General report on the audit outcomes of local government WESTERN CAPE

Transcription

1 General report on the audit outcomes of local government WESTERN CAPE

2 Our reputation promise The Auditor-General has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

3 General report on the audit outcomes of Local Government WESTERN CAPE Our responsibility extends to citizens who trust us to make a contribution towards a better South Africa The information and insights presented in this flagship publication of my office are aimed at empowering oversight structures and local government and provincial leaders to focus on those issues that will result in reliable financial statements, credible reporting on service delivery and compliance with laws and regulations. This publication also captures the commitments that leaders have made to improve audit outcomes. AUDITOR-GENERAL: TERENCE NOMBEMBE

4 Table of contents Our reputation promise/mission... 2 FOREWORD... Error! Bookmark not defined. SECTION 1: Executive summary... 7 SECTION 2: OVERVIEW OF AUDIT OUTCOMES Summary of audit outcomes Findings arising from the audit of financial statements Findings arising from the audit of reporting on predetermined objectives Findings arising from the audit of compliance with laws and regulations SECTION 3: ROOT CAUSES OF AUDIT OUTCOMES Summary of root causes of poor audit outcomes Significant deficiencies in auditees systems of internal control Human resource management Information technology management Audit committees and internal audit units SECTION 4: INITIATIVES AND IMPACT OF KEY ROLE PLAYERS ON AUDIT OUTCOMES Assurance providers in local government Oversight by municipal public accounts committees Interactions with mayors Initiatives and commitments of key role players to improve audit outcomes Auditor-General of South Africa s initiatives to encourage clean audits SECTION 5: FINANCIAL HEALTH OF LOCAL GOVERNMENT Going concern Financial health indicators

5 KEY ROLE PLAYERS NOT PROVIDING ASSURANCE MANAGEMENT AND LEADERSHIP INTERNAL INDEPENDENT ASSURANCE AND OVERSIGHT EXTERNAL INDEPENDENT ASSURANCE AND OVERSIGHT Senior management 19% 66% 15% Municipal management 15% 58% 27% Mayor 35% 46% 19% Internal audit 50% 31% 15% 4% Audit committee 46% 31% 23% Treasury, cooperative governance department, premier s office 100% Council Provides assurance Provides some assurance Provides limited/no assurance Not established 31% 50% 19% Municipal public accounts committee 8% 12% 15% 65% Legislature and portfolio committee 100% 1 1 THE KEY ROLE PLAYERS NEED TO... DRIVERS OF KEY CONTROLS NOT IMPROVING 53% 23% 24% Leadership 47% 26% 27% Financial and performance management 35% 33% 34% 31% 30% 37% 53% 29% 18% Governance Good Causing concern Intervention required 43% 27% 30% % 77% 4% Unqualified with no findings IMPROVEMENT IN AUDIT OUTCOMES 80% 12% Unqualified with findings 8% 4% % 16% Qualified/adverse/disclaimed with findings...to ENSURE IMPROVED RESULTS IN SIX KEY AREAS... KEY RISK AREAS NOT RECEIVING REQUIRED ATTENTION Supply chain management Information technology controls Quality of performance reports Financial health...take SOME VITAL ACTIONS... Quality of submitted financial statements Human resource management Good Causing concern Intervention required 2 Unchanged Regressed ROOT CAUSES NOT BEING ADDRESSED Key positions vacant or key officials lacking appropriate competencies A root cause at 50% of auditees Lack of consequences for poor performance and transgressions A root cause at 38% of auditees Slow response by political leadership in addressing the root causes of poor audit outcomes A root cause at 73% of auditees

6 FOREWORD I hereby present to the legislature and municipal councils of the Western Cape province my general report summarising the results of the audit outcomes of local government for the financial year ended 30 June The positive trend towards clean administration in the province is slowly gaining momentum, with five (19%) of the 26 municipalities in the province included in this analysis for achieving clean audit outcomes. Despite commitments by the municipal leadership, 20 of the 26 auditees (77%) received financially unqualified with findings. Of the 20 auditees in this category, 17 remained financially unqualified with findings. These auditees had to make material corrections to their financial statements during the audit and failed to avoid material findings on predetermined objectives and/or compliance with laws and regulations. This stands in sharp contrast to those municipalities with clean audit outcomes whose leadership is working together with the governance and oversight structures to monitor the implementation of credible actions plans to address past audit findings and internal control deficiencies, while basic financial disciplines and monthly processing and reconciling of transactions, regular preparation of credible financial and performance reports, as well as the effective implementation of checklists to ensure compliance with laws and regulations have become the norm. The rand value of irregular expenditure decreased notably in the current year from R242,8 million to R66,6 million through the concerted efforts of the leadership to prevent non-compliance with supply chain management regulations, after being highlighted as a key concern in A total of four audits were still outstanding at the date of this report due to municipalities not submitting financial statements by the legislated deadline. This is a result of poor discipline and a lack of competence as well as the leadership s failure to set the right tone with a view to improving accountability. These municipalities must consider replicating the processes implemented by the Swartland and West Coast District Municipalities, which have sustained their clean audit outcomes and which have ensured that their finance units are adequately capacitated and the municipal managers hold all municipal officials accountable for clean governance within the municipalities Although we acknowledge the improvements in findings relating to supply chain management regulations and predetermined objectives, uncompetitive procurement and other deviations from supply chain management regulations remained a prominent feature at many municipalities. The quality of financial statements submitted for auditing, as well as the quality of performance reports, remained a concern. Adequate progress had not been made in addressing prior information technology control findings owing to key vacant positions and key officials lacking appropriate competencies. If these key areas are not effectively addressed, supported by a strengthened human resource capacity, as demonstrated by the good practices of municipalities with clean audit outcomes as mentioned above, they will continue to hamper the achievement of sustainable clean audit outcomes and impair the financial health of municipalities. Central to the stagnation in the audit outcomes of the majority of municipalities was the fact that many councils, executive mayors and municipal managers did not consistently focus on internal control deficiencies, with the result that corrective action was not taken in time to positively impact the control environment at 73% of municipalities. The inadequate management of the performance of accounting officers and employees at 38% of municipalities, as well as key positions that remained vacant for long periods of time in the case of 50% of municipalities, further compromised the achievement of clean audit outcomes. At some municipalities, key officials lacked appropriate competencies, as reflected by their continued reliance on consultants to prepare financial statements and on the audit process to correct material misstatements in their financial statements. Financial management practices at the province s municipalities were generally not adequate. In municipalities with clean audit outcomes, the administrative and political leadership actively took ownership to address financial, performance and governance deficiencies, while enhancing oversight responsibilities and enforcing accountability and consequences for poor performance and transgressions. The municipal leadership, assisted by the Department of Local Government, the provincial treasury and governance structures, must take effective steps to enable timely remedial action where financial health and service delivery of municipalities may be at risk. 5

7 In working towards sustainable clean administration, the municipal leadership should enhance the ability of management to provide first-level assurance (management assurance) about the validity, accuracy and completeness of financial and performance information and compliance with laws and regulations. This is directly linked to the implementation of properly designed internal controls and the preparation of regular financial statements. Moreover, municipal councils and municipal public accounts committees should be strengthened through intensified training to enable them to improve their oversight functions and hold the administration accountable for non-performance. Oversight by the legislature and portfolio committees should be strengthened and be more vigorous in following up their resolutions. This can only happen through the coordinated efforts of the provincial executive, the provincial legislature, the provincial and national departments responsible for monitoring and coordinating, the South African Local Government Association and municipal councils. It is encouraging that the executive has reaffirmed their collective intention to assist municipalities to achieve clean administration. We also take note of the efforts of the legislature to monitor the actions of municipalities to address the obstacles to achieving clean administration. Indeed, progress towards improved transparency and accountability will be evident only when the leadership sets the right tone. As part of our contribution towards clean administration, our provincial leadership will continue to refine their strategies to improve the clarity and simplicity of our messages. I wish to thank the audit teams from my office and the audit firms that assisted in the province for their diligent efforts towards fulfilling our constitutional mandate and the manner in which they continue to strengthen cooperation with the leadership of the province. Auditor-General Pretoria 6

8 SECTION 1: Executive summary Significant aspects of the audit outcomes of the Western Cape Local Government are summarised in the table below, followed by a summary of the root causes. Table 1: Significant aspects of the audit outcomes and root causes Aspect Indicator Key outcomes and trends Overall audit outcomes Overall trends Improved audit outcomes Sustained clean audit outcomes The overall audit outcomes for the province improved as six (23%) auditees improved, with only one (4%) auditee regressing. Over the past three years there has been slow progress towards clean audit outcomes, with the number of clean audit outcomes increasing from one in to two in and thereafter to five in The improved audit outcomes included those of three (12%) auditees that progressed to clean audit outcomes by addressing the weaknesses in predetermined objectives and/or findings on compliance reported in the prior year; and another three (12%) auditees that progressed to unqualified with material findings on predetermined objectives and/or compliance by addressing the qualification findings. The two (8%) auditees with a clean audit outcome in were able to sustain their clean audit status. Submission of financial statements for audit Unchanged Regressed outcomes on predetermined objectives Late submission of annual financial statements A total of 17 (65%) auditees remained unqualified with material findings on predetermined objectives and/or compliance. Of these auditees 15 (58%) have not been able to progress to clean audit status for the past three years, failing to avoid material findings on predetermined objectives and/or compliance. Two (8%) auditees with no material findings on predetermined objectives in the prior year regressed. Four (13%) auditees had not submitted annual financial statements by 31 August 2012, as required by the Municipal Finance Management Act, 2003 (Act No. 56 of 2003) an improvement compared to 12 (40%) in the prior year. By 31 March 2013 the audits of four (13%) auditees had not been finalised mainly as a result of late submission of their annual financial statements. Opinions on Quality of submitted Only eight auditees submitted financial statements without material misstatements. 7

9 Aspect Indicator Key outcomes and trends financial statements Reporting on predetermined objectives Findings on noncompliance with laws and regulations financial statements Seventeen (65%) auditees achieved an unqualified audit opinion because they corrected all the misstatements that the Auditor-General of South Africa had identified during the audit. Only one (4%) auditee received a qualified opinion, moving from an unqualified with material Net improvement in findings on predetermined objectives and/or compliance in the prior year. The three (12%) qualified audits auditees with qualified opinions in moved to unqualified opinions with material findings on predetermined objectives and/or compliance. The qualification area for the auditee is the completeness and existence of current assets (inventory) disclosed in their financial statements. No material findings on Fourteen (54%) auditees did not have any material findings on the usefulness and reliability of usefulness and their annual performance reports improving from nine (35%) in the prior year. reliability Annual report contained material misstatements Planned service delivery targets Eleven (42%) auditees submitted annual performance reports that contained material misstatements, 10 of which were able to avoid findings on the presentation and reliability of the reports because they corrected all misstatements identified during the audit. Based on the annual performance reports, 69% of auditees achieved 80% or fewer of their planned service delivery targets. The most common material finding on the usefulness of the reported information was that the performance targets were not specific and/or measurable to ensure that the required performance can be meaningfully measured. Findings on reliability of the annual performance reports mostly related to the accuracy of the information and the validity thereof. Material findings on noncompliance Findings on material misstatements only Material findings on non-compliance with laws and regulations were reported for 21 (80%) auditees, an improvement from the 24 (92%) in the prior year. Only three auditees addressed their prior year findings on compliance and no auditees had material findings for the first time this year. Two (8%) auditees only had findings on material misstatements in submitted financial statements. Full compliance with key laws and regulations is therefore within their reach. The top three areas of non-compliance related to material misstatements in submitted financial statements, prevention of and addressing unauthorised, irregular as well as fruitless and wasteful expenditure, and procurement and contract management (supply chain management), which occurred as a combination and/or individually at 21 (80%) municipalities. The other areas of non-compliance included audit committees, internal audit, budgets and asset and liability management. AGSA focus area Improvement in the Findings on supply chain management were reported in the management reports of 24 (92%) 8

10 Aspect Indicator Key outcomes and trends Supply chain management Unauthorised, irregular as well as fruitless and wasteful expenditure number of auditees with material non-compliance findings on supply chain management Some improvement in the awards to suppliers in which employees had an interest Regression in awards to family members of employees of the auditee Some improvement in completeness of declarations by employees and suppliers Regression in unfair and uncompetitive procurement practices Incurred by 92% of auditees Unauthorised expenditure increased by R752,7million Irregular expenditure decreased by R176,2m million Fruitless and wasteful [ : 22 (85%)] of the auditees, while at 10 (39%) [ : 22 (85%)] auditees the findings were material enough to warrant reporting thereon in the auditor s report. At an overall level there has been some improvement, with the number of instances of non-compliance reducing at each auditee. One auditee improved to no findings for the year and three regressed. Contracts to the value of R identified at three auditees were awarded to suppliers in which employees of the auditee had an interest. This represents a decrease from the R1,8 million identified in the prior year at four auditees. Contracts to the value of R37,4 million identified at 10 auditees were awarded to suppliers in which close family members of employees of the auditee had an interest, which represents an increase from the R3,4 million identified in the prior year at two auditees. Where interest was identified, the suppliers did not declare such interest in 51% of instances, while the employee did not declare in 60% of instances. This is an improvement from the prior year in that 84% of suppliers had not declared in Findings on unfair and uncompetitive bidding were raised at 62% of auditees, which was unchanged from the prior year. The most common findings related to competitive bidding and quotation processes not followed and the non-submission by suppliers of their tax certificates and declarations of independence. The preference point system was also not always applied in the procurement process. Although findings on material non-compliance reduced, auditees incurring unauthorised, irregular as well as fruitless and wasteful expenditure remained high with 92% of auditees incurring such expenditure. Unauthorised expenditure of R1 029,4 million was incurred by 18 (69%) auditees, four more than in the financial year and R752,7 million more. Irregular expenditure of R66,6 million was incurred by 20 (77%) auditees. The number of auditees incurring irregular expenditure increased by one (5%) but the value decreased by R176,2 million (73%). Fruitless and wasteful expenditure of R7,8 million was incurred by nine (35%) auditees. The number of 9

11 Aspect Indicator Key outcomes and trends expenditure increased by R1,5 million auditees incurring fruitless and wasteful expenditure increased by two (28%) and the value by R1,5 million (24%). The average overall vacancy rate for 26 municipalities at year-end was 12%. The highest vacancy rate was at George with 48% and the lowest at Witzenberg with 3%. Vacancy rate The average vacancy rate at senior management level for municipalities at year-end was 14%. The highest vacancy rate was at Overberg District with 45% and the lowest at Overstrand with 2%. Auditor-General of South Africa s focus area human resource management Performance management At 14 (54%) auditees the overall vacancy rate has increased since A total of two (8%) of the municipal managers appointed in the province did not have signed performance agreements for At one (4%) auditee, 20% or more of the senior managers did not have signed performance agreements for Appropriate performance management systems were not established at three (12%) auditees to monitor, measure and evaluate the performance of officials other than the municipal manager and senior management. Financial reporting assistance provided by consultants Minimum competencies Effective use of consultants By 30 June 2012 (six months from the effective date of the relevant regulations), nine (38%) of the appointed municipal managers in the province had not yet met the minimum competency levels defined in the regulations. The cost of assistance on financial reporting provided by consultants to auditees is estimated at R13,4 million ( : R14,7 million) for the financial year, i.e. an average in excess of R0,7 million per auditee. The reported extent of skills transfer by consultants to municipal staff was noted as a concern at seven (37%) of the municipalities that had engaged consultants. Thirteen of the 15 municipalities that used consultants to prepare financial reports, submitted financial statements that were subject to material adjustments from the audit process, mostly due to the late engagement with the consultants. 10

12 Aspect Indicator Key outcomes and trends Auditor-General of South Africa s focus area information technology management Auditees systems of internal control Audit committees and internal audit units Auditor-General of South Africa s focus area financial health Assurance provided by key role players Municipal public accounts Challenges with the design of IT controls Significant deficiencies decreasing Effectiveness of audit committees Going concern Financial health Limited impact Municipal public accounts committees not The majority of municipalities experienced challenges with the design of information technology controls. Adequate progress had not been made in addressing prior findings as risks remained in all of the focus areas. Municipalities have made progress in addressing significant internal audit deficiencies in leadership, financial and performance management and governance components. Audit committees were in place at all auditees and internal audit units were in place at 24 (92%) of the auditees, but at 13 (50%) of the auditees the audit committees were not making a positive impact on the audit outcomes. It was reported that two district municipalities had uncertainty regarding their ability to continue as a going concern. The financial statements of two (7%) auditees disclosed that a material uncertainty existed with regard to their ability to continue as a going concern. A total of 50% of municipalities reported on recorded a net deficit for the year under review. Other areas of concern were the significant underspending of the capital budgets of district municipalities contributing to the non-achievement of performance targets and the creditor payments period that was shorter than the debtor collection period, which may result in cash flow problems for municipalities. At an overall level, the key role players in local government provided some assurance. As is evident from the audit outcomes presented in this general report, the activities and interventions of role players had limited impact. The assessment of no significant identified impact does not imply that no efforts were made by the role players, but illustrates that the impact on the audit outcomes was not yet evident. Significant strides were still needed if the required level of assurance is to be provided for credible decision-making. The municipal public accounts committees (MPAC) have not had the desired impact on audit outcomes and clean administration in local government due to their late establishment and/or non-establishment. 11

13 Aspect Indicator Key outcomes and trends committees yet established MPACs were not established at 17 (65%) of the municipalities at 30 June There is a long way to go before MPACs will achieve their intended oversight effectiveness and impact on audit outcomes. The leadership and oversight structures, in liaison with the AGSA, are encouraged to support the work of these committees. Status of commitments from key role players Root causes of audit outcomes Some impact The commitments made by the various role players, such as the premier; members of the executive council for finance and local government; the joint coordinating departments, provincial treasury and local government, to guide, support coordinate and monitor local government have translated into some impact on the audit outcomes of municipalities, although more concentrated efforts in this regard would be required to see greater results in the form of improved clean audit outcomes. Key positions vacant or key officials lacking appropriate competencies Lack of consequences for poor performance and transgressions Slow response by political leadership in addressing the root causes of poor audit Good Concerned Poor 12

14 SECTION 2: OVERVIEW OF AUDIT OUTCOMES This section provides the local government audit outcomes (section 2.1), followed by further details on findings arising from the audit of the financial statements (section 2.2), reporting by auditees against their predetermined objectives (PDOs) (section 2.3) and compliance by auditees with key laws and regulations (section 2.4). Root causes of audit findings and recommended best practices are presented in section Summary of audit outcomes Summary of overall audit outcomes Local government in the province comprises one metro, five district municipalities, 24 local municipalities and two municipal entities. The audits of 26 of the 28 auditees that had submitted financial statements by 31 August 2012, or by 30 September 2012 in the case of consolidated financial statements, were completed within the legislated time frame of three months from receipt of the financial statements. Arising mainly from late submission of financial statements for auditing, the audits of four (13%) auditees had not been finalised as at 31 March 2013, which was the cut-off date set by the AGSA for inclusion of their audit outcomes in this general report. The status and these outstanding audits are provided in section The audit outcomes of the financial year for audits completed by 31 March 2013 and the audit outcomes of the prior year are summarised in table 2 below. Where applicable, audit opinions relate to the consolidated financial statements of auditees. With findings denotes findings on PDOs and/or compliance with laws and regulations. Clean audit outcomes are achieved when the financial statements are unqualified and there are no reported audit findings in respect of either reporting on PDOs or compliance with laws and regulations. 13

15 Table 2: Summary of audit outcomes for current and prior years Audit outcomes Total Cape Town Metro District Municipalities Local Municipalities Unqualified with no findings (clean audits) Unqualified with findings Unqualified financial statements 83% 83% 100% 100% 100% 80% 79% 83% Qualified opinion, with findings Adverse opinion, with findings Disclaimer of opinion, with findings Number of audit reports not issued by 31 March Outstanding audits and qualified financial statements 17% 17% 0% 0% 0% 20% 21% 17% Total number of audits Findings on reporting on PDOs only Findings on compliance with laws and regulations only Findings on both PDOs and compliance Total number of audits "with findings" Legend: Significant improvement Significant regression Seventeen (65%) of the auditees avoided qualified financial statements by correcting the material misstatements identified during the audit process. If the misstatements were not corrected, the unqualified financial statements would have effectively decreased from 25 to eight, as shown in the table below: Total Cape Town Metro District municipalities Local municipalities Unqualified financial statements Also refer to section for further detail. Annexure 1 lists all auditees with their current and prior year audit outcomes. While the preceding table showed the net change in audit outcomes from the prior year, the following figure highlights the detail of improvement and regression that caused the net change. 14

16 Figure 1: Improvement and regression in the audit opinions Net improvements = 5 Improvements = 6 Local = 3 Clean audit (Unchanged = 2) (New auditees = 3) District = 1 Local = Unqualified with findings (Unchanged = 17) (New auditees = 3) Qualified with findings (Unchanged = 0) (New auditees = 1) Adverse/ disclaimed with findings (Unchanged = 0) Regressions =1 1 Local = 1 Unqualified - with no findings Unqualified - with findings Qualified - with findings Adverse/ disclaimed - with findings 15

17 It is clear from the audit outcomes table and the preceding figure that the audit outcomes of the majority of the auditees remained in the category unqualified with material findings on their reporting on PDOs and/or compliance. The following figure shows the improvement and regression of the auditees in these areas. Figure 2: Improvement and regression in findings on predetermined objective and compliance Improvements = 10 Local = 2 Local = Local = 5 District = 1 Net improvement = 8 Regressions = 2 No findings (Unchanged = 2) (New auditees = 3) PDO findings only (Unchanged = 0) Compliance findings only (Unchanged = 3) (New auditees = 6) Both PDO and compliance findings (Unchanged = 10) (New auditees = 2) 2 Metro = 1 Local = 1 No findings PDO findings only Compliance findings only Both PDO and compliance findings 16

