western cape - agsa 2013-14/mfma 2013-2014...swartland theewaterskloof witzenberg cape town...

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western capeMFMa 2013-14

The information and insights presented in this flagship publication

are aimed at empowering oversight

structures and local and provincial government

leaders to focus on those issues that will result in

reliable financial statements, credible reporting on service

delivery and compliance with legislation.

This publication also captures the commitments that leaders have made

to improve audit outcomes.

I wish to thank the audit teams from my office and the audit firms that assisted with the auditing of local government for their

diligent efforts towards fulfilling our constitutional mandate and the manner in which they continue

to strengthen cooperation with the leadership of the province.

Kimi Makwetu auditor-General

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General report on the local government audit outcomes of the Western Cape for 2013-14

Information technology controls still need attention(Section 9)

Auditor-general reflects on importance of clean administration as a catalyst to drive service delivery (Section 14)

Increase in clean audits to 55%; all auditees received a financially unqualified audit opinion on their financial statements(Section 1)

Compliance with key legislation continues to improve(Section 4)

Financial health of auditees is deteriorating(Section 8)

Uncompetitive and unfair procurement processes, inadequate contract management and awards to other state officials(Section 4)

Steady improvement in quality of annual performance reports(Section 3)

28% of auditees received unqualified opinions by correcting material misstatements in financial statements identified during the audit process(Section 2)

HIGHLIGHts

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western cape CLEAN AUDITS 2013-14

MUnIcIpaL entItYMUnIcIpaLItYCity of Cape Town MetroCape Winelands districtEden districtWest Coast districtBitouBreede ValleyCape AgulhasDrakensteinGeorge

HessequaKnysnaLangebergMossel BayOverstrandSwartlandTheewaterskloofWitzenberg

Cape Town International Convention Centre


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ContentsContents

foreword 5

IntroductIon 9

The government and its strategies 10

Historical overview of local government initiatives 11

overvIew 13

Summary of our message 14

Characteristics of each of the categories of audit outcomes 16

audIt outcomes, root causes and the Impact of role players 23

1. Overall audit outcomes 24

2. Audit outcomes for 2013-14 25

3. Annual performance report 27

4. Compliance 29

5. Human resource management 33

6. Use of consultants in the areas of financial and performance reporting 37

7. Conditional grants 40

8. Financial viability 42

9. Information technology systems 43

10. Key controls 44

11. Root causes 45

12. The level of assurance provided and the impact of these role players on audit outcomes 46

13. Conclusion 50

testImonIes, clean audIts and successful servIce delIvery proJects 51

annexures 69

Glossary of terms, acronyms and abbrevIatIons 75

Glossary of key terminology used in this report 76

Acronyms and abbreviations 82


5

FOREWORD


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FOREWORD

It is with pleasure that I present to the Western Cape Provincial Parliament and municipal councils my 2013-14 general report summarising the audit outcomes of local government for the financial year ended 30 June 2014.

On launching operation clean audit in July 2009, which entailed all municipalities achieving unqualified audits by 2014, the then Minister of Cooperative Governance and Traditional Affairs used the 2007-08 financial year as a baseline. All auditees achieved this milestone in the current year, which means that 100% of the provincial budget was managed by auditees that attained a financially unqualified audit opinion on their financial statements.

As part of this journey, my office has been actively involved, on a quarterly basis, in assisting the province to assess and improve the status of the internal control environment for establishing clean administration. The positive trend towards clean administration in the province, which started gaining momentum in 2012, continued in 2013 through to 2014 with 18 (55%) [2012-13:12 (36%)] of the 33 auditees in the province achieving clean audit outcomes. Fourteen auditees (42%) received a financially unqualified opinion with findings, while one auditee (3%) progressed from qualified to financially unqualified with findings. At the cut-off date for inclusion of audits in the outcomes, the Kannaland audit was still outstanding (3%). It has since been completed, with the opinion improving from adverse in 2012-13 to financially unqualified with findings in 2013-14.

The steady improvement in the systems and skills required for planning, collating and reporting of annual performance information continued to contribute to the improved quality of annual performance reports. The number of auditees with no findings on reporting on performance information increased from 18 (56%) to 25 (78%) in 2013-14. Eleven auditees (34%) had no findings on

performance information, having corrected material misstatements identified during the audit where their internal controls had failed to detect and correct the misstatements before submission for audit. While the corrections resulted in no findings being raised, there are concerns that their outcomes could regress should internal controls deteriorate further. Three auditees failed to submit performance information and four had findings on their submitted performance reports which may impact on their ability to report on service delivery objectives.

Irregular expenditure has increased by 64% to R162 million when compared to the prior year. Of the R162 million in irregular expenditure incurred in 2013-14, 99,8% was as a result of non-compliance with supply chain management regulations. Three municipalities accounted for R134,5 million (83% of the total) of the irregular expenditure due to the political and administrative leadership not setting a tone for low tolerance for deviations from controls and a lack of consequences.

Four of the six risk areas improved, while information technology controls remained unchanged and financial health deteriorated. The weak information technology controls highlighted in this report not only increase the risk of fraud at municipalities in the province, but also threaten to undermine the sustainability of the improved audit outcomes experienced by the local government sector. These controls require urgent attention.

With regard to financial health, 87% of the municipalities in the province are struggling to collect debts totalling approximately R8,2 billion (2012-13: R7,7 billion) from rate payers and the receivers of municipal services, for example water and electricity.


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We acknowledge this to be a challenge throughout the country. It means that municipalities will need to construct innovative solutions to address this issue, with support and assistance from the provincial government.

Despite the improvement in the quality of submitted financial statements, the area with the highest occurrence of non-compliance, as in 2012-13, remained material misstatements in financial statements submitted for audit, with nine auditees (28%) attaining financially unqualified opinions only because they had corrected all the material misstatements identified during the audit process.

While there have been improvements in the first and second level of assurance, increased focus is required to improve daily and monthly processes vested in senior management and accounting officers in order to effect an improvement in the key controls, funding, compliance with supply chain management regulations, and the quality of financial statements and annual performance reports, as mentioned above.

