Taking accountability to improve audit outcomes

INTEGRATED DEVELOPMENT PLAN (IDP)

Plan-Do-Check-Act Cycle, also the Deming cycle, courtesy of the International Organization for Standardization 3

PLAN DO ACT CHECK 10

The AGSA has a constitutional mandate and exists to strengthen our democracy by enabling oversight, accountability and good governance in the public sector through auditing, thereby building public confidence We have improved our audit methodology and audit report Delivering a valuable and relevant product focusing on the things that matter 11

Engaging accounting officers in conversations that are insightful, relevant and have an impact Key control engagements / status of records review objectives Key control engagements / status of records review focus areas Identify key areas of concern that may derail progress in the preparation of financial and performance reports and compliance with relevant legislation and consequential regression in audit outcome Financial health Oversight and monitoring Financial management Provide our assessment of the status of key focus areas that we reviewed IT management Key focus areas Performance management Assess progress made in implementing action plans/ follow through with commitments made in previous engagements Identify matters that add value in putting measures and action plans in place well in advance to mitigate risks HR management Compliance management Procurement and contract management 12

The percentages in this presentation are calculated based on the completed audits of 263 municipalities, unless indicated otherwise The overall audit outcomes are indicated as follows: Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Audits outstanding Movement over a period is depicted as follows: Improved Unchanged slight improvement slight regression Regressed 13

2015-16 MFMA outcomes Audit outcomes Emerging risks Internal control 0% 20% 40% Root causes Total budget: R365 billion Assurance providers 60% Compliance Human resource management and the use of consultants 80% 100% Irregular expenditure and supply chain management Annual performance reports Water and sanitation Grant management Financial health Fraud and consequences Unauthorised expenditure 2015-16 2014-15 14

Internal controls Good controls = 18% Leadership 25% 43% 32% Financial and performance management 23% 47% 30% Governance 37% 38% 25% Good Of concern Intervention required 15

Root causes Best practices = 18% Slow response to improving key controls and addressing risk areas 86% (185) Management (accounting officers and senior management), the political leadership (mayor and council) and oversight bodies MPACs and portfolio committees) do not respond with the required urgency to our messages about addressing risks and improving internal controls Inadequate consequences for poor performance and transgressions 73% (157) If officials who deliberately or negligently ignore their duties and contravene legislation are not held accountable for their actions, such behaviour can be seen as acceptable and tolerated. Instability or vacancies in key positions 73% (158) The instability and prolonged vacancies in key positions can cause a competency gap that leads to a high demand for consultants and support. 16

Little improvement in areas of compliance With no findings = 19% Prevention of unauthorised, irregular and fruitless and wasteful expenditure 73% (191) Quality of financial statements submitted 68% (178) Management of procurement and/ or contracts 63% (167) Consequence management 52% (136) Expenditure management 45% (119) 17

Irregular expenditure over three years 98% (2014-15: 96%) of occurrences were related to contraventions of SCM prescripts With no IE = 10% 2015-16 MFMA R16 810 m (236 municipalities [90%]) R6 019 m (36%) 31% (R5 269 m) R10 791 m (64%) R11 136 m (232 municipalities [88%]) R4 137 m (37%) 24% (R2 662 m) R6 999 m (63%) R11 334 m (225 municipalities [86%]) R5 965 m (53%) 19% (R2 179 m) R5 369 m (47%) 2015-16 2014-15 2013-14 NC R287 million (2%) LP R1 636 million (10%) MP R2 279 million (13%) Provincial breakdown of irregular expenditure incurred NW R2 520 million (15%) WC R210 million (1%) KZN R2 361 million (14%) EC R5 657 million (34%) FS R361 million GP (2%) R1 499 million (9%) Identified by auditees Identified during audit Incurred in previous years identified in current year 18