18 The following observations are made regarding the overall audit outcomes and the improvement and regression since the prior year: Table 3: Significant aspects of the audit outcomes Indicator Key outcomes and trends Overall audit outcomes Of the 26 municipalities reported on in , six improved, one regressed and 19 remained unchanged. Of these municipalities five received a financially unqualified opinion with no other findings (clean audit outcomes), 20 received a financially unqualified opinion with other findings, while one received a qualified opinion. Three municipalities improved from financially unqualified with findings to clean audit outcomes, namely George, Langeberg and Mossel Bay. Progression to clean audit outcomes George s leadership took the AGSA s message seriously and responded quickly to the recommendations made to address the issues that led to the adverse audit opinion in the audit. The leadership set the tone from the top by getting involved in addressing audit queries through effectively monitoring a credible action plan to address the past audit findings. The municipal manager drove this process and emphasised the importance of the first-level review of information to ensure that it is valid, accurate and complete by the time it gets to him and subsequently reported in the financial statements. The municipality also effectively used and monitored the consultants appointed to prepare the financial statements, which also contributed to the reduced material misstatements identified during the audit. This allowed the municipality to progress from an adverse opinion in to financially unqualified with findings in and then to financially unqualified with no findings in the year under review. The use of consultants by the municipality has gradually reduced over the years with them only preparing key disclosures and reviewing other financial statement sections prepared by the municipality. A permanent chief financial officer (CFO) was appointed in September 2012, which should further reduce the municipality s dependence on consultants and also ensure sustainability of the outcome. Langeberg submitted its financial statements late in the prior year due to management not exercising sufficient oversight over the work of consultants who assisted the municipality with the unbundling of the fixed assets and the updating of the fixed asset register. The manager: budget was responsible for the preparation of the financial statements, but the position was vacant in the prior year, which resulted in material errors in the financial statements submitted in This position was filled during the year under review and consultants were also appointed to perform high-level reviews on the financial statements prior to submission for auditing. The material corrections identified during the audit were deemed material for non-compliance reporting due to them being assessed as isolated instances and not a breakdown in internal 17

19 Indicator Key outcomes and trends control, as per the AGSA reporting. The municipality was likely to continue using consultants to review the financial statements prior to submission for auditing, which will assist in sustaining the improved audit outcome. Mossel Bay had compliance findings on asset management, procurement and contract management and PDOs in the prior year. The municipality failed to perform regular asset counts and reconciliation of its asset register, which led to material misstatements related to assets in its financial statements. The leadership of the municipality responded quickly to the AGSA s recommendations and performed monthly reconciliation of its asset register. Management also monitored the controls around the review of supplier declarations to ensure that they were all signed and complete. Suppliers were also encouraged to submit regular declarations whenever there were changes that might affect the municipality. Management performed a detailed review of performance information before it was submitted for auditing, which eliminated their non-compliance finding on performance information. The controls instituted by Mossel Bay were still in place during the most recent key control visit, which indicates that the improved audit outcomes will be sustainable. Two municipalities maintained their clean audit outcome status, namely Swartland and West Coast District. Sustaining clean audit outcomes Swartland maintained its clean audit outcome status from the prior year mainly due to strong leadership which set the tone from the top and instilled a culture of good governance and monitored the municipality s internal controls to ensure that they operate effectively. Furthermore, the leadership and management addressed the internal control deficiencies that were reported in the prior audits management reports through the implementation and ongoing monitoring of action plans during the year under review. Progress reports on the implementation of the action plan were also monitored and reviewed by the audit committee on a quarterly basis. The audit committee also reported to the council bi-annually on their monitoring of the action plan, as well as the progress of the internal audits. West Coast District maintained its clean audit outcome status through the sustained efforts of the municipal leadership to monitor key controls, especially in supply chain management (SCM). The internal audit unit and the audit committee also assisted management to further strengthen internal controls over financial and performance reporting, as well as compliance with laws and regulations and recommended and monitored corrective actions where weaknesses were identified. Regression to qualified audit opinions Bergriver regressed from a financially unqualified with findings to a qualified opinion due to the incorrect determination by the municipality that emergency inventory kept was not material and, therefore, not accounted for in the financial statements. In addition, they did not have adequate systems in place to maintain records of acquisitions and issues of emergency inventory, which resulted in it not being possible to determine the accuracy and completeness of the 18

20 Indicator Key outcomes and trends corresponding figure for this inventory. The situation has been the same for a number of years, but the value was always assessed as immaterial. As a result of consistent probing by the auditors, the municipality agreed to count and value the inventory in the current year. The conclusion was that the emergency inventory amount was material and the lack of systems made it impossible to value the prior year s inventory (comparative figure) by the time the audit was concluded. Furthermore, there was no one in a leadership position to ensure that the CFO, internal audit unit and the audit committee performed a proper review of the financial statements before submission for auditing, owing to the CFO acting as the municipal manager for the period until the financial statements were due for auditing. The CFO s deputy was also on maternity leave for a large part of the audit, which impacted negatively on the ability of the municipality to resolve audit queries on time. Three municipalities improved from qualified to financially unqualified with findings, namely Overberg District, Laingsburg and Prince Albert. Overberg District was qualified in the prior year due to not having a proper system to make sure that their infrastructure assets were valid, accurate and complete. The municipality failed to perform regular counts of infrastructure assets and reconciliation of its asset register, which led to the following challenges: missing barcode numbers, duplicate barcode numbers, assets not being located for physical verification or not matching the description in the asset register. Movement towards unqualified audit opinions The municipality incurred a net loss for the year ended 30 June 2012 and, as of that date, the municipality s total liabilities exceeded its total assets. Vacancies could not be filled due to a lack of funds, resulting in capacity constraints which led to non-compliance with numerous laws and regulations. High fees were also paid to consultants to perform functions of officials that were suspended with remuneration. In the year under review the municipality relied on appointed consultants to reconcile the fixed asset register and also help with the preparation of the financial statements. The reliance on consultants was not sustainable as the municipality was unable to attract and retain a CFO with the required skills to do the job. The suspended employees also impacted on the transfer of skills from the consultants to the municipality. The municipality received a qualified conclusion on PDOs, although this was an improvement from the disclaimer in As a result of this situation and the ongoing control deficiencies identified in the last key control visit, we were concerned about the sustainability of the improved audit outcome. 19

21 Indicator Key outcomes and trends Laingsburg was qualified in the prior year because it was unable to correct material misstatements on distribution losses for water, provision for environmental rehabilitation, inventory and corresponding figures pertaining to investment property and intangible assets. The municipality struggled to attract appropriately qualified officials to support the management of financial, performance reporting and compliance with laws and regulations, including internal controls related thereto, due to its geographic location and limited financial resources. Furthermore, the leadership of the municipality did not appropriately train the existing officials for the achievement of the municipal objective relating to financial and performance reporting and compliance with laws and regulations, including internal controls related thereto. The leadership of the municipality was slow in responding to recommendations made by the AGSA to address the internal control deficiencies that led to the qualification in It largely relied on new consultants to assist to correct the many material misstatements that were identified during the current year s audit. Because of the municipality s overreliance on consultants and the fact that it will need the provincial treasury and local government to assist with training and up-skilling of its existing employees, the improved audit outcome may not be sustainable. Prince Albert was qualified in the prior year because of their inability to correct material misstatement on value-added tax (VAT) and income from fines. The municipality then did not monitor the work done by the service provider appointed to collect income from fines to ensure that they performed the services in accordance with the service level agreement in the past. The municipality subsequently took the service provider to court to enforce terms to implement systems in place to ensure the completeness of revenue collected and agreed in their service level agreement. The municipality struggled to attract appropriately qualified officials to support the management of financial, performance reporting and compliance with laws and regulations, including internal controls related thereto due to its geographic location and limited financial resources. As a result, reconciliations were not prepared between the creditor s ledger and the subsidiary ledger and no reconciliation was performed between the VAT control account and the accounts receivable. Consequently, transactions and events were misstated in the financial statements. Unqualified with findings stagnation Consultants were appointed to prepare the financial statements for the municipality as they did not have the technical expertise and people. The municipality relied on the appointed consultants to assist it to reconcile its VAT account and correct all material misstatements that were identified in the audit process. Because of the municipality s over-reliance on consultants and the fact that it would need the provincial treasury and local government to assist with training and upskilling of its existing employees, the improved audit outcome may not be sustainable. Although the municipalities responded to the AGSA messages on areas of non-compliance and PDOs and implemented action plans, municipalities were still not heeding our call to regularly prepare financial statement as the leadership did not require this from its officials. They also did not see the value in preparing regular financial statements. At some 20

22 Indicator Key outcomes and trends municipalities, key officials lacked the skills and competencies to allow for regular preparation of financial statements and they relied on consultants to assist with the annual financial statements. Management did not conduct proper reviews of financial information, thus failing to ensure its credibility. As a result these municipalities relied on independent assurance from third parties to confirm credibility of their financial information instead of their own internal controls. This has led to these municipalities remaining financially unqualified with findings despite significant improvements in findings on compliance with laws and regulations and PDOs. Overall outcomes on PDOs and compliance with laws and regulations Overall outcomes on compliance with laws and regulations There were municipalities that still failed to address findings previously reported as they implemented our recommendations too late to have a meaningful impact on the next audit outcome, which led to recurring findings on compliance with laws and regulations and PDOs. Since no auditees remained with PDO findings only. There has also been a steady decline in auditees with findings on both PDOs and compliance with laws and regulations from 69% to 46%. Material findings on non-compliance with laws and regulations were reported for 21 (80%) auditees. There was a marginal improvement when compared to the 24 (92%) in the prior year. Three (12%) auditees addressed their prior year findings on compliance, while two (8%) auditees maintained their status of no findings on compliance with laws and regulations. 21

23 Indicator Key outcomes and trends Audits of four municipalities had not been finalised as at 31 March 2013, the cut-off date set by the AGSA for inclusion of their audit outcomes in this analysis. The auditees whose audits are not included in this analysis received disclaimer (Kannaland and Swellendam) and financially unqualified with findings (Oudtshoorn and Cederberg) audit opinions in Outstanding audits The main drivers of delays are: poor planning to take appropriate action to enable the complete and accurate unbundling of assets key control accounts related to assets, debtors and VAT were not regularly reconciled, including the non- or late clearance of suspense accounts inadequate capacity and staff not being sufficiently knowledgeable concerning the GRAP account framework to prepare quality financial statements or perform meaningful reviews of annual financial statements prepared by consultants failure by management to review and effectively monitor the performance of consultants appointed to assist with accounting-related work and compiling of the annual financial statements. We had identified these risks during our quarterly evaluation of key controls and in spite of assurances given to our staff during these discussions, the municipal leadership failed to develop and monitor the implementation of key controls, including the development and monitoring of credible action plans to address past audit findings. The continued ineffectiveness of the governance structures (internal audit units and audit committees) at these municipalities as well as ineffective oversight by the municipal councils also contributed to the failure of the municipal leadership to submit financial statements within the legislated deadline. Good Concerned Poor 22

24 2.1.2 Five-year progress towards clean audits Producing unqualified financial statements is an important milestone towards clean audit outcomes but not the ultimate objective. The five-year progress made by local government towards obtaining unqualified audit reports with no findings (i.e. clean audit outcomes) is shown in the following figure. Figure 3: Five-year progress towards unqualified financial statements 4% 7% 17% 75% 79% 69% 76% 67%? 25% 21% 27% 17% 17% Unqualified with no findings Unqualified with findings Qualified/ adverse/ disclaimed with findings (including audits outstanding) 23

25 In , one district municipality and four local municipalities received clean audit outcomes. These auditees, however, represent only 17% of auditees in the province. Audit outcomes for municipalities in the province were improving at a slow pace, with some improvement across the three facets of our audit, namely (i) financial statements, (ii) reporting against PDOs (service delivery reporting); and (iii) compliance with laws and regulations. Despite the commitments from the municipal leadership, the majority of municipalities have been slow in moving towards clean audit outcomes with 17 remaining unchanged with financially unqualified audit opinions with findings from compared to We have not yet seen the desired impact of the operation clean audit programme and the local government financial management improvement plans and turnaround strategy on these auditees. At this rate it appears unlikely that municipalities in the province will achieve the Operation clean audit 2014 goal of 100% clean audit outcomes. The province has the ability to do better and achieve much more. It is concerning that there were municipalities that failed to submit financial statements by the legislated deadlines and have their audits completed within reasonable time. Four audits were still outstanding on 31 March The audit outcomes improved compared to with fewer municipalities receiving qualified audit outcomes. The current financial year ( ) reflects one qualified opinion compared to , but this trend could be reversed by the expected audit outcomes of the four audits not yet finalised. The ability of the municipalities to achieve clean administration will continue to be compromised unless they address the internal control deficiencies that result in the qualified audit opinions and findings on compliance with laws and regulations and PDOs. In particular, the continued prevalence of material misstatements in the financial statements submitted for auditing is evidence of weak internal controls, which is slowing down the achievement of clean audits. The leadership should exercise its oversight responsibility and ensure that basic internal control disciplines are strictly adhered to in areas of financial reporting, compliance with laws and regulations and PDOs. This can be achieved if the leadership sets a strong tone from the top that findings on compliance with laws and regulations and PDOs, which are withholding municipalities from achieving clean audit outcomes, are not acceptable through appropriate consequences for non-adherence and holding management accountable. In addressing these internal control deficiencies, the leadership should enhance the ability of management to provide first-level assurance (management assurance) about validity, accuracy and completeness of financial and performance information and compliance with laws and regulations by strengthening human resources capacity and ensuring its productivity. Attention should also be paid to the credibility of management information and the production of more regular financial statements. The progress made by auditees that achieved clean audit outcomes will require greater effort from the municipal leadership to decisively address the internal control deficiencies that could compromise their ability to sustain clean audit outcomes. 24

26 2.1.3 Useful and reliable reporting against predetermined objectives and compliance with laws and regulations three-year progress In order to obtain clean audit opinions auditees should report annually on the achievement of their PDOs in a useful and reliable manner and their audit reports should not contain material findings on compliance with laws and regulations. The three-year progress made by local government in the province towards meeting these requirements is shown in the following figure. Figure 4: Three-year progress in addressing findings on predetermined objectives and compliance with laws and regulations 80% 69% Findings on both PDOs and compliance with laws and regulations (12 auditees) 46% 23% 35% Findings on compliance with laws and regulations only (9 auditees) 12% 4% 0% 0% PDO findings only (0 auditees) It is encouraging to note that since there has been no auditees remaining with PDO findings only. There has also been a significant decline in auditees with findings on both PDOs and compliance with laws and regulations. The increasing trend in auditees with non-compliance with laws and regulations findings only was as a result of auditees addressing PDO findings while non-compliance findings remained. Refer to section 2.3 and 2.4 for a detailed analysis of findings on PDOs and compliance with laws and regulations. 25

27 2.1.4 Status and outcomes of audits not finalised by 31 March 2013 Timely completion of audits within the legislated timelines was primarily influenced by the date on which the AGSA received municipalities financial statements for auditing and the efficiency with which the audits proceeded until completed. The figure below indicates that a total of four (13%) auditees were unable to submit financial statements for auditing by 31 August 2012 (30 September 2012 in the case of consolidated financial statements), as required by the MFMA. Figure 5: Timeliness of submission of annual financial statements for auditing AFS submitted on time 26 (87%) AFS submitted late 4 (13%) Audits of four municipalities had not been finalised as at 31 March 2013, the cut-off date set by the AGSA for inclusion of their audit outcomes in this analysis. 26

28 Between 1 April 2013 and the date of this general report, one more audit was finalised, but its outcome was not included in the analysis contained in this report. Details of this audit outcome are presented in the following table. Table 4: Outcomes of audits finalised after 31 March 2013 Auditee audit opinion audit opinion Movement from audit opinion Oudtshoorn Municipality Unqualified with findings Unqualified with findings Improvement Unchanged Regression Although Oudtshoorn managed to submit its financial statements on time, the ongoing administrative instability due to the suspension and dismissal of the municipal manager had an adverse impact on the 2012 audit. The senior managers were all in acting positions for the first six months of the financial year and permanent appointments were only made in January This led to the municipality failing to design and implement appropriate controls over information technology (IT) systems to ensure the reliability of the systems and the availability, accuracy and protection of information. They did not have a back-up for systems and could not recover information timeously when the system failed, which delayed the audit. Furthermore, the audit could not be finalised before the audit was finalised. The audit was finalised on 6 February The following table shows the reasons for the remaining audits being outstanding at the date of this report with an indication of the prior year audit outcomes. Table 5: Prior year outcomes of audits outstanding at the date of this report Auditee Financial statements not yet received Reason not finalised Late receipt of financial statements Audit still in progress due to other reasons Expected date of finalisation Year AFS last finalised Audit outcome of audit last finalised Swellendam Municipality x June Disclaimed Cederberg Municipality x June Financially unqualified with findings Kannaland Municipality x June Disclaimed Total 3 27

29 Swellendam experienced a breakdown in internal controls and a lack of leadership oversight caused by political and administrative instability (changes in municipal manager and CFO, as well as the court case to determine who should be the mayor and govern the municipality), while key vacancies at the finance unit remained a problem, which the leadership failed to address in a timely manner. This resulted in its failure to implement basic financial disciplines during the course of the financial year. These include areas of record keeping and management, reconciling control accounts on a monthly basis and also clearing suspense accounts on a monthly basis. Action plans to address the prior year s disclaimer of opinion and internal control deficiencies (non-performance of bank reconciliations, clearing suspense accounts and updating the asset register) were not effectively monitored by the leadership. The late finalisation of the 2011 audit impacted on the municipality s ability to prepare and submit financial statements for auditing. The current leadership is trying to address the municipality s legacy of disclaimers, which is taking longer than expected. Cederberg s finance staff did not maintain the required information to enable the appointed consultants to prepare a complete and accurate asset register to be used in the preparation of the financial statements. The consultants contracted to assist the municipality with the unbundling of the fixed assets and the updating of the fixed asset register, were appointed close to year-end. This was worsened by the leadership s inadequate monitoring of the consultants, as well as the continued ineffectiveness of the internal audit unit and audit committee. Plans to address the deficiencies in asset management reported previously by the AGSA were not effectively monitored due to political and administrative instability during the year under review. There was a change of council at the municipality due to bi-elections, which resulted in the municipal manager resigning in November, stating that his philosophy was not compatible with that of the new council. The new council then replaced all the experienced senior managers. Furthermore, the fraud risk at Cederberg was assessed as significantly high. This required additional audit work, which further delayed the conclusion of the audit. Kannaland had a history of disclaimers and political instability caused by frequent changes in the political leadership of the municipality and the lack of ownership by the administrative leadership to address internal control deficiencies. Related to this instability, the positions of the previous municipal manager and the CFO who left the employ of the municipality and key vacancies in the finance unit were not filled in a timely manner. This has resulted in its continued failure to implement basic financial disciplines during the course of the financial year. Action plans to address the prior years adverse opinion were not effectively monitored by the leadership. The situation was made worse by the destruction of the supply management office and the related supporting documents by a fire in August 2011 and a lack of back-up supporting information. This caused major delays in the finalisation of the audit and the municipality could not submit financial statements before the prior year audit was concluded. The audit was finalised on 20 January

30 2.2 Findings arising from the audit of financial statements Material misstatements in financial statements Outcomes if misstatements were not corrected 65% of auditees avoided qualification Outcomes after correction of misstatements Unqualified 8 (31%) PY: 12 (46%) Qualified/ disclaimed 18 (69%) PY: 14 (54%) Material misstatements corrected during the audit process Unqualified 25 (96%) PY: 23 (88%) Qualified/ disclaimed 1 (4%) PY: 3 (12%) : 100% = 26 auditees Some corrected 1 (4%) PY: 3 (12%) All corrected 17 (65%) PY: 11 (42%) No material misstatements 8 (31%) PY: 12 (46%) Cape Town Metro District municipalities Local municipalities Total 100% 0% 60% 40% 65% 30% 5% 65% 31% 4% 0% 0% Auditees with no material misstatements Auditees that submitted financial statements for audit with material misstatements subsequently corrected Auditees with uncorrected material misstated financial statements 29

31 The purpose of the annual audit of the financial statements is to provide the users thereof with an opinion on whether the financial statements fairly present, in all material respects, the financial position (statement of financial position) and results of an auditee s operations (statement of financial results) and cash flows for the reporting period in accordance with the applicable accounting framework and the requirements of the applicable legislation. The audit provides the users with assurance on the degree to which the financial statements are reliable and credible on the basis that the audit procedures performed did not identify any material errors or omissions therein. The quality of financial statements submitted for auditing The majority of auditees analysed (96%) submitted their financial statements by the legislated deadline of 31 August 2012 (25 of 26), but as shown above many of these were of poor quality as they contained material misstatements in one or more area. Eight (31%) municipalities submitted financial statements that required no material adjustments, compared to 12 (48%) in the prior year. Seventeen (65%) [ : 11 (42%)] auditees received a financially unqualified audit outcome because they had corrected all the misstatements the AGSA identified during the audit. Misstatements corrected were reported as material non-compliance for the 17 auditees, as well as for Bergriver which received a qualified opinion. The continued reliance on the auditors to identify corrections to be made to the financial statements in order to obtain an unqualified audit opinion is not a sustainable practice. Furthermore, it places undue pressure on legislated deadlines and increases the audit fees. The inability to produce credible and reliable financial statements is evident across all types of auditees/districts with only two district municipalities and one local municipality submitting financial statements without material misstatements. Uncorrected material misstatements in financial statements resulting in qualified, adverse or disclaimed audit opinions One (4%) auditee, Bergriver, failed to correct all the material misstatements identified during the audit process due to unavailability of information or documentation required to determine the correct amounts to be reflected in the financial statements. This auditee could therefore not avoid a qualified audit opinion. Section provides more detail on the areas in the financial statements that were misstated. 30

