THE REPUBLIC OF UGANDA REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF LOCAL GOVERNMENT FINANCE COMMISSION FOR THE YEAR ENDED 30 TH JUNE, 2015 OFFICE OF THE AUDITOR GENERAL KAMPALA
LIST OF ACRONYMS...3 REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF LOCAL GOVERNMENT FINANCE COMMISSION FOR THE YEAR ENDED 30 TH JUNE, 2015...4 1.0 INTRODUCTION...7 2.0 BACKGROUND INFORMATION...7 3.0 OBJECTIVES OF LOCAL GOVERNMENT FINANCE COMMISSION...7 4.0 AUDIT SCOPE...8 5.0 PROCEDURES PERFORMED...8 6.0 ENTITY FINANCING...9 7.0 CATEGORIZATION AND SUMMARY OF FINDINGS...9 7.1 Categorization of findings...9 7.2 Summary of Findings... 10 8.0 DETAILED FINDINGS... 10 8.1 Mischarge of expenditure... 10 8.2 Unaccounted for expenditure on fuel... 11 8.3 Non-deduction of Withholding Tax... 11 8.4 Staffing gaps... 12 8.5 Budget performance... 12 8.6 Under-remittance of PAYE on retainer payments... 13 8.7 Defiance of Minister of Public Service Authority... 14 2
LIST OF ACRONYMS Acronym URA TAI LGFC PFMA PPDA PAYE NSSF Meaning Uganda Revenue Authority Treasury Accounting instructions Local Government Finance Commission Public Finance Management Act Public Procurement and Disposal of Public Assets Authority Pay As You Earn National Social Security Fund 3
REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF LOCAL GOVERNMENT FINANCE COMMISSION FOR THE YEAR ENDED 30 TH JUNE, 2015 THE RT. HON. SPEAKER OF PARLIAMENT I have audited the accompanying financial statements of Local Government Finance Commission for the year ended 30th June 2015. These financial statements comprise of the statement of financial position as at 30th June 2015, statement of financial performance, statement of changes in equity, cash flow statement together with other accompanying statements, notes and accounting policies. Management s Responsibility for the Financial Statements Under Article 164 of the Constitution of the Republic of Uganda, 1995 (as amended) and Section 45 of the Public Finance Management Act, 2015, the Accounting Officer is accountable to Parliament for the funds and resources of Local Government Finance Commission. The Accounting Officer is also responsible for the preparation of financial statements in accordance with the requirements of the Financial Reporting Guide, 2008, and for such internal control as management determines necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility My responsibility as required by Article 163 of the Constitution of the Republic of Uganda, 1995 (as amended) and Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an opinion on these statements based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that I comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing audit procedures to obtain audit evidence about the amounts and disclosures in the financial statements as well as evidence supporting compliance with relevant laws and regulations. The procedures selected depend on the Auditor s judgment, including the assessment of risks of material misstatement of the 4
financial statements whether due to fraud or error. In making those risk assessments, the Auditor considers internal controls relevant to the entity s preparation of financial statements in order to design audit procedures that are appropriate in the circumstances but not for purposes of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my qualified opinion. Part A of this report sets out my qualified opinion on the financial statements. Part B which forms an integral part of this report presents in detail all the significant audit findings made during the audit which have been brought to the attention of management. PART A Basis for Qualified Opinion Mischarge of Expenditure The Commission charged wrong expenditure codes to a tune of UGX.256,125,970 thereby misstating the balances in the financial statements. The practice undermines the budgeting process and the intensions of the appropriating authority as funds are not fully utilised for intended purposes. The practice also leads to financial mis-reporting. Unaccounted for expenditure on fuel UGX.168,333,000 was deposited with a petrol station for onward loading onto fuel cards for Commission officials town running and activities. However, these amounts were not accounted for as there were no consumption statements availed for verification. Without the consumption statements, I was unable to confirm that the funds were indeed used for intended purposes. Qualified Opinion In my opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements of Local Government Finance 5
Commission as at 30 th June 2015 are prepared, in all material respects, in accordance with section 51 of the Public Finance Management Act, 2015 and the Financial Reporting Guide, 2008. John F.S. Muwanga AUDITOR GENERAL KAMPALA 12 th December, 2015 6
PART "B" DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF LOCAL GOVERNMENT FINANCE COMMISSION FOR THE YEAR ENDED 30 TH JUNE 2015 This Section outlines in detail the audit scope, audit findings, my recommendations and Management responses in respect thereof. 1.0 INTRODUCTION In accordance with Article 163(3), of the Constitution of the Republic of Uganda, 1995 (as amended), I am required to audit and report on the public accounts of Uganda that is to say, all public offices including the courts, the central and the local government administrations, universities and public institutions of the like nature and any public corporation or other bodies or organizations established by an Act of Parliament. Accordingly, I carried out the audit of the Local Government Finance Commission to enable me report to Parliament. 2.0 BACKGROUND INFORMATION The Local Government Finance Commission was created under Article 194(1) of the Constitution of Uganda and section 3 (1) of the Local Government Finance Commission Act, 2003 to provide advice to the President and Local Governments on all matters concerning financing of Local Governments (LGs). It plays an advisory role. The Commission s vision is A Uganda with Financially Sustainable Local Governments that provide efficient and effective service; and its mission is To ensure effective mobilization and equitable distribution of financial resources for service delivery in local governments. 3.0 OBJECTIVES OF LOCAL GOVERNMENT FINANCE COMMISSION The following are the objectives of the Commission:- To improve Revenue distribution between CG and LGs and among LGs for effective and efficient service delivery To enhance Local Revenue Generation in LGs To undertake Local Governments budget analysis and tracking 7