The third-level assurance providers should further improve follow-up and monitoring to ensure timely implementation of their resolutions and confirm the credibility of the progress reported against such resolutions. Although the number has decreased from seven since 2012-13, four municipalities still need to establish municipal public accounts committees.

There has been an improvement in the three root causes we identified. Political and administrative leadership have improved the speed of responding to the root causes of poor audit outcomes, with 12 (2013: 18) auditees still needing to improve in this respect.

There has also been improvement with regard to the filling of vacancies, the competencies of key officials and consequences for transgressions.

In the first three months of 2015, I spent some time visiting various municipalities across the Western Cape that had received clean audits. It is reassuring that the leadership of these auditees remain committed to the cause, fully embrace the concept of clean audit and are keen to sustain these audit outcomes.

In our partnership with the Western Cape government, we see a golden prospect of a public service characterised by transparent financial and performance reporting. This will be led by accounting officers who appreciate ethical and professional behaviour, and have a low tolerance for indecisive execution of controls and deviation from legislation. Auditees must be supported by strong internal audit capabilities that contribute to a culture of good internal control and accurate, empowering financial and performance reporting to enable effective oversight by audit committees and the legislature.

We are encouraged by the provincial executive’s continued commitment to ensuring that operation clean audit, coordinated by the ministries of provincial treasury and local government, will remain 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 prior year commitments will remain a focus in that the premier and all role players have pledged their support for the municipal governance review and outlook processes that will address the remaining shortcomings in the province.


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These processes will be followed through at the premier’s coordinating forum and all management forums and interactions and will be driven by provincial treasury. The provincial executive has also indicated that in addition to the above processes, they will respond to key risks identified internally or by our office.

I trust this report will provide some useful insights and also wish to use the opportunity to thank our employees and all our delivery partners for a sterling effort towards building public confidence.

auditor-General pretoria June 2015

General report on the audit outcomes of the Western Cape for 2013-14

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9

INTRODUCTION


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The government and its strategies

The Constitution of South Africa is the supreme law and provides the legal foundation for the existence of the republic, sets out the rights and duties of its citizens and defines the structure of the government. The spirit and aim of the Constitution is best summarised in the preamble where it pronounces the ultimate goal - Improve the quality of life of all citizens and free the potential of each person. This foundation of our society, the Constitution, appoints government as the facilitator and enabler in chasing this goal. The illustration below depicts the basic operations of government to give effect to the Constitution.

Section 40(1) - In the Republic, government is constituted as national, provincial and local spheres, which are distinctive, interdependent and interrelated.

Section 41(1)(c) - All spheres of government must provide effective, transparent, accountable and coherent government for the Republic as a whole.

The Medium term strategic framework (MTSF) is government’s strategic plan for 2014-2019. The MTSF sets out the actions government will take and targets to be achieved over the next five years.

Constitution

MTSF

Resp

on

se o

f th

e W

este

rn C

ap

e p

rov

incia

l ad

min

istr

ati

on

wit

h s

pecif

ic r

efe

ren

ce t

o lo

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ov

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Section 151 - Municipalities must be established. The executive and legislative authority is vested in the municipal council. Section 152 - Objectives of local government are as follows:

To provide democratic and accountable government for local communities

To ensure the provision of services to communities in a sustainable manner

To promote social and economic development

To promote a safe and healthy environment

To encourage the involvement of communities and community organisations in the matters of local government.

Premier’s state of the province address (SOPA):

The provincial strategic plan 2014-2019 sets out our five strategic goals to achieve the objectives of the province so that we can create an enabling environment for higher economic growth and increased jobs, improve education and health outcomes and build better living environments for our citizens. Strategic goal 5 specifically outlines the Western Cape government’s commitment to embedding good governance and integrated service delivery through partnerships and spatial alignment. While the building blocks of good governance are already in place, it can be further strengthened and consolidated by raising the bar.

This applies in both the Western Cape government and municipalities across the region. Greater alignment of provincial and local government policy, planning, budgeting and implementation will be promoted. A process supporting this has been introduced and is currently being implemented, together with a transversal spatial governance system. Government coherence and delivery performance will be closely monitored, reported on and evaluated as part of this outcome. The focus during the next five years will be on implementation and enhanced delivery. Some service initiatives and projects will be specific to geographical areas and there is an imperative to move from mere ‘information-sharing’ to meaningful ‘joint planning’. between the spheres of government.

Constitution

SOPA

2015

1 metro

R31,4 billion budget

24 local municipalities

R14,1 billion budget

5 district municipalities

R1,1 billion budget


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Historical overview of local government initiatives

In response to the findings of a government inquiry into the problem areas of service delivery, leadership, financial management and matters of governance, the minister of Cooperative Governance and Traditional Affairs (CoGTA), on 22 September 2009, addressed Parliament on the launch of operation clean audit 2014.

During this address the minister highlighted the particular focus on local government as local government is the closest to the coalface of service delivery. He summarised the pre-2009 status as follows:

The then DPLG did not support provincial departments. As a result, the link and support between municipalities and provinces was weak and not sustainable. Thus, service delivery, governance and financial management were severely affected. Technically, when a system of governance and financial management is poor due to lack of support, without a doubt service delivery will be negatively affected. More importantly, in some provincial departments and municipalities, there is lack of both administrative and political leadership.

The initiative was aimed at making sure that all municipalities and provincial government departments in South Africa achieve clean audits on their financial statements by 2014 and that they further maintain systems for sustaining quality financial statements and management information. In this address the following

milestones were set:

By 2011 no municipality will receive adverse and disclaimed audit opinions

By 2012 at least 60% municipalities must achieve unqualified audit opinions

By 2013 there must be an increase to 75% of municipalities that achieve unqualified audits

By 2014 we must have 100% ‘clean audits’.

His Excellency, President Jacob Zuma, in his state of the nation address on 17 June 2014, articulated government’s concerns regarding improvements needed at local government level. He said: We would like our people’s experience of local government to be a pleasant one.