32 2.2.2 Financial statement qualification findings. Figure 6: Progress on and nature of most common financial statement qualifications Property, infrastructure, plant and equipment Current assets Other disclosure 100% 100% 100% 8% 1 auditee 8% 4% 4% Progress Nature of findings Progress Nature of findings Progress Nature of findings Progress: Nature of qualification Prior year qualifications addressed New qualifications Repeat qualifications Existence/ occurrence Valuation/ accuracy Completeness 31

33 The three most common qualification areas of 2011 are shown in figure 6 with the progress made by auditees in addressing prior year qualifications and the basis of the current year qualification. The table below provides the reasons for the qualification. Table 6: Qualification area Qualification area Current assets Basis for qualification Completeness, valuation and existence of the disclosed inventory Reason for qualifications The incorrect determination by the municipality that emergency inventory kept was not material and, therefore, not accounted for in the financial statements. The municipality did not have adequate systems in place to maintain records of acquisitions and issues of emergency inventory, which resulted in it not being possible to determine the accuracy and completeness of the corresponding figure for this inventory. Refer to annexure 1 for further details regarding auditees progress in addressing their prior year qualification findings. 32

34 2.3 Findings arising from the audit of reporting on predetermined objectives Overall outcomes from the audit of reporting on predetermined objectives Movement in number of auditees with findings on PDOs Unchanged with findings 10 (38%) Regressed 2 (8%) 54% (14) 35% (9) Improved 7 (27%) Unchanged with no findings 7 (27%) 46% (12) 65% (17) (26) (26) Auditees with PDO findings Auditees with no PDO findings Non-compliance with legislation relating to strategic planning, performance management and reporting 30% (6) 80% or less of planned targets fully achieved 100% (1) 80% (4) 65% (13) Material adjustments made to annual performance reports 60% (3) 40% (8) Metro District Municipalities Local Municipality Metro District Municipalities Local Municipalities Total 100% 0% 40% 40% 60% 60% 55% 15% 15% 10% 7% 20% 55% 23% 8% 15% 54% Findings on both usefulness and reliability Findings on usefulness only Findings on reliability only No PDO findings 33

35 The Public Audit Act, 2004 (Act No. 25 of 2004) (PAA) requires the AGSA to audit annually the reported information relating to the performance of the auditees against their PDOs. The overall audit outcomes on the audit of PDOs shown in the above figure indicate an improvement in the number of auditees that had no PDO findings. Table 7: Key trends in findings on predetermined objectives Indicator Key findings Findings reduced Compliance reduced Planned targets not met Annual report corrections Fourteen (54%) [ : nine (35%)] of the reported auditees received PDO audit outcomes that did not have findings. This represents an improvement of seven (27%) during the period under review. Six (23%) [ : nine (35%)] auditees had material compliance findings relating to PDOs. The most prevalent of these findings related to strategic planning and performance management, performance reporting, internal audit units and audit committees. Eighteen (69%) municipalities did not meet at least 80% of their planned targets. Eleven (42%) of the auditees annual performance reports had errors that were corrected as a result of the audit. Good Concerned Poor 34

36 2.3.2 Findings on predetermined objectives Figure 7: Progress on and nature of predetermined objectives findings Usefulness: : 4 auditees ( : 14 auditees) Reliability: : 10 auditees ( : 13 auditees) 19% s e ite d u a 4 46% 8% 8% Progress Nature of findings s e ite d u a 0 1 8% 31% Progress 31% 12% 4% Nature of findings Progress: Prior year PDO findings addressed New PDO findings Repeat PDO findings Nature of Presentation Consistency Relevance Measurability findings: Accuracy Validity Completeness Progress made by auditees in addressing prior year findings and the nature of current year audit findings are shown in figure 7. The usefulness of reported information is measured against the criteria of presentation, consistency, measurability and relevance. The information contained in the performance reports of four (16%) [ : 14 (54%)] auditees was not useful. 35

37 Findings on reliability relate to whether the reported information on performance against PDOs could be traced back to the source data or documentation and whether the reported information was accurate, complete and valid when compared to the source data, evidence or documentation. The information contained in the performance reports of 10 (39%) [ : 13 (50%)] auditees was not reliable. The most prevalent types of findings are presented in the table below. Table 8: Usefulness and reliability of reported information Category of PDO findings Reported information not useful Reported information not reliable Most prevalent types of findings The indicators/measures were not well defined to ensure that performance data will be collected consistently and easy to understand and use. Performance targets were not specific and/or measurable to ensure that the required performance can be measured. Supporting information for reported performance information was not complete. Reported performance information was not accurate when compared to supporting information. Reported performance information was not valid when compared to supporting information. 36

38 2.4 Findings arising from the audit of compliance with laws and regulations Overall outcomes from the audit of compliance with laws and regulations Common areas of non-compliance Movement in number of auditees with findings on compliance Material misstatement / limitations in submitted Annual Financial Statements 14 54% 18 69% Regression Unauthorised, irregular as well as fruitless and wasteful expenditure 12 46% 21 80% Decreased, still high Unchanged with findings 21 (80%) Improved 3 (12%) Unchanged with no findings 2 (8%) Procurement management Audit committees Internal audit 10 38% 10 38% 10 38% 9 35% 11 42% 22 Remains high Decreased, still high 85% Decreased, still high Budgets % 31% Remains high Overall decrease of 12% over Asset and liability management % 31% Regression Cape Town Metro District municipalities Local municipalities Total auditees 100% 80% 20% 80% 20% 80% 20% Auditees with no compliance findings Auditees with compliance findings 37

39 The PAA requires the AGSA to audit on an annual basis compliance with laws and regulations applicable to financial matters, financial management and other related matters. The compliance audit was limited to the following focus areas: Material misstatements in submitted annual financial statements asset and liability management audit committees budget management expenditure management prevention of unauthorised, irregular as well as fruitless and wasteful expenditure financial misconduct internal audit revenue management strategic planning and performance management transfer of funds and conditional grants procurement and contract management (SCM) human resource management and compensation. Annexure 1 lists all auditees where material non-compliance was reported in one or more of the AGSA s compliance focus areas. Depicted previously are the overall outcomes from the audits which show an overall decrease in the number of auditees that had findings on compliance. Table 9: Key trends in non-compliance findings Indicator No compliance findings Two areas decreased significantly Top three areas Material misstatements Other noncompliance Key findings Auditees with no findings on compliance with laws and regulations improved from two (8%) to five (20%). Two auditees (Cape Winelands District and Hessequa) addressed all prior year compliance findings and are one step away from clean audit outcomes with only material misstatements in submitted financial statements remaining as a non-compliance finding. Two areas of non-compliance decreased significantly: Unauthorised, irregular as well as fruitless and wasteful expenditure from 21 to 12 auditees (80% to 46%) Procurement management from 22 to 10 auditees (85% to 38%). Compliance findings were prevalent across all three types of municipalities, the metro, district municipalities and local municipalities. Twenty-one (80%) of the auditees had findings in one or more of the top three areas of non-compliance, namely (i) material misstatements in submitted financial statements, (ii)unauthorised, irregular as well as fruitless and wasteful expenditure and (iii) procurement management. Material misstatements in submitted financial statements regressed from 14 to 18 auditees (54% to 69%). Non-compliance related to audit committees, internal audit and budgets remained high with internal audit showing slight improvement. Good Concerned Poor 38

40 2.4.2 Findings on compliance with laws and regulations Figure 8: Common areas of findings on compliance with laws and regulations Findings in top three areas of compliance (100%=21) Findings in other areas of compliance (100%=21) 14% 48% 67% 33% 5% 10% 18 52% 52% 12 38% 10 19% 19% 19% 10% 10 33% 29% 9 14% 14% 14% 24% 8 24% 14% 8 Material misstatement/limitations in submitted annual financial statements Unauthorised, irregular, as well as fruitless and wasteful expenditure Procurement management Audit committees Internal audit Budgets Asset and liability management Prior year compliance findings addressed New compliance findings Repeat compliance findings The figure shows progress made by auditees towards addressing prior year findings on compliance. The extent and impact of material misstatements/ limitations in annual financial statements submitted for auditing are analysed in section Findings on procurement management are detailed in section and the extent and nature of unauthorised, irregular, as well as fruitless and wasteful expenditure in section Details on the nature of the most prevalent findings in other areas of non-compliance per type of auditee are provided below. 39

41 Table 10: Summarised findings in other areas of non-compliance Nature of other areas of non-compliance per type of auditee Audit committees: 10 auditees (38%) Internal audit: nine auditees (35%) 0% 20% 80% 0% 11% 89% No review of the annual financial statements [five (19%) auditees]. No review of the adequacy, reliability and accuracy of financial reporting and information [four (15%) auditees]. The performance audit committee did not submit an auditor s report to the council regarding the performance management system at least twice during the financial year [four (15%) auditees]. The internal audit unit did not audit the results of performance measurement / performance measurement was not audited continuously [five (19%) auditees]. No review of adequacy, reliability and accuracy of financial reporting and information [four (15%) auditees]. No internal audit function in place [two (8%) auditees]. Budgets: eight auditees (31%) Asset and liability management: eight auditees (31%) 0% 25% 75% 0% 12% 88% Expenditure was not in accordance with approved budget [six (23%) auditees]. Quarterly reports on implementation of budget and financial state of affairs were not submitted to the council [three (12%) auditees]. Proper control systems were not implemented for safeguarding and maintenance of assets [four (15%) auditees]. No/inadequate management, accounting and information system for assets [six (23%) auditees]. Auditees with findings: Cape Town Metro District municipalities Local municipalities Improvement Unchanged Regression 40

42 2.4.3 Findings arising from the audit of supply chain management Movement in number of auditees with findings on compliance Summary of findings on supply chain management Limitation on planned scope of audit of awards 0% 3 12% Reduction Awards to employees and councillors or other state officials 16 62% 58% Increase Unchanged with findings 21 (80%) Regressed 3 (12%) Unchanged Improved with no 1 (4%) findings 1 (4%) Awards to close family members of employees and councillors Uncompetitive or unfair procurement processes Inadequate contract management % % 15% Same level 38% Increase 16 62% Same level 16 62% Internal control deficiencies 19% 9 35% Increase Findings: Overall increase of 9% over Awards not in compliance with legislation: Awards not in compliance with legislation: Metro District Local Total auditees 90% 92% 100% 100% 10% 8% Auditees with no SCM findings Auditees with SCM findings 41

43 The AGSA audits included an assessment of procurement processes, contract management and the related controls in place. To ensure a fair, equitable, transparent, competitive and cost-effective SCM system, the processes and controls need to comply with legislation and minimise the likelihood of fraud, corruption, favouritism as well as unfair and irregular practices. The assessment was performed at a total of 26 auditees. Findings arising from the audit were reported in the management reports of 24 (92%) [ : 22 (85%)] of the auditees, while in only 10 (38%) [ : 22 (85%)] of these cases the findings were material enough to warrant reporting thereof in the auditor s report. The previous figure presents the movement in the number of auditees with SCM findings, the prevalence of SCM findings across the categories of auditees and a summary of SCM findings, with a comparison to the audit results of the financial year. Key outcomes and trends are provided in the table below, followed by further analysis of the SCM findings. Table 11: Key supply chain management outcomes Indicator Reduction in the limitations experienced in the audit of SCM Some reduction in awards to employees, councillors and other state officials Some reduction in uncompetitive and unfair practices No change in inadequate contract management Regression in awards to family members 42 Key findings There was a complete reduction in the number of limitations experienced in the audit. In audit limitations were experienced at three of the 26 auditees reported on, whereas in the year no limitations were experienced. This indicated an improvement in record keeping that the required information related to procurement was available for auditing at all auditees. Although there was an increase in the number of auditees that transacted with employees, councillors and other state officials from 58% to 62%, a further analysis revealed that the actual number of instances and rand value of these awards have decreased. Refer to table 12 below for further detail. This was further evidenced by the fact that the number of material noncompliance findings has decreased significantly from 14 auditees in to six auditees in Although the number of auditees that did not follow the correct procedures when procuring goods and services remained unchanged, a further analysis revealed that the actual number of instances and rand value of these awards have decreased. Refer to table 14 below for further detail. This was further evidenced by the fact that the number of material non-compliance findings has decreased significantly from the 12 auditees in to just six auditees in This was an area of concern that needed to be closely monitored as it had the most impact in ensuring effective and efficient service delivery. There has been no improvement in the number of auditees with findings although the number of material findings decreased from four in to two in There has been a regression in the number of auditees with awards to families. Although this was allowed in terms of the SCM regulations the identification of these awards remained a concern and in there was only one auditee that had findings

44 Indicator Key findings while in there were 10. A possible reason for this was that in the data available to identify these awards was only available at seven of the auditees reported on while in the data was available at all 26 auditees. Significant regression in internal control deficiencies This area has seen a regression. Although no material findings were included in the audit report, this indicates that auditees had control deficiencies within the SCM processes which required attention. Should these deficiencies not be addressed, there is a risk that the progress made above could be reversed. Refer to table 25 below for further detail. Good Concerned Poor Limitations on planned scope of the audit of awards None of the 26 auditees reported on for the financial year experienced limitations. Awards to employees and councillors or other state officials SCM regulation 44 prohibits awards to persons or entities owned/managed by them if they are in the service of the auditee (i.e. employees and councillors) or if they are in service of any other state institution. Such expenditure is also considered irregular. The audit included the identification of such prohibited awards. Further testing was performed to determine whether the legislated requirements with regard to declaration of interest were adhered to. The table below shows the extent and nature of these awards and whether any non-compliance with legislation was identified, with an indication of the positions of the officials involved. Where prohibited awards were also identified in the prior year, the name of the auditee is highlighted in red. 43

45 Table 12: Prohibited awards to employees and councillors or other state officials Auditee Beaufort West Bergrivier Bitou Breede Valley Cape Winelands District Number of instances Awards made to employees and councillors Amount (R) Positions Awards made to Supplier did not Employee or Supplier did not officials of other state submit declaration of councillor did not declare interest institutions interest declare interest Number of Number of Number of Number of Amount (R) Amount (R) Amount (R) Amount (R) instances instances instances instances City of Cape Town Drakenstein Eden District George Hessequa Knysna Saldanha Bay Stellenbosch Theewaterskloof West Coast District Witzenberg Senior manager and other employees Other employees Other employees Total Total Improvement Regression Eleven municipalities had repeat findings, while five others had new findings related to prohibited awards to employees and councillors or state officials. A total of R38,9 million (90 instances) [ : R87,9 million (129 instances)] was spent on these prohibited awards, which represents a 56% reduction in rand terms, compared to the previous year. As indicated in the summary above, there has been a good improvement in the number and value of instances of awards to persons in the service of the state. This indicates that actions implemented by all stakeholders to reduce the extent of non-compliance with SCM regulations are starting to bear fruit, however, it should be noted that there is still more that needs to be done and that if risks are not addressed adequately there is a possibility of regression. 44

46 It was also noted that the non-compliance related to suppliers either not declaring or not being required to submit a declaration form was not due to a lack of internal controls, but rather suppliers not being honest in their declarations. Special attention is required by municipalities with the support of oversight and monitoring initiatives to address control deficiencies in the areas of contract/awards to officials of the state institutions or suppliers who did not declare or submit a declaration of interest. Awards to close family members of employees and councillors Awards to persons or entities owned/managed by persons who are close family members of persons in the service of the state, whether at the auditee or at any other state institution, are not prohibited. However, such awards of more than R2 000 must be disclosed in the financial statements of the auditee for the sake of transparency and as required by SCM regulation 45. A close family member is defined as a spouse, child or parent of a person in the service of the state. The audit included the identification of awards to close family members. Further testing was performed to determine whether the financial statement disclosure was made and whether the legislated requirements with regard to declarations of interest were adhered to. The following table shows the audit findings raised at auditees where awards to close family members of officials of the auditee were identified, with an indication of the positions of the officials involved. The percentage is based on the number of auditees reported on. Where such awards were also identified in the prior year, the name of the auditee is highlighted in red. 45

47 Table 13: Awards to close family members Auditee Awards made to close family members of persons in service of the auditee No disclosure in financial statements Official did not declare interest Supplier did not submit declaration of interest Supplier did not declare interest Number of Number of Amount Positions instances instances Beaufort West Other employees 2 Number of instances Bitou Other employees 5 Breede Valley Other employees Number of instances Number of instances City of Cape Town Other employees Eden District Other employees 2 Hessequa Other employees Knysna Other employees 4 4 Langeberg Other employees 1 Matzikama Local Other employees Theewaterskloof Other employees 2 Total Total Improvement Regression Uncompetitive or unfair procurement processes The principles of contracting for goods and services in a manner that is fair, equitable, transparent, competitive and cost effective come from our Constitution. Legislation, most notably the MFMA and SCM regulations, prescribes the processes and rules to be followed by auditees in order to consistently and correctly apply the constitutional principles and to safeguard the process against abuse. The preferential procurement framework further gives effect to the constitutional principle of affording preference to the previously disadvantaged in the allocation of work by the public sector. Our audits also focus on whether procurement processes followed were fair and competitive in that they provided all suppliers equal opportunity to compete for public sector contracts and that the process does not favour some suppliers above others. It is important that the prescribed processes be followed to ensure that the selected supplier meets the requirements and has the capacity and ability to deliver the goods and services, and that those goods and services are procured at competitive and economical prices. 46

48 The procurement processes of contracts (R2,4 billion) and quotations (R85,4 million) were tested. Not all awards made by auditees were tested, only those selected based on risk and a statistical sampling method. The most prevalent findings on non-compliance with SCM legislation that resulted in uncompetitive or unfair procurement processes are summarised in the following table. Table 14: Summarised findings on uncompetitive or unfair procurement processes Three written quotations not invited no deviation approved: five auditees (23%) Summarised findings on uncompetitive or unfair procurement processes Three written quotations not invited deviation not reasonable/justified: three auditees (12%) 0% 40% 60% 0% 0% 100% A price quotation process was prescribed for procurement of goods and services valued at between R and R Three price quotations were not, in all instances, obtained from prospective providers and the deviations were not approved by a properly delegated official as required. Three price quotations were not, in all instances, obtained from prospective providers and although the deviations were approved by a properly delegated official as required, it was found not to be reasonable or justified. No declaration of interest by supplier: eight auditees (31%) Preference points system not used: three auditees (12%) 62% 33% 25% 67% 13% 0% 47

49 Suppliers were required to submit a declaration of interest as required for all awards where a written quotation was required (MBD4). This was to ensure that awards were only made to those suppliers who were not persons in the service of the state. In all instances, a declaration of interest form was not submitted by the supplier. Quotations not obtained from listed prospective suppliers/ suppliers meeting listing requirements: three auditees (12%) Summarised findings on uncompetitive or unfair procurement processes The preference point system was not applied in all procurement of goods and services above R30 000, as required by the Preferential Procurement Policy Framework Act. Other findings: 11 auditees (65%) 0% 33% 67% 9% 18% 73% Awards were made to suppliers that were not listed on the supplier database or to suppliers that did not meet the listing requirements. Other findings included bids advertised for a shorter period, construction projects not registered on the CIDB website, performance of contractors not monitored on a monthly basis. Inadequate contract management Shortcomings in the manner in which contracts were managed resulted in delays, wastage and fruitless and wasteful expenditure, which in turn, impacted directly on service delivery. Inadequate contract management remained at the same level. The most prevalent findings on inadequate contract management are summarised in the table below. Table 15: Inadequate contract management Payments made in excess of approved contract price (with further approved extensions) Key findings Auditees Percentage 1 4% Performance of contractors not monitored on a monthly basis Inadequate contract performance measures and monitoring 3 12% 2 8% 48

50 Inadequate supply chain management controls Internal control deficiencies in the SCM environment were the highest at nine (35%) auditees, a further deterioration of two (8%) auditees compared to prior year. The most prevalent deficiencies identified during the audit on fundamental SCM controls are summarised in the table below. Table 16: Inadequate internal controls Inadequate controls to ensure that interest is declared Register of bids received on time not published on website Key findings Auditees Percentage 3 12% 2 8% SCM policy/procedures in conflict with applicable legislation/did not include all requirements No/inadequate record keeping No plan for addressing audit findings on SCM/adherence to the plan was not monitored regularly Other control deficiencies included performance of the SCM unit was not regularly analysed; inadequate controls for vendor acceptance; and no controls were in place to monitor the performance of contractors 1 4% 1 4% 1 4% 4 15% Conclusion As indicated in the summary above there has been a good improvement in the area of SCM. This indicates that actions implemented by all stakeholders to reduce the extent of non-compliance to SCM regulations is starting to bear fruit, however, it should be noted that there is still more that needs to be done and that if risks are not addressed adequately there is a possibility of regression. This improvement can be attributed to the fact that a greater awareness has been created among the auditees regarding procurement. Auditees have taken the message and implemented policies and procedures as well as detailed compliance checklists where these were lacking and the internal audit units have been active in looking into the risks of non-compliance in the area of procurement. The next step for auditees is to maintain the momentum of these actions to ensure that this result is sustainable. With regard to those auditees that have stagnated and not improved, it was identified that due to the timing of the implementation of actions, although the number of instances of non-compliance has reduced significantly, the actions implemented were not timeous enough to prevent material non-compliance. The leadership needs to be more active in ensuring that credible action plans are designed and implemented timeously, and monitored to ensure that the actions 49

