk management, and oversight and monitoring functions do not support sustainable practices that will lead to improved audit outcomes. Going forward, the leadership should create an environment that enhances controls by focusing on the following: Provide effective and ethical leadership, and exercise oversight of financial and performance reporting and compliance with legislation. Implement effective human resource management to ensure that adequate and sufficiently skilled staff are employed.