It is against this background that the ministry of CoGTA is pursuing the back-to-basics approach to address challenges faced by local government, strengthening municipalities and instilling a sense of urgency towards improving citizens’ lives. At a very basic level, municipalities are expected to:

put people and their concerns first and ensure constant contact with communities through effective public participation platforms.

create conditions for decent living by consistently delivering municipal services of the right quality and standard. This includes planning for and

delivery of infrastructure and amenities, maintenance and upkeep, as well as budgeting for this and ensuring that there is no failure in service and, where there is, restoring it with urgency.

be well governed and demonstrate good governance and administration - cut wastage, spend public funds prudently, hire competent staff and ensure transparency and accountability.

ensure sound financial management and accounting, and prudently manage

resources so as to deliver services sustainably and bring development to communities.

build and maintain sound institutional and administrative capabilities, administered and managed by dedicated and skilled personnel at all levels.

The AGSA has a constitutional mandate and, as the supreme audit institution of South Africa, exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

In support of CoGTA’s operation clean audit, the AGSA intensified interactions with both political and administrative leadership on the outcomes of their municipalities, the root causes underpinning the unfavourable outcomes and the need for a strong control environment entrenched in daily, weekly and monthly processes. The previous auditor-general had also embarked on a door-to-door campaign where he visited each municipality in the country with a message of support and emphasised that it is possible to obtain clean administration if there is true political will to change and if the leadership actively strives for quality and sustainability in executing their duties.

The AGSA is committed to being a critical supporter of the back-to-basics initiative.

AGSA is once again committed to be a critical role-player in the Back to Basics initiative

Operation clean audit 2014 Back-to-basics programme 2015


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OVERVIEW


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Summary of our message Figure 1(a): Overview of the audit message

3% 3%

16%

3%3%3%

9%

9%42%

58%

69%

75%

55%

36%

16%

2013-14 2012-13 2011-12 2007-08

the key role players need to ...To improve/maintain the audit outcomes,

1 2

Improvement in audit outcomes

Unqualified with no findings

Unqualified with findings

Qualified with findings

Adverse with findings

Disclaimed with findings

Assurance levels

Provides assurance Provides some assurance Provides limited/no assurance Not established

67%

6%19%

22%

13%

33%

72% 68%

6% 9%16%

78%

44% 31%

16%

47%53%

Sen

ior

man

agem

ent

Mu

nic

ipal

man

ager

s/

chie

f ex

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off

icer

s

May

ors

Inte

rnal

au

dit

un

its

Au

dit

co

mm

itte

es

Co

ord

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ing

/

mo

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dep

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Mu

nic

ipal

pu

bli

c

acco

un

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om

mit

tees

Mu

nic

ipal

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First level of assurance Second level of assurance Third level of assurance

33 auditees 32 auditees32 auditees33 auditees

Leg

isla

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/NC

OP

an

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mm

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es o

n

loca

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vern

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16%19%

19%25%

19%100%

56%46%

Audit outstanding


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Figure 1(b): Overview of the audit message

28%

38%

56%

13%

25%

38%

24%

13%

63%

28%

72%

Key controls

Leadership

Financial and

performance

managementGovernance

... attend to the key controls,

Good Concerning Intervention required

the risk areas and

Quality of submitted

financial statements

Supply chain

management

Human resource

management

Risk areas

52%

48%

Quality of

submitted

performance

reports

Information technology

Financial health

Good Concerning Intervention required

the root causes.

543

59%

22%

19%

80%

10%10%

11%22%

29%

25%

60%53%

2013-14 2012-13

11% 16%

18%21%

71%63%

2013-14 2012-13

12%

28%

45%

34%

43%38%

2013-14 2012-13

78%

9%13%

Root causes

2013-14 2012-13

Slow response by management/political leadership to

address the root causes of poor audit outcomes

Lack of consequences for poor performance and

transgressions

Key positions vacant or key officials lacking appropriate

competencies

Critical commitments by political leadership from 2013

were implemented in 2014 and will continue in 2015:

• Clean audit agenda at premier’s coordinating

forum meetings

• Monitor the implementation of the local

government financial management improvement

plan, as per the operation clean audit programme

Commitments


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Characteristics of each of the categories of audit outcomes

The table provided on the following pages summarises the characteristics of auditees that fall within the different categories of audit outcomes. The purpose of this summary is the following:

• Assist the reader to understand the different audit outcomes.

• Highlight the good practices of auditees with clean audit opinions.

• Emphasise that auditees with an unqualified audit opinion with findings still have serious weaknesses that should be dealt with.

• Explain why auditees with qualified, adverse and disclaimed opinions are failing. Although the Western Cape had no auditees in this category, the characteristics reflected are those of auditees in this category in other provinces, and have only been included for knowledge-sharing purposes.

Area Clean (18) Unqualified with findings (14) Qualified with findings (0) Adverse or disclaimed (0)

Fin

an

cia

l sta

tem

en

ts

Produced financial statements free from material misstatement.

Nine (64%) produced financial statements with material misstatements, but corrected these

during the audit process.

The most common areas in which auditees made corrections were:

property, infrastructure and equipment

irregular expenditure

receivables

revenue

expenditure

Produced financial statements with material misstatements, which they could not correct before the

financial statements were published.

The most common areas in which they could not make corrections were:

property, infrastructure and equipment

receivables

revenue

Adverse: Produced financial statements that included so many material misstatements that we disagreed with virtually all the

amounts and disclosures.

Disclaimed: Could not provide us with evidence for most of the amounts and disclosures in the financial statements. We were unable to conclude or express an opinion on

the credibility of their financial statements.

An

nu

al

perf

orm

an

ce

re

po

rt

Measured and reported on their performance (in the annual performance report) in accordance with the predetermined objectives in their integrated development plan (IDP) and/or SDBIP and in a manner that was useful and reliable.

Nine (50%) obtained good outcomes only because they corrected the misstatements identified during the

audit.

Three (21%) did not prepare an

annual performance report.

The annual performance reports of four (29%) were not useful and/or reliable.

Two (14%) achieved good outcomes only because they corrected the misstatements identified during the

audit.