51 reap the required benefits. More emphasis needs to be placed on employee and supplier awareness to ensure that the conflict of interest declarations are completed correctly and submitted by employees and suppliers as this seems to be a significant risk area. 50

52 2.4.4 Unauthorised, irregular as well as fruitless and wasteful expenditure Number of auditees that incurred unauthorised, irregular, and/or fruitless and wasteful expenditure Nature of compliance findings on unauthorised, irregular as well as fruitless and wasteful expenditure (UIFW) Any two of unauthorised, irregular or fruitless and wasteful expenditure 15 (57%) Unauthorised expenditure not prevented Irregular expenditure not prevented 8 31% 9 35% 10 38% 18 69% Irregular expenditure only 3 (12%) Unauthorised expenditure only 2 (8%) All three of unauthorised, irregular or fruitless and wasteful expenditure 4 (15%) No unauthorised, irregular or fruitless and wasteful expenditure 2 (8%) Fruitless and wasteful expenditure not prevented Disciplinary steps not taken against officials who made or permitted UIFW 0% 5 1 4% 0% 19% Cape Town Metropolitan District municipalities Local municipalities Total 100% 80% 20% 95% 92% 5% 8% Auditees that did not incur UIFW Auditees that incurred UIFW 51

53 The MFMA requires accounting officers/authorities to take effective and appropriate steps to ensure that unauthorised, irregular as well as fruitless and wasteful expenditure (UIFW) is prevented. Although there is an expectation that no such expenditure should be incurred, it is not always possible for an accounting officer to prevent the occurrence thereof even if all reasonable steps had been taken. In instances where it does occur, the MFMA makes it compulsory for auditees to disclose such expenditure in their annual financial statements. The MFMA further requires that all instances of unauthorised, irregular as well as fruitless and wasteful expenditure should be investigated. If the investigation determines that an official is liable for the expense, disciplinary steps should be taken and the expenditure should be recovered. The extent of unauthorised, irregular as well as fruitless and wasteful expenditure and the pervasiveness of the related non-compliance with legislation applicable to unauthorised, irregular as well as fruitless and wasteful expenditure as depicted earlier indicate a breakdown in auditees internal control environment. Table 17: Key trends unauthorised, irregular as well as fruitless and wasteful expenditure Indicator 92% incurred Noncompliance reduced Fruitless and wasteful Key findings Ninety-two per cent of auditees, compared to 85% in prior year, incurred unauthorised and/or irregular and/or fruitless and wasteful expenditure. Although non-compliance reporting decreased from 2011 to 2012 the number of auditees incurring unauthorised and irregular expenditure remained high. Although the rand value and instances of fruitless and wasteful expenditure increased, no instances of material non-compliance were reported in the audit reports for fruitless and wasteful expenditure not prevented. Good Concerned Poor Section provides further detail on the lack of consequences for transgressions, which includes incurring unauthorised, irregular as well as fruitless and wasteful expenditure. 52

54 Figure 9: Nature of and overall trends in unauthorised expenditure Amount Number of auditees ( : 69%) R1 029,4 million R 23,6 million R1 005,8 million 16 R276,7 million R 24,5 million R252,2 million R259,5 million R 52,5 million R207 million Unauthorised expenditure (UE) Unauthorised expenditure (UE) Identified by auditees Identified during audit All of UE identified by auditees All or part of UE identified during audit Cape Town Metropolitan District municipalities Local municipalities Total 100% 60% 40% 75% 25% 69% 31% Auditees that did not incur UE Auditees that incurred UE 53

55 The previous figure reflects the three-year trend in unauthorised expenditure, the extent to which it was identified during the audit (and not by the auditees internal control systems) and the type of auditee where it occurred. The unauthorised expenditure incurred was as a result of overspending of votes/main divisions within votes (97%) and expenditure not in accordance with the purpose or unrelated to functional area (3%). Two municipalities (Mossel Bay and Knysna) accounted for R704 million (68,3%) of the unauthorised expenditure due to non-cash expenditure not budgeted for related to the impairment of property, plant and equipment (PPE) (mostly land and to a certain extent buildings). Unauthorised expenditure invariably means that money intended for a certain programme was used to fund other programmes, which in turn affected service delivery in accordance with the performance objectives set for the year. Table 18: Key outcomes and trends in unauthorised expenditure Indicator Auditees identified instances Unauthorised increased Individual unauthorised greater than R10 million Non-cash expenditure Key findings Auditees identified and disclosed 98% of all unauthorised expenditure identified. The number of auditees incurring unauthorised, as well as the rand value of unauthorised increased from 2011 to Eleven municipalities incurred individual unauthorised expenditure above R10 million due to improper budgeting, incorrect allocations between capital and operating budgets and inadequate monthly budgetary controls. Two municipalities (Mossel Bay and Knysna) contributed to R704 million (68%) of the unauthorised expenditure incurred in the province due to non-cash expenditure not budgeted for related to the impairment of property, plant and equipment (mostly land and, to a limited extent, buildings). Good Concerned Poor 54

56 Figure 10: Nature of and overall trends in irregular expenditure Amount Number of auditees ( : 77%) R529,6 million R242,8 million R million R66,6 million R216,9 million R37,2 million R 89.9 million R29,4 million R25,9 million Irregular expenditure (IE) Irregular expenditure (IE) Identified by auditees Identified during audit All of IE identified by auditees All or part of IE identified during audit Cape Town Metropolitan District municipalities Local municipalities Total 100% 80% 20% 75% 25% 77% 23% Auditees that did not incur IE Auditees that incurred IE 55

57 The previous figure reflects the three-year trend in irregular expenditure, the extent to which it was identified during the audit (and not by the auditees internal control systems) and the type of auditee where it occurred. Irregular expenditure does not necessarily mean that money had been wasted or that fraud had been perpetrated. However, it is a measure of an auditee s ability to comply with laws and regulations relating to expenditure and procurement management. The nature of and current year movement in irregular expenditure are reflected in the table below. Table 19: Nature of and current year movement in irregular expenditure Nature Number of auditees Movement in number of auditees from Amount Movement in amount from Related to SCM 20 R 66,3 million 5% 72% Related to compensation of employees 2 0% R 0,1 million 89% Other non-compliance 1 R 0,2 million 50% 82% Improvement Unchanged Regression 56

58 Table 20: Key outcomes and trends in irregular expenditure Indicator Trend of reduction Number of auditees incurring Irregular identified by auditors Key findings There is a notable trend of a reduction in the rand value of irregular expenditure incurred over the three years (2010 to 2012). Although the rand value of irregular expenditure decreased significantly, the number of auditees incurring irregular expenditure increased marginally. A significant portion (56%) of the irregular expenditure incurred by auditees was identified during the audit, indicating that the auditees internal controls failed to detect these deviations. Good Concerned Poor 57

59 Figure 11: Nature of and overall trends in fruitless and wasteful expenditure Amount Number of auditees ( : 35%) R7,8 million R 2,5 million R6,3 million R 0,6 million R5,3 million R5,7 million R3 million R 0,9 million 5 6 R2,1 million Fruitless and wasteful expenditure (FWE) Fruitless and wasteful expenditure (FWE) Identified by auditees Identified during audit All of FWE identified by auditees All or part of FWE identified during audit Cape Town Metropolitan District municipalities Local municipalities Total 100% 100% 45% 55% 35% 65% Auditees that did not incur FWE Auditees that incurred FWE 58

60 The previous figure reflects the three-year trend in fruitless and wasteful expenditure, the extent to which it was identified during the audit (and not by the auditees internal control systems) and the type of auditee where it occurred. The table below shows the overall movement in the number of auditees and the movement in the amount of fruitless and wasteful expenditure incurred by these auditees. The actual fruitless and wasteful expenditure related mostly to interest incurred on late payments, payment for software not used and an overpayment on a contract. Table 21: Nature of and current year movement in fruitless and wasteful expenditure Nature Incurred to prevent irregular/loss/further fruitless and wasteful expenditure Number of auditees Movement in number of auditees from Amount Movement in amount from % 100% 1 R 0,3 million Actual fruitless and wasteful expenditure 14% 8 R 7,5 million 20% Improvement Unchanged Regression Table 22: Key outcomes and trends in fruitless and wasteful expenditure Indicator Rand value increased Two auditees account for majority Key findings Both the rand value and the number of municipalities incurring fruitless and wasteful increased from 2011 to Two municipalities accounted for R7,1 million (91%) of fruitless and wasteful expenditure incurred in the province. It related to software purchases not used (Bitou R4,4 million) and an overpayment on a contract (Saldanha Bay R2,5 million). Both auditees also incurred interest on overdue accounts. 59

61 Indicator Auditors identify a large portion Key findings A large portion (32%) of the fruitless and wasteful expenditure incurred by auditees was identified during the audit, indicating that the auditees internal controls failed to detect these deviations. Good Concerned Poor Conclusion on unauthorised, irregular as well as fruitless and wasteful expenditure Twenty-four (92%) auditees incurred unauthorised, and/or irregular and/or fruitless and wasteful expenditure. Unauthorised expenditure has increased by 272% to R1 029 million compared to the prior year. However, R704 million of this is due to non-cash expenditure that was not budgeted for. The audits further revealed that the accounting officers of 12 (46%) auditees did not ensure that reasonable steps had been taken to prevent this type of expenditure. This was reported in the auditor s reports as material non-compliance. The extent of this expenditure and non-compliance by accounting officers indicated an environment where unauthorised, irregular as well as fruitless and wasteful expenditure was still incurred by the majority (92%; : 85) of auditees. It is encouraging to note that although the number of auditees increased there has been a significant reduction in material non-compliance due to a reduction in the rand value of irregular expenditure incurred, which bodes well for sustained improvement in this area. Reasonable steps were not taken to prevent such expenditure, while the occurrence of irregular expenditure in particular, was also not detected by auditees but was most often identified through the AGSA s audit process. 60

62 SECTION 3: ROOT CAUSES OF AUDIT OUTCOMES This section details the root causes of audit outcomes and recommendations to address these root causes. Section 3.1 provides a summary of the root causes with further detail on such root causes and areas of risk that require attention; section 3.2 details the significant deficiencies in auditees systems of internal control, human resource management is discussed in section 3.3; financial reporting assistance provided by consultants is detailed in section 3.3.3; section 3.4 discusses information technology management; and section 3.5 deals with the effectiveness of audit committees and internal audit units. 3.1 Summary of root causes of poor audit outcomes The AGSA s audit process includes an assessment of the root causes of audit findings based on the identification of the internal control which failed to prevent or detect the misstatement or non-compliance. The tables that follow summarise the most common root causes of the audit outcomes in local government, provide recommendations to address the root causes and identify the role players responsible for addressing such root causes. The majority of these root causes and recommendations were also reported in the management, audit and general reports. The AGSA s view on the reasons for not addressing the prior year root causes is also provided. Legend: F = Financial reporting; P = Performance reporting [service delivery reporting]; C = Compliance with laws and regulations Table 23: Prior year root causes not addressed and recommendations not implemented Root cause number 1: Slow response by political leadership in addressing the root causes Detail on root cause Identified at 19 (73%) of auditees Audit outcomes affected F P C X X X There were municipalities that still failed to address findings previously reported as they implemented our recommendations too late for them to have an impact on the next audit outcome, which led to them to still having findings on compliance with laws and regulations and PDOs. Fourteen auditees remained with issues partially addressed from the prior year, one auditee (Mossel Bay) addressed prior year issues fully and it (implementing our recommendations too late) was identified as a new root cause for the 2012 year for five auditees. Role players that should address the root cause CFOs, municipal managers, mayors, councils, MECs for finance and local government and the premier. Reason(s) why prior year root cause was not addressed 61

63 Root cause number 1: Slow response by political leadership in addressing the root causes Identified at 19 (73%) of auditees Audit outcomes affected F P C X X X Many councils, executive mayors and municipal managers at auditees that failed to make progress and those whose outcome had regressed, did not consistently focus on the weaknesses identified in key controls, thus leading to corrective actions not being taken in a timely manner to positively impact the control environment. Lapses in effective oversight included the following: Action plans were developed too late in the financial year to resolve matters by year-end. Furthermore, in most instances the action plans also did not address the root causes of audit findings and therefore did not prevent repeat findings in the area of financial reporting and compliance with laws and regulations. This was an indication that the leadership did not assess the adequacy of action plans and monitor progress in their implementation to improve audit outcomes, despite the fact that the AGSA pointed out these shortcomings during key control visits. There was ineffective monitoring to ensure that the responsibilities assigned to address certain findings were carried out consistently and effectively. Effective internal controls were not designed and implemented in a timely and sustainable manner. Some municipalities did not see the value in the preparation of regular financial statements, supported by the daily disciplines of regular processing and monthly reconciliation of accounts. Prior year AGSA recommendations not yet implemented The political and administrative leadership should focus on the areas of non-compliance through overseeing the development and implementation of appropriate action plans and monitoring of compliance through the use of compliance checklists. The political and administrative leadership should oversee the development and implementation of adequate action plans to effectively address the risks relating to performance reporting, which should include regular preparation of performance reports that are validated for accuracy. The preparation of regular financial statements must become a standard feature of monthly reporting processes, supported by the implementation of controls to ensure daily processing of transactions and monthly reconciliation of accounts. Additional recommendations made at this time The political and administrative leadership of municipalities should insist in getting regular financial statements and performance reports whose credibility should be confirmed by the audit committee with the assistance of internal audit, as well as the provincial treasury. Municipalities should develop credible action plans to address internal control deficiencies as soon as the deficiencies have been identified. The relevant oversight functions vested in mayors, accounting officers, senior management, internal audit units and audit committees should be better exercised to ensure the effective implementation of the action plans. The monitoring and coordinating institutions such as the provincial treasury and local government should enhance the support and guidance they provide to municipalities to develop and implement action plans in a timely manner. Root cause number 2: Lack of consequences for poor performance and transgressions 62 Identified at 10 (38%) of auditees Audit outcomes affected F P C

64 Detail on root cause X X X Inadequate performance management of accounting officers and employees is still at the root of many of the failures of local government and was identified at 10 (38%) municipalities. Seven auditees remained with issues partially addressed from the prior year, five auditees addressed prior year issues fully and it (inadequate performance management) was identified as a new root cause for the 2012 year for three auditees. The three municipalities that fully addressed the issue imbedded a culture of consequence management, including actions such as including clean audit outcomes as part of the performance contracts of managers. Responsibility was assigned to specific officials to aid in holding other officials responsible and it is evident that steps were taken against officials when transgressions occurred. Role players that should address the root cause CFOs, municipal managers, mayors and municipal councils Reason(s) why prior year root cause was not addressed The controls and performance objectives of the municipalities did not filter through to the performance contracts of municipal officials in order to direct their daily operations. As such, ineffective performance management led to officials, who performed poorly, not being dealt with decisively at some municipalities. Prior year AGSA recommendations not yet implemented Prior year AGSA recommendations not yet implemented include the following: In order to improve the performance and productivity of municipal officials, the leadership should set the tone by implementing sound performance management processes, evaluating and monitoring performance, and consistently demonstrating that poor performance has consequences. The disciplinary regulations for senior managers, effective from April 2011, provide mechanisms and procedures for managing misconduct of municipal managers and senior managers. The implementation of these regulations will further provide an opportunity for the councils and municipal managers to demonstrate their commitment to accountability. Additional recommendations made at this time A concerted effort is required by mayors, municipal councils and municipal management to ensure that the disciplinary regulations for senior managers are complied with in instances were transgressions have been identified. The municipal leadership needs to enhance its oversight responsibilities to ensure that action is taken against transgressors and that action plans are implemented and monitored. 63

65 Root cause number 3: Key positions vacant or key officials lacking appropriate competencies Detail on root cause Identified at 13 (50%) of auditees Audit outcomes affected F P C X X X The complexities in local government the challenges experienced and the expectations of the public demand that key personnel at municipalities have the skills, experience and capacity to assume and fulfil their responsibilities and exercise their functions and powers. The reforms in financial and performance management have also resulted in a higher level of competency requirements than in the past for accounting officers, CFOs, senior managers, SCM officials and other municipal officials. The audit outcomes, failures in service delivery and the high demand for consultants, as highlighted in this report, indicated an environment where the persons appointed in these posts did not have the competencies required. This has been identified as a weakness at 13 (50%) of the municipalities, a regression from the 10 (38%) municipalities that had this concern in Persons were appointed who did not have the requisite competencies, while current employees did not keep up with the changing local government environment through ongoing training and development. Vacancies in key positions and instability in leadership at some municipalities affected the pace of sustainable improvements in audit outcomes. Seven auditees remained with these issues from the prior year, three addressed prior year issues and at six auditees the root causes mentioned above were identified as new root causes for the financial year. Role players that should address the root cause CFOs, municipal managers, mayors, municipal councils, provincial treasury and local government Refer to human resource management sections and for more detail. Reason(s) why prior year root cause was not addressed Prior year AGSA recommendations not yet implemented Although all vacancies should be filled as a matter of urgency, the ideal is that key positions must be filled with people who have the requisite competencies. There is an option for secondments, consultants and national and provincial support in these cases. There have been many initiatives at national and provincial levels to address the human resource weaknesses in local government, but there has been limited success. A coordinated and focused approach is needed to ensure that the many programmes, commitments and action plans from different stakeholders succeed. The implementation of the latest legislative reforms will also require a new level of collaboration, especially by the treasury and the departments of local government at national and provincial levels. Without these partnerships and commitment by the political and administrative leaders of the municipalities, the situation in the Western Cape will not improve. Additional recommendations made at this time Mayors and municipal councils should perform an assessment of the minimum competencies of all employees at their municipalities. Employees should be placed in positions for which they are qualified and have the skills and competencies to perform. The resultant vacancies should be filled with officials complying with the minimum required competencies. 64

66 Root cause number 3: Key positions vacant or key officials lacking appropriate competencies Identified at 13 (50%) of auditees Audit outcomes affected F P C X X X The provincial treasury and local government should assist with training and upskilling of existing employees at municipalities that cannot attract the required skills. Municipalities should offer bursaries to candidates that are studying towards careers to create a pipeline, which will aid the skills shortages that municipalities face. This will ensure that skills can be attracted to fill positions instead of re-advertising posts and the creation of a long-term plan to address vacancies at municipalities. Municipalities should consider implementing appropriate incentives to attract candidates with the requisite competencies and experience to municipalities that are located in remote areas. 65

67 3.2 Significant deficiencies in auditees systems of internal control * Objectives impacted on by internal control driver 53% 47% 35% 33% 53% 43% Internal control driver Financial management and reporting Service delivery Compliance with laws planning and reporting and regulations Leadership 53% 22% 25% 53% 22% 25% 51% 27% 22% 23% 26% 34% 30% 29% 27% Financial and performance management 25% 40% 35% 36% 32% 32% 37% 36% 27% 24% 27% 31% Leadership 37% Financial and performance management 18% 30% Governance Governance Good Improvement 56% 29% 15% 51% 25% 24% 51% 30% 19% Causing concern Intervention required Regression A key responsibility of accounting officers/authorities and other officials is to implement and maintain effective and efficient systems of internal control. As part of the audits the auditee s system of internal control is assessed to determine its effectiveness in ensuring reliable financial and performance reporting and 66

68 compliance with laws and regulations, which, in turn, will result in clean audit outcomes. For purposes of focusing corrective action, the principles of the different components of internal control, termed drivers of internal control, have been categorised under leadership, finance and performance management and governance. The previous figure and the table below provide the overall assessment of these drivers at the time of the audit, based on significant deficiencies identified in internal control, which resulted in material misstatements (corrected and uncorrected) in financial statements and performance reports as well as findings on compliance with laws and regulations. The following broad areas are highlighted: Table 24: Key trends drivers of internal control Indicator Significant internal control deficiencies are being addressed Municipalities requiring intervention Some controls have not improved Key findings As can be seen from the above figure, municipalities have made progress in addressing significant deficiencies in leadership, financial and performance management and governance components. These municipalities should continue to enhance their oversight and monitoring functions to ensure that internal control deficiencies are addressed in a sustainable manner. The overall improvement of the combined controls relating to leadership, financial and performance management and governance has had a positive impact on all three facets of the audit outcomes, namely (i) financial statements, (ii) reporting against PDOs (service delivery reporting); and (iii) compliance with laws and regulations. This resulted in significant decreases in the number of findings on PDOs and compliance with laws and regulations, while qualifications have also decreased. The full impact of the improved control environment, if sustained, will be evident in further improvements in audit outcomes in subsequent financial years. The overall decrease in the municipalities key drivers of internal controls requiring intervention is encouraging; however, the stagnation in the number of municipalities requiring intervention in controls related to leadership is concerning. This can be seen in the recurring findings on compliance with laws and regulations and PDOs, which continue to prevent municipalities from obtaining clean audit outcomes. The municipal management, internal audit units, audit committees and oversight functions within the municipalities should better exercise their oversight to ensure that action plans address internal control deficiencies and improve audit outcomes. The number of municipalities with qualified opinions decreased. However, there has been a marked increase in the number of municipalities that needed to make material adjustments to their financial statement to avoid a qualification of their financial statements. The majority of the municipalities have not yet paid careful attention to our advice to prepare regular financial statements during the financial year, which would reduce the material misstatements that are identified during the audit process. Furthermore, at some municipalities, effective internal controls to prevent, detect and correct non-compliance with laws and regulations and errors in financial and performance reports were lacking. Checks and balances for all key processes, monthly reporting and validation processes to ensure the credibility of all management information are basic controls, which skilled professionals employed by the municipalities should be able to implement. 67