Highest contributors responsible for 31% of the irregular expenditure Municipality Amount (million) Nature OR Tambo District (EC) Nelson Mandela Bay Metro (EC) Ngaka Modiri Molema District (NW) Mbombela (MP) City of Tshwane Metro (GP) R1 569 (2014-15: R94) R1 286 (2014-15: R1 348) R912 (2014-15: R56) R755 (2014-15: R107) R653 (2014-15: R1 010) The irregular expenditure is mainly due to various awards for water and sanitation projects e.g. Flagstaff Sewer Rectification Project). Procurement without competitive bidding or quotation process and bids advertised for shorter periods than allowed mainly for water and sanitation projects. Numerous contracts where the SCM processes were not followed resulting from a complete breakdown in controls over SCM. Awards were made (R216 million) to persons employed by the state and deviations were approved after the relevant goods and services were ordered. Payments were made on multi-year contracts that were previously identified to be irregular. A significant part relates to construction of water and sanitation infrastructure assets funded from the municipal infrastructure grant. Multiple contracts were extended even though it was not impractical to invite competitive bids. Irregular expenditure mostly relates to the Wi-Fi contract where the supplier was appointed without following competitive bidding processes. A BRT tender was also awarded to a contractor not qualified to deliver the service. 19

Little movement in SCM findings since previous year Uncompetitive or unfair procurement processes 23% (64) 59% (155) 83% (219) Awards to other state officials 41% (107) 17% (46) 58% (153), R2 520 million Inadequate contract management 18% (46) 26% (69) 44% (115) Awards to close family members of employees 19% (51) 9% (23) 28% (74), R1 396 million Awards to employees 14% (36) 6% (16) 20% (52), R56 million Limitation in planned scope of audit awards 10% (26) 10% (26) 20% (52) With findings With material findings (reported in audit report) 20

Recommendations for improving SCM findings A less tolerant approach by all parties, including those charged with governance and oversight, will result in accountability and consequences being enforced against those who intentionally fail to comply with legislation Strengthen the SCM control environment by appointing suitably skilled and qualified heads of SCM where vacancies exist and conduct regular training to improve skills this will reduce possible irregular expenditure Implement SCM compliance checklists to supplement policies and procedures Submit regular reports to management and governance structures on compliance with key legislation Corrective or disciplinary action for misconduct Focus on preventing irregular expenditure and non-compliance these should be a key performance measure in senior official s contracts 21

Fraud and consequence management 39% Control environment 101 (38%) municipalities did not have sufficient mechanisms for reporting and investigating transgressions or possible fraud Most common findings: Disciplinary board not established at 73 municipalities No hot-line at 53 municipalities No policies for investigations at 50 municipalities Allegations of financial and/or fraud and SCM misconduct (151 municipalities) Previous year unauthorised, irregular and fruitless and wasteful expenditure reported for investigation Allegations not investigated Investigations took longer than three months 17% (26) 28% (43) 46% (118) 254 MUN 54% (136) Allegations not properly investigated 9% (14) Investigated Not investigated 22

Movement in UIFW balances Movement of unauthorised, irregular and fruitless and wasteful expenditure as a percentage of previous year s closing balance Movement of unauthorised, irregular and fruitless and wasteful expenditure as a percentage of amount incurred in previous year R1 186 m (4%) R1 m <1% R1 789 m (7%) R3 937 m (14%) R 7 m < 1% R3 639 m (15%) R1 186 m (11%) R1 789 m (14%) R 7 m < 1% R 1 m < 1% R22 763 m (82%) R18 824 m (78%) R3 937 m (35%) R3 639 m (29%) Irregular expenditure (R27 887 million) Recovered Unauthorised expenditure (R24 259 million) R6 m (1%) R242 m (10%) R2 088 m (89%) Fruitless and wasteful expenditure (R2 336 million) Condoned or authorised through adjustment budget R6 012 m (54%) Irregular expenditure (R11 136 million) Written off R7 296 m (57%) Unauthorised expenditure (R12 731 million) Not dealt with R6 m (1%) R242 m (21%) R893 m (78%) Fruitless and wasteful expenditure (R1 141 million) 23