Did not prepare an annual

performance report or annual performance reports were not useful and/or reliable.

Did not prepare an annual

performance report or annual performance reports were not useful and/or reliable in various instances.


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Co

mp

lia

nc

e w

ith

ke

y l

eg

isla

tio

n Complied with key legislation. Fourteen (100%) did not comply

with key legislation.

Two auditees still had one compliance finding to be addressed to attain a clean audit outcome in the area of asset management and audit committees respectively.

Did not comply with key legislation. Did not comply with key legislation. C

on

tro

ls

Had good controls and/or were working on the areas that needed further attention to ensure that their clean audit status was maintained:

The leadership created an environment conducive

to internal control and oversight (85% of auditees).

Senior management ensured that controls were in place for robust financial and performance management reporting systems (60%).

They focused on governance through risk

management activities and effective internal audit units and audit committees (100%).

Had good controls in some areas but attention should be given to the basic controls, as the number of auditees with good controls in these areas are limited:

Effective leadership culture (71%)

Good human resource controls (29%)

Good ICT governance and controls (0%)

Effective audit action plans (7%)

Proper record keeping (36%)

Strong daily and monthly controls (36%)

Review and monitor compliance (7%)

Very few auditees had good basic controls. No auditees had good controls in the areas of audit action plans or the review and monitoring of compliance.

The basic controls were in a poor state. The status of controls at most of these auditees was assessed as ‘intervention required’.

The poorest controls were in the following areas:

Proper record keeping

Review and monitor compliance

Daily and monthly controls


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Co

ntr

ols

Their continued focus on these basic controls

contributed to their success:

The leadership established a culture of ethical behaviour, commitment and good governance

(100% had good controls).

Good human resource practices ensured that

adequate and sufficiently skilled officials were in place and that their performance was managed (100%).

Attention to ICT ensured that it supported

objectives and processes, and maintained the confidentiality, integrity and availability of information (6%). While weaknesses were identified in security management, user access controls and IT service continuity, these did not affect to overall audit outcomes.

Audit action plans were used to address internal

control weaknesses (100%).

Proper record keeping ensured that information

was accessible and available to support financial and performance reporting (78%).

Basic disciplines and controls were in place for

daily and monthly processing and reconciling of transactions (83%).

Mechanisms were in place to identify applicable legislation, changes and processes to ensure and monitor compliance with legislation (67%).


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As

su

ran

ce p

rovid

ers

Key role players worked together to provide assurance on the credibility of the financial statements and performance reports and to ensure compliance with key legislation.

These auditees, overall, understood that assurance on the credibility of the information in the financial statements and performance reports came primarily from the actions of management/leadership and their governance partners – internal audit units and

audit committees.

Their political leadership provided a strong monitoring and oversight role and held the administration to

account.

The number of auditees where role players provided full assurance were:

Senior management (22%)

Municipal managers/CEOs (78%)

Mayors (83%)

Internal audit units (100%)

Audit committees (94%)

Municipal councils (89%)

MPACs (72%)

Some role players did not provide the required level of assurance. As

a result, the financial statements and annual performance reports prepared, reviewed and signed off by senior management and the municipal manager/CEO of these auditees were materially misstated. The internal audit units and the audit committees did not add to the credibility of these reports, while monitoring and oversight by the political leadership did not have the desired results.

These role players also did not insist on strong controls to ensure compliance with key legislation and to prevent, detect and correct material misstatements.

The auditees where role players provided full assurance were limited:

Senior management (7%)

Municipal managers/CEOs (7%)

Mayors (14%)

Internal audit units (36%)

Audit committees (36%)

Municipal councils (14%)

MPACs (14%)

The role players at very few auditees provided the required assurance, with some municipal managers/CEOs, mayors, internal audit units and audit committees providing the required assurance.

The majority of the role players provided some or limited/no assurance. Internal audit units and

audit committees had not been established at some of these auditees.

The contributions to assurance by the role players at these auditees were minimal: The role players that

provided the least assurance were at the first and third level of assurance, which included senior management, municipal managers/CEO, mayors, municipal councils and MPACs.

Internal audit units had not been established at some of these auditees, and provided limited or no assurance at the majority of auditees. Some of these auditees did not have audit committees, while the audit committees at a significant portion provided limited or no assurance.


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Key o

ffic

ials

There were limited vacancies in key positions, with the

following vacancy rates at year-end:

Municipal manager/CEO – 0%

CFO – 0%

Head of the supply chain management (SCM) unit – 11%

There was stability at the level of municipal

manager/CEO, CFO and head of the SCM unit – the officials had been in these positions between four to almost six years.

The competencies of these officials were assessed and most had already achieved the competency requirements prescribed by the regulations – 94% of

municipal managers, 89% of CFOs, and 69% of heads of SCM units.

The vacancies in key positions were more pronounced at these auditees,

except in the case of the head of SCM unit:

Municipal manager/CEO – 21%

CFO – 21%

Head of the SCM unit – 7%

There was less stability, with key

officials being in these positions for two and a half years on average.

A higher number of officials had not yet achieved their minimum

competency requirements – 27% of municipal managers and 18% of CFOs.

Heads of SCM units was similar to clean audits with 31% with minimum competencies not achieved.

The vacancies in key positions were at a similar level as those of

auditees with unqualified opinions with findings.

Stability was similar to those of

auditees with unqualified opinions with findings, with key officials being in these positions for two and a half years on average.

An even higher number of officials

had not yet achieved their minimum competency requirements or it has not been assessed in the position of CFOs. Municipal managers and heads of SCM were at a similar level to those of auditees with unqualified opinions with findings.

The vacancies in key positions were the highest at these auditees.

These auditees had the least stability, with key officials being in these positions for less than two years on average.

These were also the auditees where the most officials had not yet

achieved their minimum competency requirements or it had not been assessed.


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Use o

f co

nsu

ltan

ts f

or

fin

an

cia

l an

d p

erf

orm

an

ce r

ep

ort

ing

They used consultants for financial reporting services but did so effectively. Thirteen (72%) of these

auditees were assisted by consultants at a cost of R14,8 million.