69 Good Concerned Poor The status of the internal control elements as at June 2012, underlying leadership, financial and performance management and governance and movement in the implementation thereof are presented in the following table. Annexure 3 provides the status of key controls per auditee. Table 25: The status of and movement in the internal control elements, underlying leadership and financial and performance management Driver no. 1: Leadership Movement Assessment of driver Provide effective leadership based on a culture of honesty, ethical business practices and good governance, protecting and enhancing the interests of the entity % 98% 12% 1% 1% 9% The overall improvement at some municipalities and the stagnation in the audit outcomes of other municipalities are directly associated with committed and ethical leadership at municipalities, setting the tone at the top. The leadership of an organisation sets the tone from the top regarding the importance of internal controls and expected standards of conduct. There is an intention by the political leadership of municipalities to obtain clean audit outcomes; however, the execution should match the intention. The leadership of municipalities should focus on monitoring the performance of key officials regarding the maintenance of adequate systems of internal control that ensure credible monthly financial reporting, reliable reporting against PDOs and compliance with laws and regulations. Execution will become a sustainable reality when the leadership of municipalities holds officials accountable and requires that actions be taken against officials for transgressions or poor performance. Exercise oversight responsibility regarding financial and performance reporting and compliance with laws and regulations and related internal controls % 44% 28% 24% 40% 32% Our quarterly key control visits were introduced to assist municipalities to track, on a quarterly basis, whether their drivers of internal controls have improved, remained stagnant or regressed. The municipalities, which have responded to our key control messages, have shown improvements in their drivers of internal controls. The leadership of these municipalities took this initiative seriously by making time to meet with us at least three times. This contributed to the positive impact on key internal controls on areas of financial and performance information reporting and compliance with laws and regulations. The improvements can be observed in the decrease in the number of findings on performance information reporting and findings on compliance with laws and regulations. Further improvements can be noted in the overall key control status of municipalities with substantial improvement on governance. 68

70 Driver no. 1: Leadership Movement Assessment of driver However, the response was at a slow pace as the same municipalities still had not addressed all their significant internal controls deficiencies. Many councils, executive mayors and municipal managers at auditees which failed to make progress and those whose outcome had regressed, did not consistently focus on the weaknesses identified in key controls, thus leading to corrective actions not being taken in a timely manner to positively impact the control environment. Drakenstein and Hessequa did not take these interactions seriously enough in the past as they did not make time to meet with the AGSA at least once each quarter (meeting once and twice, respectively). Stellenbosch failed to meet with us for key control meetings, because of leadership instability at municipal manager level there were four different persons that acted as municipal managers during the year under review. Implement effective human resource management to ensure that adequate and sufficiently skilled resources are in place and that performance is monitored % 55% 33% 23% 22% 17% An assessment of findings arising from the audit of human resource management is presented in section 3.3. Establish and communicate policies and procedures to enable and support an understanding and execution of internal control objectives, processes and responsibilities % 59% 27% 27% 19% 14% Policies and procedures are fundamental to an internal control environment that supports good governance and produces clean administration. The improvement recorded in the area of adequate policies and procedures is encouraging. If compliance with these policies and procedures is monitored in a timely manner to allow for corrective action when deficiencies are identified, it would result in reliability of performance information and consistent compliance with laws and regulations. Develop and monitor the implementation of action plans to address internal control deficiencies % 42% 31% 30% 33% 28% Some of the municipalities with audit outcomes that did not improve from financially unqualified with findings have shown little progress in addressing prior year findings, especially in the area of financial reporting and compliance with laws and regulations. Specific plans are required to address internal control deficiencies to improve the audit outcomes. Matters requiring attention include the following: Their action plans were developed too late in the financial year to resolve matters by year-end. The action plans also did not address the root causes of audit findings and therefore did not prevent repeat findings in the area of financial reporting and compliance with laws and regulations. This was an indication that the leadership did not assess the adequacy of action plans and monitor progress in their implementation to improve audit outcomes. Action plans should be set in a timely manner and address root causes of audit findings, in addition to other key risks facing the municipalities, to prevent repeat findings. Ineffective monitoring to ensure that responsibilities are assigned and carried out effectively and consistently. 69

71 Driver no. 1: Leadership Movement Assessment of driver Develop and monitor the implementation of action plans to address internal control deficiencies in the IT environment. Establish an IT governance framework that supports and enables the business, delivers value and improves performance % 28% 46% 25% 47% 41% An assessment information technology controls is presented in section 3.4. Driver no. 2: Financial and performance management Movement Assessment of driver Implement proper record keeping in a timely manner to ensure that complete, relevant and accurate information is accessible and available to support financial and performance reporting. Proper record keeping is an essential step towards achieving clean audit outcomes, as it ensures that the information reported can be substantiated and verified. An adequate system of record keeping requires that the senior management establish adequately developed and communicated policies to ensure that staff align their actions to the entity s objectives. A key objective of maintaining a formal and reliable system of record keeping is to have documentation readily available when requested. Adequate record keeping has regressed in respect of financial information while it has improved for performance information. Inadequate record keeping resulted in a qualification for Bergriver as they were unable to provide information for audit purposes to verify the opening balance of inventory. Adequate documentation was also not present at many other municipalities included in this analysis to support accurate reporting in the financial statements, resulting in material misstatements. The root causes included the following: The leadership s lack of willingness to implement those commitments that were specifically made to address the recurring instances of missing and incomplete supporting information. A lack of formal review of the financial statements against supporting documentation before submission thereof for auditing. 45% 53% 33% 21% 26% 22% Implement controls over daily and monthly processing and reconciling of transactions % 45% 24% 28% 35% 27% Auditees that improved or sustained their audit outcomes were found to effectively monitor daily and monthly processing and reconciling of transactions. Auditees that improved on reconciliation processes and reconstruction of fixed asset register, in particular, were able to resolve audit qualifications. Three municipalities moved from qualified opinions to financial unqualified with finding on performance reporting and compliance with laws and regulations. However, some municipalities still did not confirm that legislative requirements and policies have been complied with prior to initiating transactions and remain with findings on SCM. These basic financial controls should be actively monitored by management in order to achieve improved audit outcomes. 70

72 Driver no. 1: Leadership Movement Assessment of driver Prepare regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information % 22% 42% 36% 40% 42% Only when the in-year preparation and independent review of financial statements and performance information become an established practice, will the quality of financial statements submitted for auditing significantly improve and findings resulting from material misstatements in financial statements and performance reports be eliminated. Although the number of auditees that obtained financially unqualified audit reports increased, the quality of the financial statements submitted for auditing was still not adequate, as evidenced by the increase in the material misstatements identified and corrected during the audit. Root causes included the following: Municipalities were still not heeding our call to prepare financial statement on a monthly or quarterly basis as the leadership did not require this of its officials. The leadership still did not see the value in this practice, and as a result, various errors in the process of compilation were not detected, leading to material misstatements in the financial statements. Line managers also did not accept responsibility to ensure that information is accurate, valid and complete. Furthermore, the validation process of the information submitted for compilation of the financial statements was not adequate as was evident from the misstatements detected through the audit process. In a number of municipalities, it was also found that staff members did not fully understand the requirements of the financial reporting framework; as a result, there was an over-reliance on consultants in achieving an unqualified audit opinion. Although there have been improvements in reporting of PDOs, the number of auditees still needing to improve in their performance reporting was due to the failure to ensure the usefulness and reliability of the PDOs. Review and monitor compliance with applicable laws and regulations % 26% 27% 37% 47% 35% The analysis above includes compliance related to financial reporting, reporting on PDOs and other non-compliance. The improvement mainly relates to reporting on PDOs and other non-compliance, in particular procurement and contract management and related irregular expenditure. While the monitoring of laws and regulations in the area of procurement and contract management remained one of the biggest challenges in the province, municipalities have significantly improved in this regard. The improvement was evident by the reduction in the extent of non-compliance findings reported at municipalities and by the increase in the number of clean audit outcomes. There were those municipalities that reported repeat findings of non-compliance with laws and regulations and there appeared to be no appreciable consequences for officials who failed to comply or officials who failed to discharge their legislated duties. The biggest challenge with the municipalities in the province was their failure to prepare financial statements that are free from material misstatements, which is contrary to 71

73 the requirement of the MFMA. Driver no. 1: Leadership Movement Assessment of driver Design and implement formal controls over IT systems to ensure the reliability of the systems and the availability, accuracy and protection of information and to address application systems susceptible to compromised data integrity (Information systems) % 27% 44% 40% 42% 33% An assessment of IT controls is presented in section 3.4. Driver no. 3: Governance Movement Assessment of driver Implement appropriate risk management activities to ensure that regular risk assessments, including consideration of IT risks and fraud prevention, are conducted and that a risk strategy to address the risks is developed and monitored % 56% 36% 29% 28% 15% A risk assessment is conducted to establish what control activities (policies and procedures) are required to ensure achievement of the control objectives. The risk assessment should cover all three facets of the audit outcomes, namely (i) financial statements, (ii) reporting against PDOs (service delivery reporting); and (iii) compliance with laws and regulations. This assessment then informs management and leadership of municipalities of the areas they should focus their attention on in order to drive their respective municipalities towards clean audit outcomes. The strategy developed should then be appropriately implemented and monitored to ensure that it achieves the objective of clean audit outcomes. The analysis above shows significant improvement in the municipalities risk management strategies designed, implemented and monitored. This should result in municipalities sustaining the progress made towards clean audits and also to further improvements in the future. Ensure that an adequately resourced and functioning internal audit unit is in place that identifies internal control deficiencies and recommends corrective action effectively % 53% 27% 26% 27% 21% Section 3.6 provides an assessment of the effectiveness of internal audit units. 72

74 Driver no. 1: Leadership Movement Assessment of driver Ensure that the audit committee promotes accountability and service delivery through evaluating and monitoring responses to risks and provides oversight of the effectiveness of the internal control environment, including financial and performance reporting and compliance with laws and regulations % 50% 21% 27% 33% 23% Section 3.6 provides an assessment of the effectiveness of audit committees. Improvement Unchanged Regression 73

75 3.3 Human resource management Effective human resource (HR) management is a key driver of audit outcomes. In this context, HR management is deemed effective if adequate and sufficiently skilled resources are in place and their performance and productivity are properly managed. As detailed in section 3.1, the vacancies in key positions, competencies of key officials and the lack of consequences for poor performance and transgressions were again identified as root causes of poor audit outcomes. These weaknesses are symptoms of ineffective HR management in local government. For the past two years the audits included an assessment of HR management, with specific focus on the following areas: HR planning and organisation Management of vacancies Appointment processes Performance management Acting positions Management of leave, overtime and suspensions. Findings arising from the assessment of HR management were reported in the management reports of 38% of the auditees, while at 12% of auditees the findings were material enough to warrant reporting in the auditor s report. The following figure shows the three weakest areas of HR management at auditees, which should be improved to positively affect audit outcomes. Further detail on the findings is provided in sections to Figure 12: Summary of human resource management weaknesses Management of vacancies and acting positions 23% Competencies of key personnel 27% Performance management 4% 74

76 The audits of SCM, financial misconduct and unauthorised, irregular as well as fruitless and wasteful expenditure included procedures to determine whether there were consequences for transgressions by officials, as required by legislation. The findings arising from the audits are presented in section Management of vacancies and acting positions The biggest challenge for local government was to attract and retain qualified, competent persons across all areas of administration. Table 26: Key findings on the management of vacancies and acting positions Indicator Overall vacancy rate Vacancy rate increased from 2011 Vacancies at senior management level Senior management vacancy rate increased from 2011 Senior management positions vacant for more than 12 months Vacant municipal manager positions Key findings The average overall vacancy rate for 26 municipalities at year-end was 12%. The highest vacancy rate was at George with 48% and the lowest at Witzenberg with 3%. George achieved a clean audit opinion in spite of the high vacancy rate as these vacancies were at an operational level and not at management level. The was also assisted by consultants. At 14 (54%) auditees, the overall vacancy rate has increased since The average vacancy rate at senior management level for municipalities at year-end was 14%. The highest vacancy rate was at Overberg District with 45% and the lowest at Overstrand with 2%. At eight (31%) auditees the senior management vacancy rate has increased since Senior management positions at two (8%) auditees were vacant for more than 12 months. However, at one (4%) auditee the vacant position was not advertised within six months of becoming vacant. Officials were directed to act in these positions until the vacancies were filled, but at two (8%) of the auditees the acting periods were for longer than the accepted benchmark of six months. When a person acts in a position, they tend not to take on the full responsibility, functions and powers of the post, with a lower commitment to the deliverables as a result of the temporary nature of the position. Municipal manager positions were vacant at three (12%) auditees. At these auditees the position had not been vacant for more than 12 months and was advertised within six months of becoming vacant. 75

77 Indicator Vacant CFO positions Vacant head of SCM positions Key findings The position of CFO was vacant at four (16%) auditees. None of these positions had been vacant for more than 12 months. At one (4%) of these auditees the vacant position was not advertised within six months of becoming vacant. The head of SCM position was vacant at three (12%) auditees. The head of SCM position had been vacant for more than 12 months and the vacant position was also not advertised within six months of becoming vacant at one auditee. The reasons for the continuing vacancies in provincial local government were the following: Municipalities were unable to attract the right skills to fill vacancies in time, especially municipalities in remote locations. Funding shortages and restructuring initiatives by the council were reasons for continuing vacancies at some of the municipalities. The percentage of the labour market within the province that was skilled to the required level of municipal requirements was low and caused positions to be re-advertised, thereby increasing the amount of time it took to fill the vacant positions. Staff that would not have complied with the minimum competency framework have resigned from the municipalities due to concerns about job security. The impact of the vacancies was that these municipalities were unable to implement and monitor basic internal control disciplines in areas of financial reporting, reporting on PDOs and compliance with laws and regulations. The failure to implement these internal control disciplines had a negative impact on these municipalities ability to achieve clean administration and ultimately clean audit outcomes. The following are recommended to address weaknesses in the management of vacancies and acting positions: The municipalities should consider implementing appropriate incentives to attract candidates to municipalities that are located in remote areas. The municipalities should consider offering bursaries to candidates that are studying toward careers in the financial field to create a pipeline, which will alleviate the skills shortages that municipalities face. This will ensure that skills can be attracted to fill positions instead of re-advertising posts and the creation of a long term-plan to address vacancies at municipalities. The provincial treasury and local government should intensify their efforts to assist with training and up skilling of existing employees at municipalities that cannot attract the required skills. Good Concerned Poor 76

78 3.3.2 Competencies of key officials The complexities in local government, the challenges experienced and the high expectations of the public demand that key personnel at municipalities have the skills, experience and capacity to assume and fulfil their responsibilities and exercise their functions as required. The reforms in financial and performance management have also resulted in a higher level of competency requirements than in the past for municipal managers, CFOs, senior managers, SCM officials and other financial officials. The poor audit outcomes, service delivery failures and the high demand for consultants and for support from national and provincial governments, however, indicated an environment where the persons appointed in these posts did not have the required competencies. The root cause of this was two-pronged personnel who did not have the required competencies were appointed in key positions, and existing employees did not keep up with the changing local government environment through ongoing training and development. However, the implementation of the municipal regulations on minimum competency levels and the amendments to the Municipal Systems Act, 2000 (Act No. 32 of 2000) (MSA), is an opportunity to improve the situation. The regulations define the minimum competency levels of accounting officers, CFOs, senior managers, SCM officials and other financial officials, taking into account the differences in size and scope of the municipalities. It provides for a phasing-in period for staff currently in those positions to obtain the minimum competency level through academic studies and experience and by addressing any gaps in competencies through training and development. The phasing-in period ended on 1 January 2013 and, as per the regulations, the affected positions may not continue to be filled by persons who do not meet the minimum competency levels and this impacts on the continued employment of the affected officials. However, municipalities were granted an opportunity by the National Treasury to apply by September 2012 for an 18-month extension (until 1 July 2014) for enforcing the regulations as a special merit case based on the particular circumstances faced by the municipality. The amendments made to the MSA (effective July 2011) declare the appointment of a municipal manager without the minimum competency levels null and void. It also provides for a defined process for appointing municipal managers, which includes monitoring and intervention by the MEC for local government. Table 27: Key findings competencies of key officials Indicator MM minimum competency levels Appointed municipal managers did not meet 77 Key findings By 30 June 2012 (six months from the effective date of the regulations), nine (38%) of the appointed municipal managers in the province had not yet met the minimum competency levels defined in the regulations. Two (8%) of these municipal managers did not have the required qualification, three (13%) did not meet any of the prescribed competency requirements and four (17%) only met some requirements. Three municipal managers appointed in did not meet the minimum competency levels.

79 Indicator minimum competencies CFO minimum competency levels Appointed CFOs did not meet minimum competencies Head of SCM minimum competency levels Appointed heads of SCM did not meet minimum competencies Special merit cases Compliance with minimum competencies HR root causes of poor audit outcomes Key findings Two of these appointments were not made, subject to the condition that the minimum competency levels should be met by 1 January None of the unconditional appointments were approved by the MEC for local government, which is a contravention of the MSA. Eight (36%) of the CFOs appointed in the province by 30 June 2012 did not yet meet the minimum competency levels defined in the regulations. Three (14%) of these CFOs did not have the required qualification, two (8%) did not meet any of the prescribed competency requirements and three (14%) only met some requirements. Three CFOs appointed in did not meet the minimum competency levels. Two of these appointments were not made subject to the condition that the levels should be met by 1 January 2013 and were not approved by the MEC for local government, which is a contravention of the MSA. By 30 June 2012, eight (35%) of the heads of SCM appointed in the province did not yet meet the minimum competency levels defined in the regulations. One (4%) of them did not have the required qualification, two (9%) did not meet any of the prescribed competency requirements and five (22%) only met some requirements. Four heads of SCM appointed in did not meet the minimum competency levels. All these appointments were not made, subject to the condition that the levels should be met by 1 January These appointments were also not approved by the MEC for local government, which is a contravention of the MSA. By 1 January all municipalities (100%) had applied to be considered special merit cases. The annual report did not reflect information on compliance with prescribed minimum competencies in the case of three municipalities (4%). Four municipalities did not submit to the treasuries a report on compliance with prescribed competency levels. Based on the audits and an assessment of the root causes of poor audit outcomes, the competencies of key officials responsible for financial reporting at six (23%) auditees are deemed inadequate. At five (19%) of the auditees competencies relating to performance reporting and at seven (27%) of the auditees competencies for ensuring 78

80 Indicator Key findings compliance with laws and regulations were deemed inadequate. The reasons for the inadequate competencies of key officials and poor progress towards obtaining the minimum competency levels are listed below: Municipalities were unable to attract the right skills to fill vacancies in time, especially municipalities in remote locations. Basic financial disciplines, such as bank reconciliations, asset counts, proper record keeping and timely review of financial information were not instilled through training (external and internal where there were some officials with the necessary skills). Capacity and resources in the form of a lack of financial resources, instability at CFO and municipal manager levels (vacancies and acting) and vacancies and skills shortages (including GRAP) at finance units. Where municipalities are cash strapped the process of recovery may take several years. The impact of the inadequate competencies was that these municipalities were unable to implement and monitor basic internal control disciplines in areas of financial reporting, reporting on PDOs and compliance with laws and regulations. The failure to implement these internal control disciplines has a negative impact on these municipalities ability to achieve clean administration and ultimately clean audit outcomes. The following are recommended to address the weaknesses: Perform an assessment of the minimum competencies of all employees. The provincial treasury and local government should assist with training and up-skilling of its existing employees at municipalities that cannot attract the required skills. Change the job grade of employees and place them in positions they are qualified for and for which they have the skills and competencies to perform and fill the resultant vacancies with officials complying with the minimum required competencies Financial reporting assistance provided by consultants Good Concerned Poor As in previous financial years, auditees continued to engage consultants to assist them with accounting-related services and the preparation of year-end financial statements. Nineteen (73%) auditees were assisted by consultants compared to 19 (73%) in Based on the available information, the cost of consultants to auditees was estimated as having exceeded R13,4 million ( : R 14,7 million) for the financial year, i.e. an average in excess of R0,7 million per auditee. This excluded amounts spent by the National Treasury and provincial treasuries and the Department of Local Government on consultants assigned to assist municipalities. The following figure shows the most common reasons why consultants were engaged and the extent of use by auditees categorised per audit outcome, with an indication of whether it is a recurring use and whether skills transfer took place. Not all improvements in audit outcomes (or the lack of improvement) can be directly attributed to the use of consultants as the contracted scope of work varies from one auditee to the next. 79

81 Unqualified with no findings (5) Unqualified with findings (20) Recurring use at 3 auditees 60% (3) used consultants Recurring use at 14 auditees 75% (15) used consultants Skills transferred No skills transfer at 7 auditees Qualified with findings (1) Recurring use 100% (1) used consultants skills transferred Reasons for use of consultants 16% 84% Vacancies Lack of technical skills Observations George, Langeberg and Swartland were financially unqualified with no findings and had used consultants even in the past financial years. George: The effectiveness of the use of consultants has greatly improved. Monitoring of the performance and deliverables of consultants took place and a plan, such as the appointment of a permanent CFO, was being implemented to reduce the reliance on the consultants. Langeberg only used consultants as an additional control to review the financial statements for technical GRAP issues. Swartland made used of consultants to assist them with componentisation of assets obtained during the year under review. Bergriver regressed from financially unqualified with findings to qualified with findings due to the incorrect determination by the municipality that emergency inventory kept was not material and inadequate systems in place to maintain records of acquisitions and issues of emergency inventory. The following factors contributed to the overall outcome. The consultants were appointed late to review the financial statements and not to verify/audit the source data. The CFO 80