To enhance disputes resolution and mitigation related to the financing of LGs To Strengthen LGFC s Institutional Capacity for effectiveness and efficiency. 4.0 AUDIT SCOPE The audit was carried out in accordance with International Standards on Auditing and accordingly included a review of the accounting records and agreed procedures as was considered necessary. The audit was carried out with regard to the following objectives:- a. Whether the financial statements have been prepared in accordance with the requirements of the Public Finance Management Act 2015 and fairly present the income and expenditures for the year and of the financial position as at the end of the year. b. Whether all Commission funds were utilized with due attention to economy and efficiency and only for the purposes for which the funds were provided. c. Whether goods and services financed have been procured in accordance with the PPDA Act. d. To evaluate and obtain a sufficient understanding of the internal control structure of the Commission, assess control risk and identify reportable conditions, including material internal control weaknesses e. Whether management of the entity funds was in compliance with the Government of Uganda financial regulations. f. Whether all necessary supporting documents, records and accounts have been kept in respect of all activities, and are in agreement with the financial statements presented. 5.0 PROCEDURES PERFORMED The following audit procedures were undertaken:- a. Revenue Obtained all schedules of all revenues collected and reconciled the amounts to the Commission s cashbooks and bank statements. 8
b. Expenditure The Commission payments vouchers were examined for proper authorization, eligibility and budgetary provision, accountability and support documentation. c. Internal Control System Reviewed the internal control system and its operations to establish whether sound controls were applied throughout the period. d. Procurement Reviewed the procurement of goods and services under the Commission during the period under review and reconciled with the approved procurement plan. e. Fixed Assets Management Reviewed the use and management of the assets of the Commission during the period under review. f. Financial Statements Examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by management; as well as evaluated the overall financial statement presentation. 6.0 ENTITY FINANCING The commission was financed by grants from Central Government. Grants totaling to UGX.4,562,172,952 from central Government were received. The total revenue of UGX.4,562,172,952 constituted 99.6% of its approved budget estimates of UGX.4,579,259,964. The released amount was fully utilized. 7.0 CATEGORIZATION AND SUMMARY OF FINDINGS 7.1 Categorization of findings The following system of profiling of the audit findings has been adopted to better prioritise the implementation of audit recommendations: Category Description 1 High significance Has a significant/material impact, has a high likelihood of reoccurrence, and in the opinion of the Auditor General, it requires urgent remedial action. It is a matter of high risk or high stakeholder interest. 9
2 Moderate significance Has a moderate impact, has a likelihood of reoccurrence, and in the opinion of the Auditor General, it requires remedial action. It is a matter of medium risk or moderate stakeholder interest. 3 Low significance Has a low impact, has a remote likelihood of reoccurrence, and in the opinion of the Auditor General, may not require much attention, though its remediation may add value to the entity. It is a matter of low risk or low stakeholder interest. 7.2 Summary of Findings No Finding Significance 8.1 Mischarge of expenditure High 8.2 Unaccounted for expenditure on fuel- High UGX.168,333,000 8.3 Non-deduction of withholding tax Moderate 8.4 Staffing gaps Moderate 8.5 Budget performance Moderate 8.6 Under-remittance of PAYE on retainer allowances Moderate UGX.4,500,000 8.7 Defiance of Minister of Public service authority Low 8.0 DETAILED FINDINGS 8.1 Mischarge of expenditure The Parliament of Uganda appropriates funds in accordance with the needs of the country and this appropriation is implemented through the budget in which funds are tagged to particular activities and outputs using account codes and MTEF codes. A review of the Commission s expenditures revealed that the entity charged wrong expenditure codes to a tune of UGX.256,125,970 which constituted 5.6% of total expenditure. This practice undermines the importance of the budgeting process and leads to financial misreporting. Management in their response acknowledged the mischarges and attributed it to the inadequate budget allocation for gratuity and allowances which are statutory obligations. I advised the Accounting Officer to streamline the budget process to ensure that sufficient funds are allocated to each account. Authority should be sought prior to any reallocations. 10