They appointed the consultants in time, provided them with the required records and documents, and managed the process effectively.

They used consultants widely for financial reporting services, but most could not produce financial statements without material misstatements – these material

misstatements were corrected through the audit process.

Twelve (86%) of these auditees were assisted by consultants to the amount of R19,5 million.

Their practices in managing consultants (not limited to financial reporting) need attention:

No transfer of skills at 33%

Poor performance management and monitoring at 33%

Inadequate planning and appointment processes at 33%

An even higher number of

auditees were assisted by consultants.

They had poor audit outcomes in

spite of using consultants. The main reasons for this were as follows:

Poor project management

The records and documents that consultants needed to perform their services could not be provided to them in some instances.

The consultants were appointed too late at some of the auditees.

Poor practices in managing consultants (not limited to financial reporting) were widespread in the areas of transfer

of skills, performance management, monitoring and planning and appointment processes.

The use of consultants was the most common in this category.

They had poor audit outcomes in

spite of using consultants. The main reasons for this were as follows:

The records and documents consultants that needed to perform their services could not be provided to them at a significant portion of the auditees.

The consultants were appointed too late at some of the auditees.

At some of the auditees, the consultants could not deliver on their contract.

Displayed the poorest practices in managing consultants (not limited to financial reporting) in the areas of

transfer of skills, performance management, monitoring and planning and appointment processes.


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Use o

f g

ran

ts

The municipalities effectively utilised the grants aimed

at improving financial and performance management -municipal systems improvement grant (MSIG) and financial management grant (FMG):

Only 4% of these grants were not spent.

All the targets for the grants were achieved, except for 6% of the MSIG spent.

They were also able to use their municipal infrastructure grants(MIG) effectively:

Only 0,1% of the grant were not spent

The targets were achieved for 100% of the money spent.

The municipalities utilised the MSIGs and FMGs. Although they underspent slightly more, they achieved more than auditees with

clean audit opinions:

6% were not spent.

All targets were achieved for the MSIGs and FMGs.

The weaknesses in the control environments of these municipalities affected their ability to use the MIG effectively:

6% of the grants was not spent

The targets were not achieved for 12% of the money spent.

The utilisation of grants by municipalities is poorer in the

category of achievement of targets and the spending of grants.

Municipalities in this category showed the least ability to utilise their grants effectively.

They had the lowest percentage of grants not spent, with the highest percentage in terms of targets that were not achieved for money spent.

Su

pp

ly c

hain

man

ag

em

en

t an

d irr

eg

ula

r

exp

en

dit

ure

They had no material instances of non-compliance

with SCM legislation.

Their irregular expenditure levels were low. They

incurred only 13% of the irregular expenditure of all auditees, but were responsible for 91% of the municipal budget.

In total, 50% of these auditees showed material non-compliance

with SCM legislation.

Their irregular expenditure levels were high. They incurred 87% of the

total irregular expenditure even though they were responsible for only 9% of the municipal budget.

At two auditees (6%), the municipal manager and council did not investigate the irregular expenditure of the previous year to

determine whether anyone was liable for the expenditure.

In total, most of these auditees had material non-compliance with

SCM legislation.

Their irregular expenditure levels were high as a result of their poor

SCM practices. They contributed the most to irregular expenditure.

Lack of investigations is more pronounced as the majority of municipal managers and councils did not investigate the irregular expenditure of the previous year

to determine whether anyone was liable for the expenditure.

In total, most of these auditees had material non-compliance with SCM

legislation.

We experienced limitations in performing the SCM audits at the majority of these auditees.

Their irregular expenditure levels were high as a result of their poor

SCM practices and had it not been for the audit limitations it could have been higher.

Lack of investigations is most common for this category where a higher number of the municipal managers and councils did not investigate the irregular expenditure of the previous year to

determine whether anyone was liable for the expenditure.


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


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Overall audit outcomes 1.

The Western Cape municipal sphere consists of 30 municipalities and three municipal entities. The municipalities are made up of one metro, five district municipalities and 24 local municipalities. The municipalities operate on a budget of R46,6 billion (operating expenditure: R38,7 billion and capital expenditure: R7,9 billion). The entities have a budget of R0,2 billion, with a combined provincial budget of R46,8 billion. We have completed the audits of 32 auditees whose outcomes are reflected in this report. Kannaland municipality was completed after the cut-off date for inclusion in the general report analysis and is reflected as outstanding or is excluded from analysis, as appropriate. Kannaland’s audit opinion improved from adverse in 2012-13 to financially unqualified with findings in 2013-14.

Where municipalities have municipal entities under their control, the audit opinion is based on the consolidated financial statements.

Seven-year analysis indicates steady improvement

(2007-08 versus 2013-14)

Figure 2: Seven-year outlook on audit outcomes

3% (1) 3% (1)3% (1)3% (1)

16% (5)3% (1)

9% (3)

9% (3)42% (14)

58% (19)

69% (22)

75% (24)

55% (18)

36% (12)

16% (5)

2013-14 2012-13 2011-12 2007-08

33 auditees 32 auditees32 auditees33 auditees

Disclaimed with

findings

Unqualified with

no findings

Qualified with

findings

Unqualified with

findings

Adverse with

findings

Audit

outstanding

Figure 2 shows that the province achieved 100% financially unqualified audits by 2014, which was the target that government set itself through operation clean audit. The province has also made steady progress over the last three years in

achieving financially unqualified opinions with no findings. With an improvement in the Cango Caves’ audit outcome from qualified in the prior year to unqualified with findings in the current year, there are no qualified, adverse or disclaimed audit opinions in the province – this is the first time that the province has achieved this milestone. In comparing the 2013-14 outcomes to those of 2007-08, it was found that 23 auditees (72%) improved their outcomes (from disclaimer, qualified or financially unqualified with findings), while eight auditees remained unchanged at financially unqualified with findings.

An analysis of the movement in outcomes over the last seven years indicates that the majority of auditees had addressed audit findings at a root cause level, leading to the sustainability of audit improvements. There is potential for regression in audit outcomes related to compliance and performance information due to an increase in irregular expenditure and the quality of financial statements and performance reports submitted for auditing which required corrections.