82 was acting municipal manager for the period until the financial statements were due and did not sufficiently review the financial statements. The CFO s deputy was also on maternity leave for a large part of the audit, which impacted negatively on the ability of the municipality to resolve audit queries in a timely manner. Furthermore, there was no one in a leadership position to ensure that the CFO, internal audit unit and the audit committee performed a proper review of the financial statements before submission for auditing. The remaining 15 municipalities remained unchanged on financially unqualified with findings. Thirteen of the 15 municipalities (87%) had submitted financial statements that were subject to material adjustments from the audit process, resulting in non-compliance reported in the audit report, and the main reason can be attributed to late engagement with the consultants. For the rest, they still had other findings relating to compliance with laws and regulations and/or the report on PDOs, for which the consultants were not responsible for assisting with. Overberg District, Laingsburg and Prince Albert improved from qualified to financially unqualified with other findings mainly due to the leadership taking ownership of the work of the consultants and the leadership and management taking ownership of action plans to address previous findings. The consultants were available to assist management to respond to audit queries and also worked together with the auditors towards an improved outcome. Twelve of the 19 municipalities (63%) had a successful transfer of skills from the consultants to the municipal staff. This was evidenced by management s ability to respond independently to audit findings in most instances without having to rely on consultants in this regard and also by the decrease in the amount spent on consultants (R13,4 million in and R14,7 million in ). The remaining seven municipalities did not have a skills transfer, mainly due to the late engagement of consultants, impacting on their ability to add value, and underlying problems with the control environment in which the financial information is produced. Conclusion There was still a need for the respective municipal managers to improve their oversight over the work of consultants to ensure that they transfer skills and knowledge to the finance staff members and interns to reduce their dependence on external assistance in undertaking their financial responsibilities in the current and in future periods. The leadership of the affected municipalities should assess whether the ongoing use of consultants for the preparation of financial statements is the most economical way of addressing their needs, also taking into account the need for continuity and sustainability of the function the consultants are engaged to perform. The effective use of consultants to assist with the improvement in audit outcomes will also depend on the quality of information provided to consultants, stability at CFO level and continued monitoring and direction provided by the executive mayors and municipal managers Performance management Inadequate performance management of municipal managers, senior management and other officials was identified in to be at the root of many of the failures of local government. The controls and performance objectives of the municipalities did not filter through to the performance contracts of municipal officials in order to direct their daily operations. 81

83 A lack of discipline, an absence of commitment to serving the public interest and non-adherence to the code of conduct for municipal officials were identified as root causes by national, provincial and oversight role players and were echoed in the experiences of the public at some municipalities. In order to improve the performance and productivity of municipal officials, the leadership should set the tone by implementing sound performance management processes, evaluating and monitoring performance and consistently demonstrating that poor performance has consequences. Table 28: Key findings arising from the assessment of performance management processes Indicator Key findings Signed performance agreement for municipal manager Signed performance agreement for senior managers Establishment of performance management system Performance evaluations for senior managers Two (8%) of the municipal managers appointed in the province did not have signed performance agreements for Of those with performance agreements, two (8%) had not been signed by the mayor, while two (8%) did not comply with the requirements of the MSA. At two (8%) of the auditees senior managers did not have signed performance agreements for At one (4%) auditee, 20% or more of the senior managers did not have signed performance agreements for The performance agreements of senior managers were not all signed by the municipal manager at two (8%) auditees, while at one (4%) auditee the performance agreement did not meet the requirements of the MSA. Appropriate performance management systems were not established at three (12%) auditees to monitor, measure and evaluate the performance of officials other than the municipal manager and senior management. Performance evaluation was not done for all senior managers at one (4%) of auditee. At two (8%) of the auditees performance bonuses were paid to senior managers in without a performance evaluation being performed and approved by the council for the applicable year. The following are the reasons for the weaknesses in the performance management systems: Vacancies and political instability caused the performance management system at municipalities not to be implemented. Lack of leadership accountability for the performance of staff at the municipality. The impact of poor performance management: The lack of performance management will create an incentive for staff not to fulfil key responsibilities that they are responsible for, which will eventually result in poor service delivery. Municipalities would not be able to implement and monitor basic internal control disciplines in areas of financial reporting, reporting on PDOs and compliance with laws and regulations. The failure to implement these internal control disciplines has a negative impact on these municipalities ability to achieve clean administration and ultimately clean audit outcomes. 82

84 Indicator Key findings The following are recommended to address the weaknesses: Poor performance should be penalised through appropriate measures instituted by municipalities, as per the MFMA and related regulations. Vacancies should be filled so that the performance management system is implemented by those responsible for this process. The tone of the leadership should encourage good performance and discourage poor performance. Good Concerned Poor Consequences for transgressions In terms of the MFMA, financial misconduct is committed by a municipal manager, senior manager or other official if he/she deliberately or negligently: fails to comply with a duty imposed by a provision of the MFMA or fails to perform a delegated duty makes or permits, or instructs another official of the municipality to make, an unauthorised, irregular or fruitless and wasteful expenditure provides incorrect or misleading information in any document which, in terms of a requirement of the MFMA, must be submitted to the mayor or the council of the municipality, the auditor-general, the National Treasury or other organ of state or must be made public contravenes a provision of the MFMA (municipal manager only). The MFMA and the Disciplinary regulations for senior managers prescribe how such financial misconduct should be dealt with through an investigation and disciplinary process, with sanctions if found guilty and criminal proceedings if applicable. The SCM regulations further provide for steps to be taken if improper conduct was identified in SCM processes, while the MFMA prescribes the steps to be taken to investigate and deal with unauthorised, irregular as well as fruitless and wasteful expenditure. The findings in this general report relating to failure to meet legislated obligations and responsibilities, instances of non-compliance with legislation, indicators of improper conduct in SCM and the occurrence of unauthorised, irregular as well as fruitless and wasteful expenditure require an appropriate response in accordance with the mentioned legislation. Such a response should clearly demonstrate that there are consequences for transgressions by officials in local government. Table 29: Key findings related to steps taken to address transgressions 83

85 Indicator Key findings Allegations of financial misconduct Allegations of misconduct in SCM Response to allegations Recovery of unauthorised, irregular as well as fruitless and wasteful expenditure Nineteen auditees (73%) recorded allegations of financial misconduct. Financial misconduct allegations were all investigated by municipalities. Disciplinary hearings were not held in the case of one (4%) municipality where financial misconduct was confirmed. Four (16%) auditees did record allegations of misconduct in the SCM processes. Eight municipalities (31%) did not deal appropriately with allegations after investigations. The following illustrates the level of staff that were implicated during investigations: Senior manager two auditees (8%) SCM officials four auditees (16%) Other officials two auditees (8%) Two (8%) auditees did not take the necessary steps to recover unauthorised, irregular as well as fruitless and wasteful expenditure or approve/certify such expenditure as irrecoverable. The level of action is expected within the province as steps for recovery are dependent on possible legal processes and outcomes in disciplinary hearings which can be a time-consuming process. The following were the reasons for the lack of consequences for transgressions by local government officials: Due to poor performance management of local government officials, consequences for transgressions in the form of investigations were not timeous. Lack of detailed action plans to address audit findings delayed follow-up action against local government officials that have transgressed. The impact of the lack of consequences: An environment will be created which encourages transgressions due to lack of consequences. Local government officials that have transgressed will not be made to account for their actions. The following are recommended to address the weaknesses: Investigations of transgressions should be timeous and follow-up action should be monitored by the council. Action plans in response to audit findings included time frames for follow-up action against local government officials that have transgressed. Performance management of local government officials should incorporate criteria, which promotes zero tolerance against those who have transgressed. Good Concerned Poor 84

86 3.4 Information technology management Information technology management as a key driver of audit outcomes Figure 13: Status of information technology across the Western Cape local government 1 Minimal movement in the status of information technology across local government and municipal entities Status of local government information Confidentiality The necessary level of secrecy is enforced for all local government information. This was assessed by auditing the following focus areas: Security management IT governance User access controls Integrity All local government information is authentic, remains unaltered until authorised to change and is complete. This was assessed by performing data analytics and auditing the following focus areas: Security management User access controls Availability All local government information is ready for use when expected. This was assessed by auditing the following focus areas: Security management IT service continuity Status of key enabling controls Good governance Effective management Secure architecture / infrastructure Management intervention required 2 The majority of auditees have challenges with the design of controls and have not even begun to deal with implementation and sustained effectiveness 3 Drivers of IT control weaknesses many cannot be addressed from within IT IT control life cycle Challenges Level 1: Control design At a minimum, management should design IT controls that would address the threats and weaknesses identified in vulnerability assessments. Particular attention should be given to the threats and weaknesses that would impact the confidentiality, integrity and availability of data. Level 2: Control implementation Challenges Once the IT controls have been designed, management should ensure that they are implemented and embedded in IT processes and systems. Particular attention should be given to ensuring that staff are aware of and understand the IT controls being implemented, as well as their roles and responsibilities in this regard. Level 3: Control effectiveness Management should ensure that the IT controls that have been designed and implemented are functioning effectively at all times. Management should sustain these IT controls through disciplined and consistently performed daily, monthly and quarterly IT operational practices. IT matters not prioritised Inef f ective management of IT Poor IT governance Minimal executive involvement in matters pertaining to IT Focus on operational IT activities rather than strategic priorities Role of controlled IT environments in effective service delivery is not understood Overreliance on IT consultants No technical skills to monitor IT consultants No skills transfer from consultants where internal resources existed IT vacancies not filled Informal processes deemed to be adequate Lack of IT policies and procedures Municipal management did not ensure that key IT controls were designed and implemented No consequences for not resolving prior year audit findings Lack of oversight bodies for municipalities 85

87 3.4.2 Summary of the overall audit outcomes IT controls were assessed in four key focus areas at 22 municipalities in the Western Cape, i.e. IT governance, security management, user access management and IT service continuity management. Detailed IT general control audits were conducted at the 22 municipalities in the province that had complex IT environments. The remaining four municipalities, i.e. the Cape Agulhas, Witzenberg, Bergriver and Overberg District Municipalities, did not have complex IT environments. Their internal controls were therefore assessed by means of questionnaires. This process was followed to determine the readiness of these municipalities for detailed IT audits and these assessments were not included as part of the overall IT audit outcomes. An analysis of the audit outcomes indicated that the majority of municipalities experienced challenges with the design of IT controls. Although most municipalities had initiated measures to design and implement IT controls in accordance with the commitments made in the previous audit cycle, adequate progress had not been made in addressing the prior-year audit findings. In most instances, the weaknesses in the IT control environment could be attributed to the shortage of in-house IT resources with specialised technical skills to design and implement IT controls; and the over-reliance on third-party vendors for the provision of IT services. The lack of municipal oversight bodies to track and monitor the implementation of IT controls as well as the lack of consequences for not resolving audit findings also contributed to the previous IT audit findings not being resolved. Furthermore, management did not prioritise IT as a service delivery enabler. The reason for this was that the role of effective IT environments in service delivery was not clearly understood Information technology governance IT governance is the responsibility of both the executive and IT management. It is an integral part of organisational governance and consists of the leadership, organisational structures and processes to ensure that the organisation s IT resources would be able to sustain its strategies and objectives. IT governance allows the organisation to manage IT risks and derive value from IT investments; and supports the achievement of business objectives that are dependent on IT systems. The IT governance controls at the municipalities were evaluated in terms of their status in relation to the IT control life cycle, namely design, implementation and operating effectiveness. The outcomes are shown below: 86

88 Figure 14: Information technology governance audit outcomes municipalities Minimal improvement Controls not designed Controls designed but not implemented Controls implemented but not operating effectively No control weaknesses Bitou Breede Valley Cape Winelands District Central Karoo City of Cape Town Drakenstein Eden District George Hessequa Knysna Laingsburg Langeberg Matzikama Mossel Bay Overstrand Prince Albert Saldanha Bay Stellenbosch Swartland Theewaterskloof West Coast District None None Beaufort West 87

89 Metropolitan municipalities Service level agreements (SLAs) between internal and external providers of IT services to the City of Cape Town Metropolitan (metro) were not adequately designed and formally implemented. Adherence to service levels and the performance of service providers was therefore not effectively monitored. Root causes The existing informal processes followed in managing the performance of internal stakeholders were deemed to be adequate. Enterprise/support agreements for software licensing were used as a basis for measuring vendor performance. The IT service management tool had not been fully integrated into the IT environment to monitor the internal SLAs District and local municipalities At the majority of the municipalities audited frameworks for IT governance and IT risk management had not been documented or approved. IT risk assessments were not conducted and IT risk registers had not been established to ensure that IT risks would be managed appropriately. IT strategic plans were also not in place at many municipalities. Most of the district and local municipalities made use of third-party vendors for the provision of IT services. SLAs for these vendors either did not exist or had not been formally approved. SLAs that had been established were, moreover, not reviewed and updated or renegotiated on a regular basis. Municipalities also did not have formal mechanisms in place to measure the performance of IT vendors against the agreed service levels. As a result, third-party vendors could not be held accountable for poor delivery of agreed services. Root causes Management deemed the existing informal processes in place at their municipalities to be working well and therefore made no effort to formalise them. Executive management relied on the fact that the requirements with which IT service vendors had to comply had not changed and therefore did not update their SLAs. Most municipalities lacked both the human and financial resources required to develop and implement IT governance controls. Although certain municipalities had IT resources in place, these resources lacked IT governance and IT risk management skills and were more operationally focused. There was no proactive approach to the management of IT service providers. Existing SLAs and software licensing contracts did not include penalty clauses that could be enforced should the required services not be rendered. 88

90 Good practice At Beaufort West, adequate IT governance processes had been designed and implemented and were operating effectively. The effective operation of IT governance processes at this municipality could be ascribed to the leadership demonstrated by municipal management in ensuring that an IT governance framework was adopted and implemented, as well as to the effective management of IT risks and the establishment of an IT steering committee Security management Security controls are measures designed by management to prevent and detect the risk of unauthorised access to the IT infrastructure that supports the financial and performance application systems. This responsibility normally resides with the IT department. The security management controls at the municipalities were evaluated in terms of their status in relation to the IT control life cycle, namely design, implementation and operating effectiveness. Outcomes are shown below: 89

91 Figure 15: Security management audit outcomes municipalities Minimal improvement Controls not designed Controls designed but not implemented Controls implemented but not operating effectively No control weaknesses Beaufort West Bitou Cape Winelands District Central Karoo Eden District City of Cape Town Drakenstein George Hessequa Laingsburg Langeberg Matzikama Mossel Bay Prince Albert Saldanha Bay Stellenbosch Swartland Theewaterskloof West Coast District None None Knysna Overstrand Metropolitan municipalities Controls had not been adequately designed and implemented at the City of Cape Town Metro to prevent unauthorised access to the network and information systems. As a result, unnecessary network protocols/services were configured on the UNIX server, security logs were enabled but not reviewed and password standards on the Systems, Applications and Products System (SAP) did not comply with the documented password policy. Although no instances of unauthorised access had occurred at the City of Cape Town Metro during the period under review, appropriate IT controls should be implemented to prevent this risk from materialising in future. 90

92 Root cause IT management considered the proactive review of logs as a labour-intensive exercise, given the high number of users to whom access had been granted to the network and applications and the volume of logs generated by the system District and local municipalities At most district and local municipalities IT security policies had not been adequately designed. Most municipalities did not have mechanisms in place for reviewing security violations or failed logon attempts. Consequently, security breaches on the network or application systems might not be detected. Although no instances of unauthorised access were identified at municipalities, appropriate IT controls should be implemented to prevent this risk from materialising in future. Root causes Municipalities that lacked IT resources relied on third-party service providers to maintain the IT security infrastructure and consequently did not have staff with sufficient capacity or technical skills to review security logs. There were no processes in place for transferring IT knowledge and skills from third-party service providers to internal resources at municipalities. IT resources at some municipalities did not have sufficient knowledge regarding password security parameters and relied on prior-year audit findings to provide guidance. IT resources at municipalities focused on day-to-day operations and considered the proactive reviewing of security reports to be a labour-intensive, lowpriority task. Good practices No weaknesses were identified in the management of IT security at the Eden District, Knysna and Overstrand Municipalities. This could be attributed to the leadership demonstrated by the IT manager, hands-on management and efficient use of available IT resources User access management User access controls are measures designed by management to prevent and detect the risk of unauthorised access, creation or amendment of financial and performance information stored in the application system. This responsibility normally resides within core and supporting business units. User access management controls at the municipalities were evaluated in terms of their status in relation to the IT control life cycle, namely design, implementation and operating effectiveness. Outcomes are shown below: Figure 16: User access audit outcomes municipalities 91

93 Minimal improvement Controls not designed Controls designed but not implemented Controls implemented but not operating effectively No control weaknesses Beaufort West Bitou Breede Valley Cape Winelands District Central Karoo Drakenstein Eden District George Hessequa Knysna Laingsburg Langeberg Matzikama Mossel Bay Overstrand Prince Albert Saldanha Bay Stellenbosch Swartland Theewaterskloof West Coast District City of Cape Town None None Metropolitan municipalities The user access management controls designed for the City of Cape Town Metro were not consistently implemented or operating effectively across all platforms and applications. As a result, the accounts of users no longer in the service of the metro were found to be active. In addition, the management of users access to the SAP financial application was deemed inadequate due to the high number of users to whom access had been granted to sensitive SAP basis transactions. 92

94 Root cause IT management considered the proactive review of logs as a labour-intensive exercise, given the high number of users to whom access had been granted to the network and applications and the volume of logs generated by the system District and local municipalities User account management practices at most municipalities were informal and had not been adequately designed to contain the key elements required to mitigate the risk of unauthorised access to the financial systems. User access policies and procedures were also not documented or approved at the majority of municipalities audited. With the exception of the Eden District, user access profiles were not regularly reviewed at municipalities to confirm that users system access was in line with their job roles and responsibilities. Root causes Executive and IT management at municipalities deemed the informal user access management processes in place to be working well and therefore made no effort to formalise them. At most municipalities, user access to the financial systems was managed by the finance department and these resources focused mainly on day-to-day financial operations. Municipalities lacked adequately skilled resources to design and implement user access management controls, specifically regarding the monitoring and review of users access rights and system controllers activities. Executive management was not held accountable and faced no consequences for failing to implement corrective actions that were committed to in prior year audits. 93

95 3.4.6 Information technology service continuity IT service continuity controls are measures designed by management to ensure the availability of financial and performance information in the event of data loss or a disaster. This responsibility is normally shared between the IT department and the business. IT service continuity controls at municipalities were evaluated in terms of their status in relation to the IT control life cycle, namely design, implementation and operating effectiveness. Outcomes are shown below: Figure 17: Information technology service continuity municipalities Minimal improvement Controls not designed Controls designed but not implemented Controls implemented but not operating effectively No control weaknesses Beaufort West Bitou Breede Valley Cape Winelands District Central Karoo Drakenstein Eden District George Hessequa Knysna Laingsburg Langeberg Matzikama Overstrand Prince Albert Saldanha Bay Stellenbosch Swartland Theewaterskloof West Coast District City of Cape Town None Mossel Bay Metropolitan municipalities 94

96 A disaster recovery plan (DRP) had been adequately designed to ensure the effective continuity of IT services at the City of Cape Town Metro. However, only one component of the DRP had been tested and there was no evidence that the plan had been reviewed during the year under review. Root cause The testing of the DRP would result in significant down time and management was satisfied that the non-disruptive tests performed on the SAP financial application by doing a QA refresh every fortnight, in addition to the testing of the one component, provided adequate assurance of IT service continuity District and local municipalities Due to the cost involved in developing a DRP and the lack of sufficiently skilled IT resources, the focus of IT continuity was on backup management. At most district and local municipalities there was a lack of adequately designed and formally approved backup procedures. Backups were also not monitored for successful completion, kept at secure off-site storage facilities or periodically restored to ensure the recoverability of data. Root causes Most municipalities lacked appropriately skilled resources to design and implement IT DRPs and backup procedures. Certain municipalities lacked the IT infrastructure and skills to restore the backups that had been taken. Reliance was placed on third-party vendors to manage backups. Good practices No weaknesses were identified in the management of IT service continuity at Mossel Bay. This could be attributed to the leadership demonstrated by executive and IT management, the efficient use of available IT resources and the municipality s overall understanding of the risks and the impact that a lack of IT service continuity controls would have on the municipality. 95

97 3.4.7 Quick wins and recommendations Figure 18: Quick wins (controls to be designed and implemented immediately) Control design IT policies and procedures should be approved by municipal councils. SLAs should be formalised and should make provision for the transfer of skills to resources at the municipality. The IT governance framework developed by the South African Local Government Association (SALGA) should be adopted by municipalities. The provincial treasury and the Office of the Premier should share IT policies and procedures that have already been developed with municipalities. Control implementation Municipal management should ensure that the performance of service providers is monitored to ensure adherence to SLAs. Municipalities with no control weaknesses should share their best practices with other municipalities. Municipalities in close proximity to one another could leverage from the skills of the other, share off-site backup storage facilities or act as alternative disaster recovery sites for one another. Figure 19: Recommendations (controls to be designed, implemented and sustained over time) 96

98 Control design Municipalities should leverage on the IT policies and procedures that have already been developed by the Office of the Premier and should tailor these to suit their needs and IT environment. Local municipalities and district municipalities should share IT knowledge and resources in order to reduce IT costs across municipalities. Municipal managers should ensure that development plans are established for up skilling their IT staff. Control implementation Vacant positions that have been approved should be filled. A shared disaster recovery centre should be established for the province. Control sustainability Knowledge sharing with municipal councils and municipal management regarding the importance of IT should be facilitated through the chief information officer (CIO) forums. Internal audit units at municipalities should extend their scope to include IT audits. Audit committees should play an oversight role to ensure that IT risks are appropriately managed. 97