Supply chain management findings reported to management for investigation SCM findings reported for investigation during the 2015-16 audit process (all municipalities) Follow-up of the previous year s SCM findings reported for investigations Supplier(s) submitted false declaration of interest 49% (129), 2 015 instances Supplier(s) submitted false declaration of interest 51 17 61 129 MUN Employee(s) failed to disclose interest in supplier 26% (69), 492 instances Employee(s) failed to disclose interest in supplier 23 7 53 83 MUN Other SCM findings reported for investigation 16% (43), 1 008 instances Other SCM-related allegations 17 6 37 60 MUN All investigated Some investigated None investigated 24

Unauthorised expenditure over three years 31% 2015-16 MFMA 99% (2014-15: 97%) of occurrences caused by overspending of budget / main sections in budget R12 771 m (181 municipalities [69%]) R12 731 m (190 municipalities [72%]) Provincial breakdown of unauthorised expenditure incurred R2 590 m (20%) R3 702 m (28%) R10 073 m (187 municipalities [71%]) R3 067 m (30%) WC R210 million (2%) NC R568 million (4%) NW R1 954 million (15%) EC R856 million (7%) FS R1 294 million (10%) 55% (R7 024 m) R10 181 m (80%) R9 029 m (72%) R7 006 m (70%) 2015-16 2014-15 2013-14 Identified by auditees 64% (R8 146 m) Identified during audit 59% (R5 939 m) LP R1 017 million (8%) Non-cash items including depreciations, impairments, debt written off etc. MP R1 713 million (13%) KZN R1 623 million (13%) GP R3 536 million (28%) 25

Financial health 35% Financial viability of municipalities is on a steady decline 32% (84) 35% (93) 33% incurred a deficit 44% in net current liability position 17% were able to pay their creditors in less than 30 days 33% (86) 40% took more than 120 days to pay their creditors 46% are able to collect monies owed to them in less than 90 days 44% took more than 120 days to collect money owed to them Good Of concern Intervention required 93% deem more than 10% of their debt to be non-recoverable 26

Planning, managing and reporting on performance 49% The process The findings Plan and budget 37 municipalities (14%) did not set key performance indicators for delivery of basic services (water, electricity, sanitation and refuse removal) Indicators not well defined (23%) or verifiable (21%) Targets not measurable (18%) or specific enough (16%) Monitor and in-year reporting 27 municipalities (10%) had no performance management systems 26 municipalities (10%) had inadequate performance management systems 17 municipalities (6%) had no mechanisms to monitor or review performance Report performance in annual performance report (APR) 3% did not prepare APR 6 from the Northern Cape Reported information not consistent with what was included in the plan (24%) Reported achievement was not reliable at 45% municipalities 80% of APR submitted for audit was materially misstated. After corrections were made, it was 49%, an improvement from the 38% in 2014-15 Progress made towards useful and reliable performance reporting is slow. This affects the ability of communities to hold municipalities accountable and makes it difficult for provincial and national government to track progress towards the service delivery goals. 27

Water and sanitation grant funding and performance reporting Water (148 WSA) Sanitation (150 WSA) Grant funding 18% (27) 3% (4) 13% (20) 2% (2) Grant used Grant not fully used 79% (117) 85% (127) Grant funding used for other purposes 16 of these municipalities also did not plan for the provision of water services in the SDBIP/IDP Performance reporting 14% (21) 14% (20) 21 of these municipalities also did not plan for the provision of sanitation services in the SDBIP/IDP 16% (24) 9% (13) Reliable reporting Reported but not reliable No reporting 72% (107) 75% (113) 28

Performance audit report on Water infrastructure Focused on the planning, project management and implementation of projects in ten district municipalities in six provinces Tabled on 30 November 2016 Weaknesses identified in areas of leadership and oversight, funding, project management and operations and intergovernmental coordination 29