Over the past three years there has been no regression in clean audit outcomes, once attained. The five auditees that achieved clean audits in 2011-12 have retained their clean status through 2012-13 to the current year. The seven auditees that joined them in 2012-13 also retained their clean status in 2013-14. An additional six auditees achieved clean audit outcomes in 2013-14 for the first time. Two auditees in the province, Swartland and West Coast district, have retained their clean audit outcomes for four consecutive years.

We had numerous intensive interactions with both the political and administrative leadership over this period. Topics included the audit outcomes of their municipalities, the root causes underpinning unfavourable outcomes and the need for a strong control environment entrenched in daily, weekly and monthly processes. During these engagements our consistent message has been that it is possible to obtain clean administration if there is a real will to change and if the leadership actively strives for quality and sustainability in executing their duties as prescribed in the Municipal Finance Management Act and the Municipal Systems Act. This was achieved by implementing the following good practices:

• Political and administrative leadership set the tone from the top as clean audits remain a standing item on the agenda of the premier's coordinating forum.

• Commitment to and ownership of the municipal governance review and outlook (MGRO) process. This process looks at all aspects of the first level of assurance and is driven to ensure good governance and that all auditees achieve clean administration, which in turn will result in clean audit outcomes.

• The stability in leadership, especially in the position of chief financial officer, is considered a contributing factor to clean audit outcomes.


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• Continuous monitoring of the implementation of action plans by the leadership and audit committee.

• The strong oversight provided by audit committees of the work of internal audit units ensured that audit committees were able to advise and provide the required assurance to councils, mayors, accounting officers or authorities and senior management on internal controls, information systems, reliability of financial information, reliability of performance information and compliance with legislation and supply chain management regulations.

Overall, all levels of leadership have generally been responding well to these messages and recommendations, as is apparent from the improvement in audit outcomes, with some exceptions in certain instances where audits have stagnated at financially unqualified with findings (including repeat findings on compliance and performance information).

Audit outcomes for 2013-14 2.

The 2013-14 municipal audit outcomes, shown in figure 2, reflect an encouraging net improvement in six audit outcomes since the previous year, with no regressions.

Figure 3: Audit outcomes per budget

0,4%R0,2bn

9%R4,2bn

90,6%R42,4bn

Budget - Rand value

3% (1)

42% (14)

55% (18)

Audit outcomes

Convert audit

outcomes to the

expenditure

(budget) that

they represent

Unqualified with no findings Outstanding auditsUnqualified with findings

Almost 91% (90,6%) of the provincial budget, totalling R42,4 billion, was managed by auditees that have achieved clean audit outcomes, while 9% was in the hands of auditees with unqualified opinion with findings on compliance or

performance reporting. The outstanding audit was finalised after the cut-off date for inclusion in the general report and received a financially unqualified audit opinion with findings (on compliance and performance reporting).

Submission and quality of financial statements

Municipalities are required by the Constitution and various other laws to be transparent and accountable for the public resources allocated to them. Municipalities are required to prepare financial statements according to the applicable accounting framework and relevant legislation. These financial statements must constitute transparent reporting by being reliable, accurate and credible and supported by underlying records.

All auditees submitted their financial statements per the legislated deadline in the 2013-14 financial year. There has been improvement in the quality of financial statements submitted for audit over the past five years. It remains a concern, however, that 28% of auditees submitted financial statements that required correction of material misstatements – these misstatements were identified by the auditors and not by the auditees’ internal controls.

Figure 4: Quality of financial statements submitted for audit

100%(32)

28%(9)

72%(23)

Outcome if

NOT correctedOutcome

after corrections

Financially qualified (qualified,

adverse, disclaimed with

findings)

Financially unqualified

(clean audit), unqualified

with findings


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26

Figure 4 illustrates that 23 auditees did not need to effect material adjustments to their financial statements during the audit process. Had adjustments not been effected, the 100% unmodified opinions (32 auditees) reported earlier would have stood at 72%.

Movement in the 2013-14 outcomes

Figure 5: Movements in audit outcomes

Outcomes Improved Unchanged Outstanding

Unqualified with

no findings 18

Metro

City of Cape Town

District municipalities

West Coast

Local municipalities

Breede Valley, George, Knysna,

Langeberg, Mossel Bay, Overstrand,

Swartland, Theewaterskloof,

Witzenberg

Entities

Cape Town International Convention

Centre

Unqualified with

findings 14

District municipalities

Central Karoo

Overberg

Local municipalities

Beaufort West, Berg River,

Cederberg, Laingsburg, Matzikama.

Oudtshoorn, Prince Albert, Saldanha

Bay, Stellenbosch, Swellendam

Entities

Central Karoo Economic

Development Agency

Qualified with

findings 0

Adverse with

findingsLocal municipality

Kannaland

257

Can

go C

aves

1342%

55%C

ape

Win

elan

ds,

Ed

en,

Bito

u, C

ape

Agu

lhas

,

Dra

kens

tein

, H

esse

qua

1

12

3%

Improvements

Six municipalities progressed to clean audit outcomes. The improvement in the audit outcomes was due to a combination of leadership setting a tone of good governance from the top, thereby maintaining existing internal controls; implementation and monitoring of detailed action plans to address prior year

matters; and appointing additional staff to ensure adequate resourcing where appropriate. Intervention and cooperation between the coordinating ministries and municipal leadership during the MGRO process also played a positive role in the overall positive outcomes. Cango Caves improved its audit outcome from a qualification in the prior year to unqualified with findings; this was achieved by monitoring action plans in order to address the qualification areas that had been raised in the prior year.

Unchanged

Twelve auditees have maintained their clean audit status, which indicates that internal controls relating to financial management, compliance and performance information have been institutionalised. Of concern, however, are five of the 12 municipalities that required material adjustments to their performance information, which indicates that some controls need to be embedded.

Thirteen auditees remained financially unqualified with findings on compliance and/or performance information. This group includes five auditees that have made little or no progress in addressing prior year compliance and/or performance information findings. 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, need to be implemented at these auditees.