99 3.5 Audit committees and internal audit units Effective governance is a key driver of internal control, which in turn impacts on audit outcomes. Risk management and effective audit committees and internal audit functions are key elements of this driver of internal control. In terms of the MFMA, an audit committee and internal audit unit must be established by all auditees. Audit committees serve as independent governance structures whose function is to play an oversight role regarding the systems of internal control, compliance with legislation, risk management and all other matters of governance. In executing its duties, the audit committee assists the accounting officer in the effective execution of his/her responsibilities, with the ultimate aim of ensuring that the organisation achieves its objectives. Internal audit units form an integral part in providing assurance on governance, risk management and internal control. The figure below shows the results of an assessment of the effectiveness of audit committees and internal audit units. Figure 20: Assessed effectiveness of audit committees and internal audit units Aspect assessed Assessment: Audit committee Assessment: Internal audit Positive impact on audit outcomes 50% 50% 54% 46% Interacts with the executive authority 92% 8% Not applicable Evaluates compliance with laws and regulations 73% 27% 92% 8% Evaluates supply chain management 77% 23% 92% 8% Evaluates reliability/ integrity of performance information 58% 42% 54% 46% Evaluates reliability/ integrity of financial information 62% 38% 62% 38% Evaluates internal controls 73% 27% 92% 8% Fully compliant with legislated requirements 62% 38% 71% 29% In place 100% 92% 8% Yes No The table below provides information on the key findings arising from the assessment. Table 30: Assessment of the effectiveness of audit committees and internal audit units 98

100 Governance structure aspect Audit committee and internal audit units in place Audit committees and internal audit units fully compliant with legislation Audit committees and internal audit units evaluate internal control Audit committees and internal audit units evaluate the reliability of performance information Audit committees and internal audit units evaluate SCM and compliance with laws and regulations Key findings All the municipalities reported on had audit committees in place for the period under review, as prescribed by the MFMA. Two (8%) of the municipalities reported on did not have internal audit units in place contrary to the requirements of the MFMA. Ten (38%) of the audit committees did not comply with the legislated requirements while the majority of the internal audit units complied with the legislated requirements, with seven (29%) of the existing internal audit units having shortcomings in this regard. The following findings on audit committees relate to non-compliance with the MFMA: o No review of performance management systems o No review of effectiveness of internal control systems o No review of effectiveness of internal audit function o No review of adequacy, reliability and accuracy of financial reporting and information o Not correctly constituted o No review of risk areas of institution s operations to be covered in the scope of internal and external audits Non-compliance findings related to internal audit units included the following: o No/inadequate evaluation/advice or reporting on internal controls, accounting, risk and loss control o No reporting to audit committee on compliance with legislation o Performance measurements not audited on a continuous basis o Quarterly reports, detailing performance against annual internal audit plan, not submitted to audit committee o No three-year strategic internal audit plan Seven (27%) of the audit committees did not evaluate internal controls while only two (8%) of the internal audit units failed in this regard. The majority of audit committees managed to assess internal controls at municipalities, which assisted them to improve audit outcomes and their control environment. Audit committees and internal audits units have started to pay more attention to performance information, which was evidenced by the marked improvement of the findings on performance information. However, 11 (42%) of the audit committees and internal audit units did not evaluate the reliability of performance information, which contributed to 11 municipalities making material adjustments to their performance reports as reported in section of this report. The reduction in the number of findings on SCM is as a result of 22 (92%) of the internal audit units and 20 (77%) of the audit committees giving attention to SCM risks and other risks of non-compliance (including unauthorised, irregular as well as fruitless and wasteful expenditure). However, the repeat external audit findings on compliance at some municipalities indicated the need for a more intense focus on and improved attention to implementing external and internal audit recommendations. 99

101 Governance structure aspect Audit committees interact with executive authority Key findings Interactions between audit committees and their executive authorities provide a basis for progress towards clean audit outcomes, especially as executive authorities are in a position to objectively assess the merits of audit committee recommendations and have the authority and power to address obstacles that audit committees may encounter in executing their mandate to promote sound governance, risk management and control. A total of 24 (92%) of the audit committees had regular interactions with the councils (executive authority) of their respective municipalities. However, the repeat external audit findings on compliance at some municipalities indicated the need for a more intense focus on and improved attention to implementing external and internal audit recommendations. Audit committees need to do risk assessments of their respective municipalities on areas of financial reporting, reporting against PDOs, and compliance with laws and regulations. They should make recommendations to management and the executive authority to address the identified risks. Positive impact of audit committees and internal audit units on audit outcomes In order for the work of audit committees to have a positive impact on the audit outcomes of their municipalities, management and the political leadership should take the recommendations of audit committees seriously and implement them in a timely manner. The implementation of these recommendations needs to be monitored by the political leadership on a regular basis with visible consequences for inaction. The work of audit committees (with the assistance of internal audit units) may not immediately translate into municipalities progression to clean audit outcomes. However, their work should be proven by improvement in the control environment of municipalities which is the foundation upon which clean administration and improvements in audit outcomes can be achieved. A total of 13 (50%) audit committees were assessed as having had a positive impact on the audit outcomes of their respective municipalities as the municipalities had fewer or no findings on PDOs and/or compliance with laws and regulations, compared to the previous financial year. The audit committee and internal audit units also played a major role at the Swartland and West Coast District Municipalities that sustained their clean audit outcomes. 100

102 SECTION 4: INITIATIVES AND IMPACT OF KEY ROLE PLAYERS ON AUDIT OUTCOMES This section provides an overview of the impact of the key role players in local government. An assessment on these assurance providers is included in section 4.1. The levels of oversight by municipal public accounts committees are included in section 4.2, while the interaction with mayors is included in section 4.3. The commitments made by key role players, the status thereof and the impact on audit outcomes are reported in section 4.4, while section 4.5 outlines the AGSA s ongoing initiatives to encourage clean administration. 4.1 Assurance providers in local government The accountability of local government for their actions, performance, financial management and compliance with legislation serves as a cornerstone of democratic governance in South Africa. The annual reports serve as a mechanism whereby the mayors and their municipal managers report on the financial position of the auditee, its performance against PDOs and overall governance. One of the most important oversight functions of councils is the consideration of auditees annual reports. For the council to perform its oversight function, assurance is needed that the information in the annual report is credible. To this end, the annual report also includes the audit report of the AGSA, which provides assurance on the credibility of the financial statements and annual performance report and the auditee s compliance with laws and regulations. In addition to the AGSA, there are other role players in local government that contribute to the credibility of financial and performance information and compliance with legislation by ensuring that adequate internal controls are implemented at auditees. The role players recorded below are (1) those directly involved with the management of the auditee (management/leadership assurance); (2) those that perform an oversight/governance function, either as an internal governance function or an external monitoring function (internal independent assurance and oversight); and (3) the independent assurance providers that provide an objective assessment of the auditee s reporting (external independent assurance and oversight). The level of assurance provided by the role players was assessed based on the status of internal controls of auditees and the impact of the different role players on the controls. In the current environment, characterised by inadequate internal controls, material misstatements in financial and performance information and pervasive non-compliance with legislation, all role players are expected to provide an extensive level of assurance. The outcome of the assessment of the province is shown below. 101

103 Figure 21: Level of assurance provided by role players that form part of the auditee First level of assurance Management/leadership Second level of assurance Internal independent assurance and oversight Third level of assurance External independent assurance and oversight Provides assurance Provides some assurance Provides limited/ no assurance Not established 102

104 The table below shows the assessment per auditee and provincial role players: Table 31: Level of assurance provided by role players that form part of the auditee (auditee level) Auditee Senior management Accounting officer Mayor Audit committee Internal audit Municipal council MPAC Beaufort West Berg River Bitou Breede Valley Cape Agulhas Cape Winelands District Central Karoo District City of Cape Town Drakenstein Eden District George Hessequa Knysna Laingsburg Langeberg Matzikama Mossel Bay Overberg District Overstrand Prince Albert Saldanha Bay Stellenbosch Swartland Theewaterskloof West Coast District Witzenberg Provides assurance Provides some assurance Provides limited/no assurance Not established 103

105 Table 32: Comments on the level of assurance provided by role players Role player Comment Senior management Senior management, which includes the CFO, chief information officer and head of SCM, is responsible for implementing the detailed financial and performance management controls. The assessment demonstrates that they have, in most instances, provided some assurance while some failed to do so adequately. The continued focus on the root causes reported by the AGSA will assist municipalities to provide a satisfactory level of assurance. Accounting officer The impact of the accounting officers in creating an effective control environment is not evident at all auditees. The leadership, planning, risk management, oversight and monitoring by the accounting officers are absolutely critical. Failing to do this will not result in sustainable practices which translate into improved audit outcomes. Mayor The number of interactions with mayors has increased from prior years and included quarterly key control visits as well as additional interactions requested by the municipality and/or training initiatives, together with the provincial treasury and the Department of Local Government. The aim of these interactions is to highlight areas requiring the intervention of executive authorities in trying to sustain clean audit outcomes and improve the audit outcomes of municipalities and entities with unqualified audit outcomes. During the AGSA s interactions with mayors in the past on their roles and responsibilities, any remaining uncertainty was removed as to the role that mayors have to fulfil to ensure that the municipalities move towards clean audit outcomes. The very slight improvement in the audit outcomes, is a direct result of the improving tone being set from the top and commitments made by municipal leadership comprising mayors, councillors and municipal managers. Although many mayors made themselves available to meet with the AGSA quarterly to discuss the status of controls, very few municipalities have taken ownership of the control assessments. Although the trend has been positive since last year, mayors have to date still failed to exercise the level of oversight that was committed to in response to the prior year s audit outcome as a number of executive mayors have still not taken full ownership of the key control document and satisfied themselves that identified areas of internal control weaknesses receive the required level of attention. 104

106 Audit committee Audit committees are in most instances playing their role to ensure that internal audit is functioning at the required level. This must continue to improve at all auditees to fully meet the extensive level of assurance expected from them. Internal audit Internal audit units are in place at almost all municipalities. The leadership needs to continue to keep their focus on fully functioning internal audit units so that sufficient assurance in the areas of financial reporting, predetermined objectives and compliance with laws and regulations can translate into positive impact on audit outcomes. Municipal council The councils did not sufficiently demonstrate an understanding of their oversight functions and had not totally satisfied themselves that processes were implemented to ensure that reported information was credible and reliable. Councillors had not taken full ownership of the key control document and satisfied themselves that identified areas of internal control weaknesses received the required level of attention. Furthermore, the councils did not, in all instances, call for regular financial and performance reports and thus did not subject them to intense interrogation. The councils did not periodically review progress made by municipal management in addressing external audit findings. The council did not periodically seek the findings and views of audit committees and internal audit units on internal control and risk management; and monitor the implementation of recommendations by the audit committee and internal audit units with a view to remedial action. The councils did not take timeous action in instances of identified weaknesses or failure by management and staff to perform statutory duties. MPAC The majority of municipalities had not established municipal public accounts committees (MPACs). There is a long way to go before MPACs will achieve their intended oversight effectiveness and impact on audit outcomes. The leadership and oversight structures, in liaison with the AGSA, are encouraged to support the work of these committees. As is evident from the audit outcomes presented in this general report, the activities and interventions of role players had limited impact. The assessment of no significant identified impact does not imply that role players did not make efforts, but illustrates that the impact on the audit outcomes is not yet evident. 105

107 Provincial role players do have a number of initiatives and interventions aimed at improving audit outcomes, some of which directly target the eight focus areas assessed above. These include the following: Premier s coordinating forum on clean audit outcomes and clean administration. Establishment of the municipal governance review outlook MGRO process at all municipalities supported by the provincial leadership. Finding avenues to establishment and train MPACs. Facilitating training for municipal officials on SCM. Assisting with the training and further development of audit committees and internal audit units at auditees. Supporting municipalities to develop fraud prevention plans and monitoring implementation. At the end of the previous MFMA cycle, the key role players in the province made commitments to improve the audit outcomes of municipalities in the province. The provincial political leadership, which included the premier, the MEC for finance and the MEC for local government, made a commitment to focus on operation clean audit and to drive resources through the provincial executive committee meetings. The table below gives a more detailed analysis of role player s contribution to the attainment of sustainable audit outcomes. 106

108 Table 33: Level of assurance provided by role players that form part of the auditee (coordinating/ monitoring institutions level) Auditee Coordinating/ monitoring institutions and provincial oversight Comment Provincial treasury The provincial treasury carries out a number of interventions in the province, ranging from budgetary control, monitoring of monthly reports and principles of financial management. The provincial treasury has reassessed its roles and responsibilities in terms of local government and has now partnered with municipalities in the form of the MGRO process. This process looks at all aspects of local government per municipality to ensure that all achieve clean administration, which will result in clean audit outcomes. Office of the Premier The premier uses mainly the premier s coordinating forum to coordinate and monitor provincial oversight. The forum, which meets bi-annually, is attended by the premier, all MECs, provincial treasury and all the executive mayors, municipal managers and CFOs in the province. This forum is aimed at addressing the financial management issues highlighted at municipalities in previous auditor s reports and recommending appropriate actions. The premier has also embarked on a process with the provincial legislature that will see a change to SCM legislation relating to instances of state employees conducting private business with the state. However, this process is still underway and has not yet had an impact on the audit outcomes and reported compliance findings. Cooperative governance The MGRO process has aligned all spheres of government in the province to focus the province on clean administration. Owing to the late implementation of MGRO, the potential positive results will only be seen in the coming year. Portfolio committee on local government The portfolio committee on local government oversight did not have the desired impact on the audit outcomes of the province. 107

109 Auditee Coordinating/ monitoring institutions and provincial oversight Comment Provincial legislature The speaker of the provincial legislature established a joint committee to focus on local government oversight. The forum has not as yet had any visible impact; however, coupled with the expected new commitments from the legislature, as a whole, it is envisioned that progress will be made going forward in moving to improved, sustainable audit outcomes. The speaker has not yet established a speaker s forum as well as a chair of chairs forum for MPACs. Provides assurance Provides some assurance Provides limited/no assurance Not established Conclusion At an overall level, the key role players in local government are providing minimal assurance. However, significant strides will have to be made if the required level of assurance is to be provided for credible decision-making. The foundation for setting up processes to provide assurance involves skills, comprises competence, ethics, embedded systems of control and an understanding of the roles and responsibilities by all role players, together with a strictly enforced performance management system. The assurance provided by senior management, accounting officers, internal audit units, audit committees, mayors and municipal councils is linked directly to the implementation of controls. Internal controls that are properly designed and implemented as intended will assist in ensuring compliance with laws and regulations and the production of credible performance reports and financial statements. Similarly, the quality and credibility of information supplied to coordinating role players (Office of the Premier, local government and provincial treasury) have an impact on the assurance they provided. Currently, the quality of information is not at the required level, which influences the effectiveness of these oversight bodies. It is thus essential that all role players take ownership of the implementation and monitoring of key controls to ensure that all information produced for oversight and decision-making is accurate and reliable, thereby enhancing credibility and accountability. 108

110 4.2 Oversight by municipal public accounts committees The establishment and functioning of an MPAC at municipalities were introduced in the province in When operating as intended, the MPAC will be one of the most critical role players in municipal oversight and governance and should have a positive impact on audit outcomes. In short, the primary functions of the MPAC include the following: Considering and evaluating the content of the annual report and making recommendations to the council when adopting an oversight report in the annual report. Reviewing information relating to past recommendations made in the annual report. This relates to current in-year reports, including the quarterly, midyear and annual reports. Examining the financial statements and audit reports of the municipality and municipal entities and considering improvements against previous statements and reports. Evaluating the extent to which the audit committee and the auditor-general s recommendations have been implemented. Promoting good governance, transparency and accountability in the use of municipal resources. By the 2012 financial year-end, some municipalities had implemented MPACs. The table in section 4.1 reflects the municipalities that had not implemented MPACs. The reasons for not implementing an MPAC ranged from: the municipality having no intention to implement an MPAC already having an audit and oversight committee and not seeing the need to have an MPAC even though the functions of an MPAC are enhanced considerably waiting for a council meeting to discuss. As shown in section 4.1, where MPACs have been established they are not yet providing the level of assurance required to contribute to the credibility and reliability of financial and performance report, compliance with legislation and effective internal control. The root causes of the ineffective functioning of MPAC are as follows: MPACs have not had the desired impact on audit outcomes and clean administration in local government due to their late establishment. There is a long way to go before MPACs will achieve their intended oversight effectiveness and impact on audit outcomes. The recommended way forward to strengthen the operation and functioning of MPACs is as follows: Provincial leadership and oversight structures, in liaison with the AGSA, are encouraged to support the establishment and work of these committees. MPAC hearings should be prioritised to ensure that monitoring and review are conducive to the reporting timelines of municipalities and in a rapid response to audit committees. Resolutions should not only deal with purely financial matters, but also with financial management, PDO reporting and compliance for the committee to be truly effective. 109

111 The role players within the municipality should submit quarterly reports to the MPAC on the implementation of its resolutions. A closer relationship with the portfolio committees is required to ensure coordination of resolutions and the monitoring thereof. New MPAC members should attend a thorough induction session where all the concepts contained in the audit report are explained. All MPAC members should be trained on a continuous basis so that this oversight structure can ensure accountability within local government and remain relevant. The way forward In order to enhance the effectiveness of the MPACs, address the challenges highlighted in this report and move towards a best practice governance structure at individual municipal level, the province should address all of the components shown below. 110

112 Figure 22: Municipal public accounts committee challenges to be addressed Timeous hearings and resolutions MPAC hearings should be prioritised to ensure that monitoring and review are conducive to the reporting timelines of municipalities and in a rapid response to audit outcomes. Resolutions on financial management, compliance and PDOs Resolutions should not only deal with purely financial matters, but should deal with financial management, compliance and PDO reporting for the committee to be truly effective Monitoring of implementation of resolutions The role players within the municipality should submit quarterly reports to MPAC on the implementation of its resolutions. Interaction with the executive (mayor and/or mayoral committee) A close relationship with the budget and treasury portfolio committees is required to ensure coordination of resolutions and the monitoring thereof. Training and capacity building New MPAC members should undergo a thorough induction session where all the concepts contained in the audit report are explained. The AGSA is committed to enhancing the understanding of its reports and will assist with this process where considered necessary. 111

113 4.3 Interactions with mayors In response to the audit outcomes, mayors committed an hour of their time every 90 days to meet with AGSA senior management. At these interactions the status of the key controls of auditees and commitments are discussed and identified risks shared. The table below shows the number of interactions with the mayors and the assessed impact of the interactions. Table 34: Interactions with mayors Auditee Total number of interactions Evaluation of impact Beaufort West 2 Berg River 4 Bitou 1 Breede Valley 2 Cape Agulhas 1 Cape Winelands District 0 Central Karoo District 1 City of Cape Town 3 Drakenstein 3 Eden District 2 George 4 Hessequa 1 Knysna 1 Laingsburg 1 Langeberg 1 Matzikama 3 Mossel Bay 1 Overberg District 4 Overstrand 3 Prince Albert 2 Saldanha Bay 4 Stellenbosch 0 Swartland 2 Theewaterskloof 3 West Coast District 5 Witzenberg 3 112

114 Significant impact improvement in audit outcome Significant impact sustained clean audit Some impact improvement in key controls Minimal impact improvement expected only in next financial year No impact As can be seen in the table above, the number of interactions with the mayors has increased from prior years and included quarterly key control visits as well as additional interactions requested by the municipality and/or training initiatives, together with the provincial treasury and the Department of Local Government. The aim of these interactions is to highlight areas requiring the intervention of executive authorities in trying to sustain clean audit outcomes and improve the audit outcomes of municipalities and entities with unqualified audit outcomes. During the AGSA s interactions with mayors in the past on their roles and responsibilities, any remaining uncertainty was removed as to the role that mayors have to fulfil to ensure that the municipalities move towards clean audit outcomes. The very slight improvement but largely stagnation in the audit outcomes is a direct result of the improving tone being set from the top and commitments made by municipal leadership comprising mayors, councillors and municipal managers. This is reflected in the fact that many mayors made themselves available to meet with the AGSA quarterly to discuss the status of controls. Very few municipalities, however, have taken ownership of the control assessments. Although the trend has been positive since last year, mayors have to date still failed to exercise the level of oversight that was committed to in response to the prior year s audit outcome as a number of executive mayors have still not taken full ownership of the key control document and satisfied themselves that identified areas of internal control weaknesses receive the required level of attention. 113

115 4.4 Initiatives and commitments of key role players to improve audit outcomes The table that follows outlines the key initiatives of the provincial leadership and oversight to improve audit outcomes as well as further commitments made to the AGSA for actions to be taken. The commitments include those made in response to the prior year s audit outcomes and new commitments obtained through in-year interactions and engagements with them between January 2013 and the date of this report. An assessment of the impact of the initiatives and commitments is also provided. Table 35: Commitments and initiatives of key role players in response to audit outcomes Key role players Outline of initiatives and commitments made Focus area targeted by initiative / commitment Progress made with implementing commitments Impact of initiatives and commitments on audit outcomes Prior year commitments/initiatives Office of the Premier The provincial leadership will: o drive the strengthening of the relationship between the ministries of provincial treasury and local government and municipalities o review the effectiveness of the municipal-specific support and oversight initiatives provided to the councillors and officials to enable them to address financial and performance management at municipalities o review the status of the quality, implementation and monitoring of the municipalities action plans. The premier can monitor the relationship through feedback at the premier s coordinating forum. The premier will ensure that operation clean audit, coordinated by the ministries of provincial treasury and local government, will become a standing agenda item of the premier s coordinating forum for monitoring and evaluation of municipalities key controls and commitments, as well as sharing of best practice in order to achieve sustainable clean audit outcomes. The premier will request internal audit units to present their findings at the premier s coordinating forum and use these sessions to follow up on the actions taken to address the findings. The premier will explore and implement the concept for a twinning system that will pair well-performing municipalities with those requiring improvement in order to 114 SCM, PDOs, FM, TP, IT, HR, CONS & GS SCM, PDO, FM, TP, IT, HR, CONS & GS SCM, PDO, FM, TP, IT, HR, CONS & GS SCM, PDOs, FM, TP, IT, Complete Complete Complete Not implemented Some impact Some impact Some impact No impact