Findings on water infrastructure projects and maintenance in local government Water infrastructure projects at 148 municipalities Maintenance of water infrastructure at 148 municipalities 56% No policy on maintenance of water infrastructure 20% The projects in progress do not address the cause of the water backlog reported 45% No maintenance plan 28% Projects exceeded planned completion date 34% 24% Conditional assessment not done to inform the maintenance plan and budget Maintenance was not budgeted for 22% Projects had significant findings on supply chain management 16% 20% Appropriate steps not taken to prevent over-/underspending of the budget allocation for routine water infrastructure maintenance Targets and time frames for routine maintenance of water infrastructure were not achieved 30

Sanitation infrastructure projects and maintenance Sanitation infrastructure projects at 150 municipalities 18% The projects do not address the cause of the sanitation backlog reported 25% Projects exceeded planned completion date 19% Projects had significant findings on supply chain management 31

Key projects funded by the municipal infrastructure grant (MIG) Achievement of planned targets - projects 35% (226) 652 projects 65% (426) 652 key projects audited at 234 municipalities 15 municipalities did not use grants in line with the grants framework 7% Only of the R15,04 billion in grants was not spent Targets achieved Targets not achieved / not evaluated Projects managed by municipalities Projects managed by implementing agents SCM findings and incorrect accounting identified 29% (192) 13% (84) 18%( 7) 3% (1) SCM findings (652 projects) Incorrect accounting (652 projects) SCM findings (38 projects) Incorrect accounting (38 projects) 32

Management of USDG and PTNG Urban settlements development grant (USDG) Public transport network grant (PTNG) R10,55 billion (7 municipalities [3%]) R0,54 billion (5%) R5,36 billion (11 municipalities [4%]) Projects have generally been successfully implemented and goods and services received for the money spent R10,01 billion (95%) R0,55 billion (10%) 2015-16 18 projects 11% (2) R4,8 billion (90%) 2015-16 19 projects 16% (3) In some projects, delays resulted in variation orders; quality issues due to lack of maintenance and project management failures due to inadequate planning All design specifications were not approved before tenders were invited for projects 89% (16) 84% (16) SCM findings on grant projects were reported in some cases. Spent Not spent 2015-16 2015-16 Targets achieved Targets not achieved/ not evaluated 33

Human resource management 27% Status of human resource management controls 26% (69) 27% (72) Good Of concern Intervention required 47% (122) Biggest improvements in EC Biggest regression in KZN Inadequate performance management at 125 municipalities (no signed performance contracts for some senior managers at 38 municipalities) 59 of 72 (82%) municipalities maintained their status of good assessment 57 of 69 (83%) municipalities remained in the red zone from the previous year 34

Vacancies, stability and achievement of competency requirements municipal managers and chief financial officers Vacancy at year-end Municipal managers Chief financial officers 2015-16 4% (11) 16% (41) 20% (52) 2014-15 2015-16 2014-15 5% (14) 8% (20) 7% (18) 12% (30) 13% (35) 19% (50) 17% (44) 20% (53) 27% (70) Stability (average of months in position) Municipal managers Chief financial officers 2015-16 2014-15 2015-16 2014-15 50 months 43 months 47 months 40 months Competency (non-achievement of minimum competency requirements) Municipal managers Chief financial officers 2015-16 2014-15 2015-16 2014-15 8% (17) 9% (20) 8% (16) 12% (26) 3% (6) 6% (12) 7% (16) 11% (22) 6% (12) 14% (29) 16% (36) 18% (38) Vacant for less than 6 months Vacant for 6 months or more Average number of months in position Did not meet minimum competency requirements Minimum competencies not assessed/ limitation 35