8.2 Unaccounted for expenditure on fuel It was noted that UGX.168,333,000 was deposited with a fuel company to be loaded onto Fuel cards for commission officials town running and official activities. However, I was unable to carry out an analysis of the fuel consumption because the consumption statements were not availed and as such I could not confirm that all the fuel was duly used for intended activities. Management attributed the non-availability of fuel statements to delays in providing the statements from the service provider and promised to avail as soon as the statements are accessed. I advised the Accounting Officer to ensure that consumption statements are regularly obtained to enable monitoring of fuel consumption. 8.3 Non-deduction of Withholding Tax It was observed that Withholding Tax to the tune of UGX.24,363,903 from payment of UGX.406,065,056 to National Social Security Fund for rental space was not deducted for onward remittance to URA. Further, an amount of UGX.2,997,963 in respect of withholding tax on vehicle repairs was also not deducted. The Commission risks losses due to fines and penalties that may be imposed by URA for non-adherence to the tax regulations. Management explained that they had erroneously based their decision not to withhold tax on payments to NSSF on the exemption tax clause in the NSSF Act but promised to withhold the tax in future. With regard to repairs, management attributed the anomaly to IFMS system that failed to deduct the withholding tax. I explained to management that the exemption clause is for the benefits paid under the Act and advised them to ensure that due taxes are deducted and remitted to URA promptly to avoid the risk of penalties and fines. Further, the Accounting Officer should liaise with the Accountant General to resolve the issue on failure of the IFMS. 11
8.4 Staffing gaps The Local Government Finance Commission approved staff structure provides for 52 posts for the two directorates. However, it was noted that out of the approved 52 positions only 36 were filled leaving 16 posts vacant. The vacant posts include key posts at management level such as Senior Revenue Officers, Senior Data Officer and Senior Monitoring and Evaluation Officer. Delays in filling vacant positions, especially at senior management level adversely affect Service delivery. More so, because of the workload staff could be overworked thus affecting productivity. Management explained that the Commission is currently carrying out a review of the organization structure because some of the vacancies noted are no longer feasible. I advised the Accounting Officer to expeditiously finalize the review process and make submissions to the Ministry of Finance, Planning and Economic Development for approval of budget funding. 8.5 Budget performance A review of the budget performance for the year under review revealed that some targets were not achieved despite government releasing funds for the various vote functions. See table below. Vote function output Project 0389- Suppprt LGFC Item description 135375- Purchase of Motor Vehicles and other transport Equipment Planned outputs/ QTY Purchase 2 4WD vehicles Amount (UGX) budgeted Amount released (UGX.) Actual output/ Qty 311,077,712 308,543,594 1 vehicle procured at 217,757,530 Remarks Despite receipt of all funds, only one vehicle was bought and balances diverted. 01 Headquarters 135301- Human Resource Management Recruit and induct 5 staff. Salary paid in time Staff training plan prepared Annual staff appraisal undertaken 1,307,406,400 1,307,406,400 -All undertaken with shortfall in recruitment -Only 3 staff were recruited (a stores assistant and 2 revenue officers) 135303- Revenue mobilization Local revenue databases in 30 urban councils 12 803,856,000 769,003,694 All conducted except the 4 regional -Despite release of 95% of funds, no
and generation Technical support to 40 urban councils on property rates collection 3 local revenue enhancement meetings 4 regional meetings on implementation of best practices & local revenue meetings single regional workshop was held. The authority s objectives may not have been met. Management explained that the Commission largely achieved its budgeted targets, however it could not acquire two (2) new Station wagons as had been planned because the amount released from treasury was not adequate to purchase the two (2) vehicles. They also could not carry out the intended recruitment program because it did not have the resources to pay for the new staff members due to budget resource constraints. Furthermore, management explained that no regional workshop was held because the resources available were not adequate to meet their costs. I advised the Accounting Officer to undertake proper planning and budgeting to have planned outputs achieved within the budgeted and approved resources. 8.6 Under-remittance of PAYE on retainer payments It was observed that Commission has five part time commissioners who are paid UGX.2,500,000 monthly retainer fee that should ideally attract tax of UGX.759,000 per individual per month. However, a review of all the payments related to this transaction revealed that only UGX.40,500,000 was remitted to URA leaving a balance of UGX.4,500,000. Non-compliance with the tax laws may lead to fines and penalties being imposed on the commission by URA leading to nugatory expenditure. Management noted the anomaly and explained that the remittance will be effected during the FY 2015/2016. 13
I advised the Accounting Officer to ensure remittance of the outstanding taxes and the necessary adjustments in the financial statements to disclose the liability. 8.7 Defiance of Minister of Public Service Authority The commission undertook procurement of a vehicle during the year at a total cost of US$.78,961 from a local company. However, a review of this procurement revealed that authority for the procurement from the Minister dated 25/09/2014 specified a station wagon not exceeding 2800cc was not adhered to. Instead a 3000cc vehicle was procured and delivered. Defiance of the authority on vehicle requirements may lead to avoidable expenditure such as higher maintenance costs due to a high capacity of the vehicle. Management explained that the Commission procured a vehicle with a higher capacity on the basis of the specifications given by the Ministry of Works (MoW). I explained to management that MoW is not the approval authority and advised the Accounting Officer to ensure compliance with the responsible authority. 14
APPENDIX 1 FINANCIAL STATEMENTS 15