116 Key role players Outline of initiatives and commitments made Focus area targeted by initiative / commitment Progress made with implementing commitments Impact of initiatives and commitments on audit outcomes transfer skills and share good practices to improve financial and performance management. The premier will raise the importance of an independent internal audit function which is protected from political influence at the President s Coordinating Council. HR, CONS & GS SCM, PDO, FM, TP, IT, HR, CONS & GS In progress No impact New commitments/initiatives In addition to the prior commitments which will remain a focus, the premier and all role players have pledged their support for the municipal governance review outlook (MGRO), a comprehensive action plan, which aims to address many of the shortcomings at a local government level. In addition to being monitored at a municipal level, MGRO will be monitored at the premier s coordination forum, and the provincial treasury will provide support and guidance to municipalities in the development and implementation of MGRO. SCM, PDO, FM, TP, IT, HR, CONS & GS New Not yet able to assess Prior year commitments/initiatives MEC Finance/ provincial treasury The provincial treasury will: o provide an online support helpdesk to assist with any queries related to the financial statements, performance information and compliance with laws and regulations o evaluate whether all 30 municipalities have implemented the GRAP framework. This will be done by providing workshops on the relevant accounting frameworks o analyse the audit outcomes to determine the transversal accounting and governance issues which will inform specific training in o arrange the rollout of GRAP 104, 103 and 24 training by external service providers o get involved in MinMay and the premier s coordinating forum to understand the complexities faced by the municipalities and address their concerns in follow-up sessions with CFOs and subsequent MinMay and premier s 115 SCM, PDO, FM Complete Some impact FM Complete Some impact SCM, PDO, FM & GS Complete Some impact FM Complete Some impact SCM, PDO, FM, TP, HR, CONS & GS Complete Some impact

117 Key role players Outline of initiatives and commitments made Focus area targeted by initiative / commitment Progress made with implementing commitments Impact of initiatives and commitments on audit outcomes coordinating forum sessions o perform LG FGRO local government financial governance reviews for all 30 municipalities where areas such as accounting, SCM and corporate governance are assessed o engage the National Treasury to provide specific guidelines on laws and regulations, practise and instruction notes, which should lead to a government-wide consistent interpretation of fruitless and wasteful, irregular and unauthorised expenditure o drive the institutionalisation of enterprise risk management and internal audit at all municipalities. These endeavours include having workshops with CFOs, audit committees and other such similar bodies. This will be in cooperation with the department of local government. SCM, PDO, FM SCM SCM, PDO, FM & GS Complete Complete Complete Some impact Some impact Some impact New commitments/initiatives In addition to the prior commitments which will remain a focus, the premier and all role players have pledged their support for the MGRO, a comprehensive action plan, which aims to address many of the shortcomings at a local government level. In addition to being monitored at a municipal level, MGRO will be monitored at the premier s coordination forum, and the provincial treasury will provide support and guidance to municipalities in the development and implementation of MGRO. SCM, PDO, FM, TP, IT, HR, CONS & GS New Not yet able to assess MEC for local government/ Department of Cooperative Governance and Traditional Affairs Prior year commitments/initiatives The Department of Local Government will: o perform a readiness assessment to determine what municipalities should do to manage and report on PDOs and assist municipalities with the Complete Some impact development of standard key performance indicators PDO o assist municipalities with the implementation of performance management systems; participate in and provide support to interview panels; appoint a service provider to assist with recruitment and to provide advice on Complete Some impact disciplinary matters HR o garner support for the establishment of MPACs and clarify the role of these GS Complete Some impact 116

118 Key role players Outline of initiatives and commitments made Focus area targeted by initiative / commitment Progress made with implementing commitments Impact of initiatives and commitments on audit outcomes committees o support the review by the premier of the appointment of internal audit units and audit committees to strengthen the independence of these governance structures o continue with council training to strengthen oversight at their level o provide quarterly progress reports on the above initiatives to the minister and, when called upon, to the standing committee on local government. There will also be a report to the premier s coordinating forum twice a year. PDO, HR & GS Complete Some impact New commitments/initiatives In addition to the prior commitments which will remain a focus, the premier and all role players have pledged their support for the MGRO, a comprehensive action plan, which aims to address many of the shortcomings at a local government level. In addition to being monitored at a municipal level, MGRO will be monitored at the premier s coordinating forum, and the provincial treasury will provide support and guidance to municipalities in the development and implementation of MGRO. SCM, PDO, FM, TP, IT, HR, CONS & GS New Not yet able to assess Prior year commitments/initiatives Provincial portfolio committee on local government The joint oversight committee will continue with its reviews. As part of proactive oversight, the municipalities key control documents will be used as a template for interactions. Municipalities will provide quarterly feedback to the committee. The joint oversight committee will report to Parliament on the outcome of reviews. Parliament will in turn, through SCOPA, call upon municipalities to account for their outcomes, if considered necessary. The joint oversight committee, together with the MEC for local government will continue with the training initiatives rolled out to local councillors. The possibility of the involvement of Public Administration Leadership and Management Academy with the executive leadership of municipalities will be explored. Municipalities will be encouraged to budget appropriately so that MPACs can be established in the financial year. SCM, PDO, FM, TP, IT, HR, CONS & GS SCM, PDO, FM, TP, IT, HR, CONS & GS GS In progress In progress In progress Some impact Some impact No impact 117

119 Key role players Outline of initiatives and commitments made Focus area targeted by initiative / commitment Progress made with implementing commitments Impact of initiatives and commitments on audit outcomes The possibility of provincial Association of Public Accounts Committees of South Africa) and MPAC forums will be explored. GS In progress No impact New commitments/initiatives Awaiting new commitments the standing committee on local government oversight has made commitments, but these have not yet been passed in the house. It is expected that they would be passed before the end of May. SCM, PDO, FM, TP, IT, HR, CONS & GS New Not yet able to assess Abbreviations FM SCM PDOs IT HR TP CONS GS Financial management Supply chain management Predetermined objectives Information technology Human resource management Turnaround plans Consultants Governance structures (internal audit and audit committees 118

120 4.5 Auditor-General of South Africa s initiatives to encourage clean audits Over the past two years, the AGSA has embarked on many initiatives to enhance accountability and to influence the process towards improving audit outcomes and achieving clean administration. The main initiative was to further strengthen our relationship with the political and administrative leadership to deepen their understanding of accountability, audit and governance mechanisms, thereby paving the way towards improving public confidence. This initiative included the increased visibility of the AGSA s senior leadership and continuous interactions to highlight possible challenges, audit findings and transversal risks. While the above has yielded limited results, the leadership will continue to refine its strategies to a new level of persistence, diligence and persuasiveness to effectively bring across our messages and change the behaviour of the leadership of municipalities on both political and administrative levels. Summarised below are some of the key initiatives the AGSA has undertaken to promote public sector accountability and to encourage the process of improving audit outcomes and attaining clean audit outcomes. Table 36: Auditor-General of South Africa's key initiatives Nature Root cause reporting Quarterly assessment of key internal controls with accounting officers, CFOs, audit committees and executive authorities, including the premier, MECs for finance and local government Engagement with legislative oversight Outline of AGSA initiatives We will continue to deepen our understanding of local government to enable us to always report accurately on the root cause of the audit findings, as it relates to the drivers of internal control. Recommendations are made as part of the audit finding to correct the misstatement, non-compliance, etc. but also to address the root cause in order to assist auditees in finding sustainable solutions to prevent recurrent findings. Root causes are also reported in the audit reports in order to provide the insight gained on what the significant deficiencies in internal control are, which caused the qualifications and material findings on PDO reporting and compliance with laws and regulations. A basic assessment of the status of the key drivers of internal control is conducted on a quarterly basis although not audited until the interim audit and/or final audit takes place. The results of the assessment are shared with the accounting officer, executive authorities and audit committee. The assessment and risks identified pertaining to the auditee are shared via a defined engagement programme with these role players with the aim of meeting with them at least once per quarter. This engagement also serves as an opportunity to obtain commitments from the role players on actions that will be taken to improve audit outcomes and to discuss the status of prior commitments made. Senior members of the AGSA teams engage with the relevant provincial portfolio committees, namely the Standing Committee on Local Government Oversight and the Budget Committee and the Standing Committee on Public Accounts in the province (directly or through the chairpersons) at least twice a year. They are also available to the committees if they need briefings or insight on matters coming before the committee. It has 119

121 become standard practice to brief these committees on audit outcomes annually in order to assist them in focusing on the most important matters to be addressed. We will continue to encourage the establishment of municipal public accounts committees and promote the training of these committees to carry out effective oversight. Promoting an understanding of PDO requirements Promoting an understanding of IT risks and controls Collaboration with the provincial treasury and local government Collaboration with the South African Local Government Association (SALGA) We will continue with our presentations on the requirements for reporting on PDO to auditees, executive authorities and audit committees where a need was identified. In instances where further engagement and clarity are required, sessions with the provincial treasury and local government are arranged to ensure that an understanding is obtained regarding the requirements of the Framework for managing programme performance information. There is regular engagement on IT issues during steering committee meetings, quarterly engagements and other stakeholder interactions to ensure an understanding of IT-related risks and controls. A relationship exists with the provincial treasury and local government to highlight and address transversal matters that impact on the audit outcomes at least on a quarterly basis and to address province-specific matters that could arise. The AGSA regularly participates in various forums concerning financial management, SCM and internal audit with the aim of providing insights into root causes of audit findings and our recommendations, as well as discussing matters that impact on the audit outcomes. We will continue to engage with PT & LG to provide training to councillors. The AGSA will strengthen its collaboration with SALGA and encourage a more coordinated approach among SALGA and various role players such as national CoGTA, provincial treasury and the provincial local government department to work together with the aim of developing targeted support for struggling municipalities to improve their audit outcomes. 120

122 SECTION 5: FINANCIAL HEALTH OF LOCAL GOVERNMENT This section provides the reported outcome of the assessments of the ability of municipalities to remain as going concerns (section 5.1) and of the financial health indicators for municipalities (section 5.2). 5.1 Going concern Under the going concern assumption, an auditee is viewed as continuing to operate for the foreseeable future. As the going concern assumption is a fundamental principle in the preparation of the financial statements, management is required to assess the ability of the municipality or municipal entity to continue as a going concern and make relevant disclosures in the financial statements. As part of the audit process, the AGSA also assesses whether there are any events or conditions that may cast significant doubt on the auditee s ability to continue as a going concern. The financial statements of two (7%) auditees disclosed that a material uncertainty existed with regard to their ability to continue as a going concern. The disclosure was also emphasised in the audit report. The table below provides detail on the auditees and the events and conditions that resulted in the disclosure. Table 37: Events and conditions of material uncertainty Auditee Central Karoo District Overberg District Events and conditions The municipality experienced severe cash flow problems during the financial year. This is due to the fact that the municipality has a very small revenue base, because of the large number of unemployed households within the region. The municipality participated in the local government turnaround strategy. A recovery plan was also compiled and submitted to National Treasury, which included a revenue enhancement strategy. There is evidence of correspondence with the MEC for local government and more than one visit to the MEC for finance and MEC for local government in connection with the financial position of the council. The municipality incurred a net loss for the year ended 30 June 2012 and, as of that date, the municipality s current liabilities exceeded its total assets. This is due to a bigger increase in expenditure over the past few years than the increase in grant funding. Large fees were paid to consultants to perform functions of officials that were suspended with remuneration. The municipality also had to incur large amounts in legal fees due to a case against provincial government and staff-related cases. 5.2 Financial health indicators 121

123 Management is responsible for the sound and sustainable management of the affairs of the municipality to which they are appointed and for implementing an efficient, effective and transparent financial management system for this purpose, as regulated by legislation. The annual AGSA audits now include a highlevel analysis of municipalities financial management indicators in order to provide management with an overview of selected aspects of their current financial management and enable timely remedial action where the municipality s operations and service delivery may be at risk. The analysis is presented under the following headings: Budget and grant management (section 5.2.1) Debtor management (section 5.2.2) Creditor management (section 5.2.3) Financial performance and position and cash management (section 5.2.4) Concluding comments (section 5.2.5) Budget and grant management Figure 23: Overspending of the operational budget 35% (9) 20% 16% (1) 40% 40% (8) 13% Overall Metro District municipalities Local municipalities Number and % of auditees that overspent Average overspending of the budget The figure above presents the overspending of final operational budgets per category of municipality, reflecting both the percentage of entities that overspent and the average percentage overspending by the province. The analysis is based on municipalities final operational budgets, after adjusting the original budgets. 122

124 Overall, 35% of municipalities overspent on their operational budgets by an average of 16% which correlates with non-compliance findings related to unauthorised expenditure not prevented by eight auditees (31%). The metro did not overspend its operational budget. The overspending of one district municipality by 40% was of great concern, while 40% of local municipalities overspent their operational budgets by an average of 13%. This indicated that the quality of budgeting and management of revenue and expenditure against the budget was poor at this level of local government. It is of concern that the level of overspending in the province does not correlate with the service delivery achievements reported in the annual reports, as 69% of the municipalities (as reported in section 2.3) did not achieve at least 80% of their planned targets. This requires further investigation and remedial action by the municipal leadership and governance structures. Figure 24: Underspending of the capital budget 85% (22) 28% 100% (1) 8% Overall Metro District municipalities Local municipalities 60% (3) 73% 90% (18) 22% Number and % of auditees that underspent Average underspending of the budget The figure above presents the underspending of final capital budgets per category of municipality, reflecting both the percentage of entities that underspent and the average percentage underspending in the province. The analysis is based on municipalities final capital budgets, after adjusting the original budgets. Overall, 85% of municipalities underspent their capital budgets by an average of 28%, with the metro underspending by 8%. A total of 60% of district municipalities underspent by an average of 73%, and 90% of local municipalities underspent by an average of 22%. The district municipalities achieved less than 80% of their planned targets partly due to the significant underspending of their capital budgets. Figure 25: Underspending of conditional grants 123

125 69% (18) 100% (1) 60% (3) 70% (14) 14% 12% 4% 16% Overall Metro District municipalities Local municipalities Number and % of auditees that under-spent Average under-spending of conditional grants The figure above presents the underspending on conditional grants per category of municipality, reflecting both the percentage of entities that underspent and the average percentage underspending in the province. The metro underspent its conditional grants by 12%, with 60% of district municipalities underspending by an average of 4%, and 70% of local municipalities underspending by an average of 16%. Overall, 69% of municipalities underspent their conditional grants by an average of 14%. The underspending on the capital and conditional grant allocations is concerning as these allocations are intended to enhance the ability of municipalities to deliver services to their citizens. This underspending may indicate, among other factors, lack of credible reporting on the use of conditional grants and capital budgets, poor capital budgeting and management of adjustment budgets, weak capital project implementation planning and a shortage of suitably skilled engineers and technicians to implement capital projects. Conclusion on capital budgets and conditional grants The municipal and provincial leadership should insist on credible monthly reports that measure actual expenditure against budgets and service delivery. The reported actual expenditure (capital and current) should be properly reconciled. The governance structures should give assurance to the leadership that all reports provided to them are credible. These reports should be monitored regularly and appropriate corrective actions taken where necessary. In addition, the Department of Local Government and the provincial treasury should assist all municipalities through the municipal governance review outlook initiatives to identify their human resource capacity to manage major capital projects, and measure the existing capacity against the number and value of budgeted capital projects. Where shortfalls in capacity are identified, appropriate appointments and/or direct hands-on support through the deployment of experts from the panel established by Department of Local Government and/or outsourcing should be considered. 124

126 5.2.2 Debt management The following figure indicates the average period in days that it takes the different categories of municipalities to collect outstanding consumer debts, both before and after impairment (write-off) for uncollectable debtors. The graph also shows the extent, in percentage terms, to which debtors were written off (impaired). Figure 26: Debt-collection period Reduction in book value after impairment: 28% Reduction in book value after impairment: 35% Reduction in book value after impairment: 33% Reduction in book value after impairment: 51% Movement in collection period: (days): Overall Movement in collection period: Overall (days) Local Municipalities Movement in collection period: Overall (days): District Municipalities Movement in collection period: Overall (days): Metropolitan Municipalities Debtor collection period (after impairment) Debtor collection period (before impairment) It took municipalities 137 days (4,5 months) on average to collect outstanding amounts from consumer debtors where no provision was made for uncollectable debt. The collection period decreased to an average of 71 days (2,4 months) if 28% of debts were written off. The difference between the debt-collection periods before and after write-off and the extent of impairment of debts may be the result of the continuing year-on-year growth in both the outstanding debts and not taking action to identify and write off bad debts. The metro achieved a 30-day (one month) collection rate, but impaired 51% of their consumer debts to do so. District municipalities required 41 days (1,4 months) to collect debts after a 33% write-off of debts, with the situation being worse at local municipalities with a 62-day (two months) collection period after a 125

127 35% write-off of debts. Only three district municipalities were included in the analysis of the debt-collection period and debt-collection intervals as two district municipalities did not have any consumer debts at year-end. The extended collection periods may result in cash flow problems, adversely affecting operational management. The excessive write-off of debts by the metro highlighted the widespread culture of non-payment for services by consumers. This may negatively impact on the maintenance of infrastructure, resulting in a deteriorating level of consistent quality service delivery. Figure 27: Debt-collection intervals 100% 13% 67% 54% 55% 33% 25% 30% 0% 0% 0% 100% 0% 0% 0% 5% 4% 5% 4% 5% 0 to 30 days 30 to 60 days 60 to 90 days 90 to 120 days More than 120 days Overall Metro District municpalities Local municipalities The figure above elaborates on the debt-collection analysis and shows the extent of municipalities, per category of municipality, that collect their debts within the indicated debt-collection intervals after having been adjusted for the write-off of bad debt. The metro collected its debts within 30 days. All the district municipalities were able to collect debts within 60 days, with 33% being collected within 30 days. A total of 60% of local municipalities collected debts in 60 days and a further 30% was collected within 90 days. The analysis of debt-collection intervals is after the impairment has been taken into account and indicated a more favourable collection period and the overall debts impaired or written off are significant. Conclusion on debtor management 126

128 The poor collection days before impairment have a negative influence on the cash flow of municipalities. This also resulted in delays in the implementation of capital projects. Revenue collection and debtor management should be improved by updating policies and ensuring that adequate capacity exists to implement the policies and the requirements of the policies are strictly enforced. The accounting officers should consider writing off debts after they have exhausted all reasonable steps to collect the amounts outstanding Creditor management In accordance with section 65(2)(e) of the MFMA, all money owing by the municipality must be paid within 30 days of receiving the relevant invoice or statement, unless prescribed otherwise for certain categories of expenditure. The following figure shows the average number of days that it took the different categories of municipalities in the province to pay suppliers. This reflects on how long an entity holds onto its cash. Figure 28: Creditor-payment period Overall Metro District municipalities Local municipalities Overall, it took municipalities 42 days (1,4 months) on average to pay creditors. The metro took 66 days (2,2 months) to pay its creditors according to the analysis above. The metro followed a strict 30-day payment policy and the analysis above may be a result of accruals included in the year-end balance that were not yet payable. The number of days required by district and local municipalities to pay their creditors were 26 days (one month) and 45 days (1,5 months), respectively. Where there was delayed receipt of payment by suppliers who provided goods and services to municipalities it could lead to reluctance on the part suppliers to do business with local government. 127

129 The following figure elaborates on the creditor-payment analysis and shows the extent of municipalities, per category of municipality, which pay their creditors within the indicated creditor-payment intervals. Figure 29: Creditor-payment intervals 100% 60% 50% 55% 35% 40% 30% 11% 10% 4% 5% 0 to 30 days 30 to 60 days 60 to 90 days 90 to 120 days More than 120 days Overall Metro District municipalities Local municipalities A total of 100% of district municipalities and 85% of local municipalities pay within 60 days, with 60% and 30%, respectively, settling outstanding amounts with suppliers within 30 days. Amounts used in calculations above may include accruals in the year-end balance that were not yet payable as most municipalities pay their creditors within 30 days. In some instances where cash flow constraints were experienced, the payment of creditors was delayed. The following figure compares the prior debt-collection periods and creditor-payment periods, indicating in number of months the difference between the average periods taken to collect from consumers and to pay suppliers. Figure 30: Debtor-collection period (after impairment) versus creditor-payment period 128

130 1,9 1,4 1 2,2 1, ,5 Overall Metro District Municipalities Local Municipalities Debtor collection period - months Creditor payment period - months Overall, municipalities took slightly longer to collect debts than they took to pay creditors. A reverse trend was evident for the metro that, on average, collected debts in one month, but only paid creditors in two months and two weeks; however, this may be distorted as previously explained. The results reflect the time delay between turning receipts from consumers into payments to suppliers and are indicative of how much cash reserves municipalities require in order to sustain their operations and manage working capital effectively and economically, as is required by the MFMA. Conclusion on creditor management The municipal leadership should implement systems and processes to ensure that transactions with suppliers are recorded promptly, are properly reconciled and are paid on time. The governance structures should provide assurance to the leadership and the council that the strategies employed to mitigate the risks of late payment are adequate. 129