Effective use of consultants overall Findings from the audit on the use of consultants at 254 municipalities where consulting services were intellectual or advisory in nature on financial reporting services, preparation of performance information, IT related services or other services. Poor performance management and monitoring 60% (152) Measures to monitor contract performance and delivery not defined and/ or implemented (82 municipalities) No evaluation performed to determine if the consultancy rendered, meet the initial project objectives, needs and deliverables (36 municipalities) No transfer of skills 49% (125) No evidence that skills transfer or training programmes took place (101 municipalities) Measures to monitor the transfer of skills according to contract not implemented (80 municipalities) Requirements/ objectives/ key details of transfer of skills not included in the terms of reference (65 municipalities) Inadequate planning and appointment process 33% (85) Consultants appointed without conducting needs assessment or gap analysis (65 municipalities) Consultants appointed without any terms of reference (34 municipalities) Inadequate terms of reference used (19 municipalities) 36

Municipalities assisted by consultants financial reporting R767 million paid to consultants on financial reporting services Audit outcomes of municipalities assisted by consultants financial reporting 26% (59) 2% (4) 9% (21) 63% (146) Reasons for the financial reporting consultants being ineffective Auditee ineffectiveness Poor project management Lack of records and documents 11% (25) 18% (42) 16% (36) Material misstatements in area of consultant's responsibility 57% (130) 230 MUN 43% (100) Province % of municipalities assisted by consultants with financial reporting CFO appointed at year-end and finance department s capacity is acceptable LP 96% 56% NC 92% 46% No material misstatements Material misstatement in area of consultant work NW 91% 25% EC 89% 35% 37

Senior management Municipal managers / chief executive officers Mayors First level of assurance management/leadership 26% Assurance provider Responsibility Senior managers Task/project leadership Doing the basics right Supervision and review Timely implementation of action plans and recommendations 13% 16% 60% 61% 26% 49% Municipal managers/ CFOs Mayors Administrative leadership, guidance and oversight Enabling delivery Monitor and report on progress of action plans Hold staff accountable Investigate all allegations of fraud Reporting channel between administrative and political leadership Political leadership, guidance and oversight Reporting channel between executive leadership and legislature Political accountability 27% 23% 25% Provides assurance Provides some assurance Provides limited/no assurance 38

Second level of assurance Internal independent assurance and oversight Internal audit units Audit committees Treasuries, cooperative governance departments, premier s offices 37% 38% 45% 43% 10% 62% 17% 16% 28% 1% 3% Assurance provider Internal audit Audit committee Coordinating / monitoring departments Responsibility Report to strengthen control environment Advise on organisational systems, processes and practices Advise on organisational effectiveness Interrogate and advise management Review financial and performance reporting before audit Ensure appropriate reaction to findings Guide and enable service delivery in coordinated effort (OTP) Ensure proper inter-governmental coordination (OTP) Hold cabinet / executive committee accountable (OTP) Monitor and provide oversight (OTP) Guide proper financial management / SCM (Treasuries) Skills development (Treasuries) Guide proper strategic planning and performance management (Cogta) Facilitate the fight against corruption (Cogta) Provides assurance Provides some assurance Provides limited/no assurance Not established 39

Third level of assurance external independent assurance and oversight Municipal councils Municipal public accounts committees Portfolio committees on local government Assurance provider Responsibility Municipal council/ MPAC Enable proper financial oversight Interrogate the audit outcomes Ensure corrective action / proper consequence management 26% 24% 60% Portfolio committees Review strategic plans and related budgets, and guide government on appropriate delivery targets and resource use Review performance reports and guiding appropriate action Ensure proper consequence management 47% 43% External audits Engage pro-actively Conducti annual audits and reporting on these Engage with governance structures Enable the work of oversight 27% 32% 40% 1% Provides assurance Provides some assurance Provides limited/no assurance Not established 40

Audit outcomes over three years 18% 18% (49) 19% (54) 14% (40) 39% (109) 44% (122) 41% (111) 26% (71) 23% (63) 27% (76) 1% (4) 9% (25) 5% (15) 1% (4) 12% (33) 1% (3) 20% (55) 2015-16 2014-15 2013-14 278 municipalities 41