Municipal districts

Three of the five districts showed improvement compared to the 2012-13 outcomes. District municipalities not only had to coordinate development and delivery throughout the district, but also needed to play a vital supporting role in the financial management of their local municipalities. These responsibilities included the following:

• Coordinate the development of the district and service delivery

• Play a supporting role in financial management

• Set the example in accountability and reporting

• Share best practices and assist in embedding them in their local municipalities

• Ensure that daily financial and performance management is embedded

• Improve internal control, governance and accountability of local government

• Assist local municipalities where there is a lack of skills.


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Figure 6: Audit outcomes per municipal district

An analysis of the outcomes per district is shown in figure 6. Three of the five district municipalities led by example and achieved clean audit outcomes of their own. The Central Karoo district has not made any progress towards clean audits. Some of the main reasons for not progressing were as follows:

• Significant weaknesses in basic financial and performance management controls and disciplines that do not prevent or detect and correct errors, omissions and non-compliance in a timely manner.

• Ineffective oversight and assurance provided by internal audit and audit committees due to capacity constraints and skills challenges.

• Municipal councils did not provide assurance through their oversight and monitoring role.

• It is difficult for the district to attract appropriately skilled individuals due to the geographical location. Skilled persons with a choice would, in most cases, rather live in other districts.

District municipalities could make a positive contribution towards improving the internal controls, governance and accountability of local government in the

province although in the Western Cape this role is performed through participation in the MGRO process. Other initiatives were a shared internal audit service in the Central Karoo district and the inclusion of various support services such as town planning, environmental services, other ad hoc requests and human resources support to local municipalities in the IDP of the West Coast district municipality.

Annual performance report 3.

To facilitate transparency, responsiveness and accountability, municipalities should have an effective performance reporting system in place. The public should have access to performance information that indicates what has been achieved with the amounts allocated to auditees.

Service delivery initiatives in the local government sector are determined by public participation in the development and/or updating of municipal IDPs and service delivery and budget implementation plans. These plans should form the basis for the allocation of budgets each year. Auditees are required to measure their service delivery against the performance indicators and targets set for each of their predetermined performance objectives and to report on this in their annual performance reports. We audit the annual performance reports to determine whether the information in these reports is useful and reliable.

Submission of the annual performance report for

auditing

The submission rate of annual performance reports remained relatively stable and was consistent with the prior year, with 91% of auditees submitting their performance reports in time for the audit process. Also consistent with the prior year, three auditees did not submit annual performance reports, namely Oudtshoorn, Cango Caves and the Central Karoo Economic Development Agency. Swellendam has improved since the prior year when their performance report was submitted too late to be audited.

Movement in outcomes on the annual performance

report

Figure 7 shows the number of municipalities with material findings on the quality of their annual performance reports over the past three years, together with the number of municipalities with findings on usefulness and reliability. Although the number of municipalities with (material) findings on performance information decreased from 15 (including four that did not submit and Kannaland which is outstanding for 2013-14) in the prior year to seven (including three that did not submit) in the current year, 11 municipalities adjusted material misstatements

Cit

y o

f C

ape

Tow

n

2 2

2013-142012-13

Cap

e W

inel

and

s

13

5

3

2013-142012-13

Ove

rber

g

23

32

2013-142012-13

Cen

tral

Kar

oo

5 5

2013-142012-13

Ed

en

1 112

4

6

3

2013-142012-13

ImprovedStagnant or limited

progress

Unqualified with

no findingsAudit

outstandingUnqualified with

findingsAdverse with

findings

Metro

City of Cape Town

Cape Town

International

Convention Centre

Wes

t C

oas

t

4 4

2 2

2013-142012-13

West Coast

Bergrivier

Cederberg

Matzikama

Saldanha Bay

Swartland

Cape Winelands

Breede Valley

Drakenstein

Langeberg

Stellenbosch

Witzenberg

Overberg

Cape Agulhas

Overstrand

Theewaterskloof

Swellendam

Central Karoo

Beaufort West

Central Karoo Economic

Development Agency

Laingsburg

Prince Albert

Eden

Bitou

Cango Caves

George

Hessequa

Kannaland

Knysna

Mossel Bay

Oudtshoorn


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28

identified during the audit process, thereby improving their outcome. This indicates that some of the improvement noted was due to the fact that misstatements were identified by the auditors and not by the municipalities’ own internal controls. Had these adjustments not been effected, 18 (55%) municipalities would have material findings reported on performance information.

Figure 7: Movement in outcomes on annual performance report and findings on usefulness, reliability and compliance

1

With no findings

47% (15)

55% (18)

76% (25)

53% (17)

45% (15)

21% (7) 3%(1)

2011-12

2012-13

2013-14

Usefulness Reliability

Improved

[2013-14] 14% (4)

[2012-13] 29% (8)

[2013-14] 86% (25)

[2012-13] 71% (20)

[2013-14] 10% (3)

[2012-13] 36% (10)

[2013-14] 90% (26)

[2012-13] 64% (18)

With findings

Budget R1,1 billion (2,3%)Budget R45,5 billion (97,3%) Budget R0,2 billion (0,4%)

Findings have been reported at seven auditees (21%) in 2013-14, representing an improvement of 53% compared to the number of findings reported in 2012-13 which were raised at 15 auditees (45%). There was one regression relating to usefulness at the Central Karoo District Municipality, where two thirds of certain

indicators were not well defined. This was due to unclear data definitions as a result of prior year immaterial findings not being addressed because of inadequate implementation of the action plan. The steady improvement can be linked to a concerted plan and collective buy-in from leadership and all affected role players in the province, namely, provincial treasury, the department of local government as well as the individual municipalities themselves. Of concern is the number of municipalities that had made use of consultants to assist with the preparation of performance information – increasing from 15 (47%) in the prior year to 21 (66%) in the current year due to a lack of skills and/or vacancies. A further concern is the transfer of skills and sustainability of the outcomes where municipalities may become dependent on consultants to sustain the improvements noted.