Movement table (2015-16 over 2014-15) 42 185 36 15 Improved Unchanged Regressed Outstanding audits Unqualified with no findings = 49 2 (DM), 7 (LM) 1 (MET) 12 (DM) 27 (LM) Unqualified with findings = 122 Qualified with findings = 63 Adverse with findings = 4 3 (DM), 16 (LM) 2 (LM) 1 (LM) 8 (LM) 2 (MET) 11 (DM) 75 (LM) 2 (MET) 4 (DM) 38 (LM) 2 (MET) 4 (DM) 7 (LM) 1 (LM) 3 (DM), 6 (LM) 2 (DM), 1 (LM) 1 (LM) 1 (MET) 2 (LM) 3 (LM) MET metro DM district municipality LM local municipality Colour of the number indicates the audit opinion from which the auditee has moved. Disclaimed with findings = 25 2 (DM) 11 (LM) 1 (LM) 10 (LM) 1 (DM) 9 (LM) 42

Status of audits that were outstanding at 15 January 2017 15 audits were outstanding on 15 January 2017 (our cut-off date), compared to six in 2014-15 Reasons include late (eight) or non-submission of annual financial statements (four) and disagreements on accounting and other matters (three) Eleven audits were subsequently finalised resulting in: four unqualified (Mangaung Metro, Matjhabeng and Phumelela FS, Gamagara - NC) six qualified (Maluti-A-Phofung FS, Grater Giyani and Mutale LP, Dikgatlong and Tsantsabane NC, Rustenburg NW) one adverse opinions (Mogalakwena LP) 43

Western Cape Eastern Cape Northern Cape Free State KwaZulu-Natal North West Mpumalanga Gauteng Limpopo Movement per province (municipalities) 1 1 2 2 2 9 9 13 11 8 4 6 2014-15 2015-16 1 2 3 1 5 6 1 4 6 11 2 2014-15 2015-16 6 4 11 10 7 7 1 2014-15 2015-16 7 10 13 4 6 14 10 2 1 1 5 2 4 2014-15 2015-16 1 1 1 12 13 4 3 8 3 3 3 4 2014-15 2015-16 5 7 16 18 2 4 2 7 7 14 2 3 10 8 5 8 4 2 2014-15 2015-16 18 35 11 42 7 1 5 1 2 2014-15 2015-16 2 3 1 22 24 7 4 1 1 1 2014-15 2015-16 10 3 19 14 2 5 4 2014-15 2015-16 44

Western Cape Eastern Cape Northern Cape Free State KwaZulu-Natal North West Mpumalanga Gauteng Limpopo Movement per province (all auditees) 3 15 10 5 12 16 2 5 24 16 2 2014-15 2015-16 7 2 14 10 1 1 6 2 4 2014-15 2015-16 2 4 2 3 10 8 5 8 9 6 2 4 2 2014-15 2015-16 1 1 2 2 2 9 9 13 11 4 8 6 2014-15 2015-16 2 5 7 12 10 7 7 1 2014-15 2015-16 1 4 3 1 1 15 16 3 8 3 3 4 2014-15 2015-16 7 10 6 8 14 22 16 37 43 8 1 6 1 2 2014-15 2015-16 10 22 25 2 3 1 23 25 8 5 1 1 1 2014-15 2015-16 14 4 20 15 6 2 4 2014-15 2015-16 45

Emerging risks 1. mscoa will be implemented from 1 July 2017 10% (26) 72% (176) 18% (43) Ready for implementation Readiness is of concern Readiness requires intervention 2. The use of the central supplier database (CSD) and the etender portal was compulsory from 1 July 2016 The SCM policy at 139 municipalities was not updated to invite quotations from suppliers registered on the CSD 118 municipalities still use their own database of prospective suppliers that is not synchronised with the CSD The SCM policy at 144 municipalities was not updated to invite competitive bids through the etender portal 3. Contracts of municipal managers and senior management (including CFOs) are ending in 2016-17 46

Source: Robert Klitgaard (academic anti-corruption research) 47

Source: Robert Klitgaard (academic anti-corruption research) 48

Source: Robert Klitgaard (academic anti-corruption research) 49

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