Findings on usefulness and reliability

Usefulness refers to setting objectives, indicators and targets in the planning document, and how they are reported on in the annual performance report. We measured the usefulness of the reported information against the criteria of presentation, consistency, relevance and measurability.

Figure 7 shows that there has been a reduction in the number of auditees with findings on usefulness. The usefulness of targets and indicators also impacts the auditees’ ability to collect information about actual performance and the reliability of actual reported performance. It is imperative that the usefulness of the planned objectives, indicators and targets, as contained in the integrated development plans and service delivery and budget implementation plans, receives proper attention as these documents provide the foundation for measuring municipal performance and legislated processes that must be followed to adjust these documents should usefulness issues be identified. The most common findings on usefulness were the following:

• Indicators/measures were not well defined and/or specific (6% of auditees)

• Performance targets were not measurable and/or verifiable (6% of auditees).

Reliability refers to the accuracy, completeness and validity of the actual reported performance against the planned objectives, indicators and targets. Figure 7 shows that there has been a reduction in the number of auditees with findings on reliability.

Findings on reliability result from municipalities not adequately considering the evidence required to prove performance when setting their objectives, indicators and targets, and not providing appropriate evidence to support their actual reported performance. The most common finding on reliability related to the fact that the auditees could not provide sufficient appropriate evidence in support of the reported performance information.

13% (4)

3% (1)

2014 2013

Reported non-compliance with strategic planning and performance management

Improved


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29

The credibility and quality of performance reports could have a direct impact on the effective, efficient and economical allocation of resources to service delivery initiatives by councils. Figure 7 shows that the municipalities that were unable to provide credible performance reports managed R1,1 billion of the total local government budget within the province. There is a risk that these municipalities’ in-year monitoring, oversight, and decision-making processes could have been based on information that was not credible. This could have had a negative impact on the manner in which services were delivered.

Compliance with legislation relating to the annual

performance report

Findings relating to the management of strategic planning and performance were reported at one auditee (3%), which is an improvement since the prior year when these findings were raised at four auditees (13%).

Way forward

For citizens to reap the benefits of a well-functioning local government, municipal councils must empower themselves with credible performance information. Auditees with findings should therefore implement the following:

• Take ownership of developing and maintaining proper systems and processes for managing and reporting service delivery information. This implies that the council must scrutinise all service delivery plans (including the integrated development plan, service delivery and budget implementation plan, and budget), regularly monitor credible in-year service delivery reports and ensure that corrective action is taken when actual performance is below expectations.

• Municipal public accounts committees, audit committees and internal audit units should assist councils to make informed decisions by providing assurance that planning documents and in-year reports on actual performance are credible. In addition, these committees, together with council, should exercise in-year oversight of performance to ensure that money is used for its intended purpose and that the anticipated return on investment is achieved.

• Council and the administrative leadership should ensure that government priorities contained in the State of the nation and State of the province addresses that affect municipalities are included in their planning documents (integrated development plan and service delivery and budget implementation plans).

• The National Treasury and the national Department of Cooperative Governance and Traditional Affairs (CoGTA) should assist municipalities to improve the usefulness of their performance information by setting standard

key performance indicators for basic services that can be included in the service delivery and budget implementation plans of the local government sector.

• The leadership should pay attention to performance planning, reporting and monitoring if the ‘back-to-basics’ initiative is to succeed. The initiative was introduced by the minister of CoGTA and is based on the principles of public participation, service delivery, good governance, sound financial management and building administrative and institutional capacity within municipalities.

Compliance 4.

Municipalities are required to deliver services to their communities according to the legislative prescripts applicable to them. The applicable legislation is based on the principles of good governance, accountability and transparency, and regulates the stewardship of the public resources at their disposal. We annually audit and report on compliance with legislation applicable to financial matters, financial management and other related matters.

Status of compliance with key legislation and

movement

The province continued to show improvements in the area of compliance with key legislation; 18 (55%) auditees had no compliance findings during the current year, compared to 12 (36%) in the prior year and five (16%) municipalities during the 2011-12 financial year.

The following good practices, among others, contributed to the continued upward trend in compliance with key legislation: The political and administrative leadership set a clear focus of driving clean audit outcomes and senior management played an active role in the monitoring and implementation of action plans to address material prior year compliance findings.

Furthermore, the attention given to basic control disciplines, including regular monitoring activities supported by the effective implementation of checklists to ensure compliance with laws and regulations, has ensured consistent improvement in this area.

Figure 8 shows the most common non-compliance areas other than those relating to annual financial statements and performance and strategic management already dealt with in sections 2 and 3, respectively.


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30

Figure 8: Compliance areas related to prevention of unauthorised, irregular and/or fruitless and wasteful expenditure, procurement and contract management and consequences management

6% (2)

38% (12)

44% (14)

6% (2)

22% (7)

28% (9)

Consequences management

Management of procurement and or contracts

Prevention and/or follow-up of unauthorised, irregular and/or fruitless and wasteful expenditure

Stagnant or little progressImproved2014 2013

The compliance findings in figure 8 are grouped together as they relate to preventing unauthorised, irregular as well as fruitless and wasteful expenditure, consequences for incurring it and the main reason for irregular expenditure (non-compliance with procurement requirements). This non-compliance is analysed in detail in the sections that follow.

Unauthorised, irregular as well as fruitless and

wasteful expenditure

The Municipal Finance Management Act (MFMA) requires accounting officers to take reasonable steps to prevent unauthorised, irregular as well as fruitless and wasteful expenditure. If there is a persistent disregard for strengthening this control, opportunities may be inadvertently created for the commission of fraudulent transactions. Where municipalities are unable to prevent such expenditure, the MFMA requires disclosure in the financial statements of the amounts incurred and the fact that such expenditure is being investigated to determine liability. Where liability can be proven, the accounting officer must take disciplinary and/or criminal action against the liable employees and must institute procedures for the recovery of funds. Only after a committee of council certifies that such expenditure is not recoverable may it be written off.

Figure 9 shows the three-year trend in unauthorised, irregular and fruitless and wasteful expenditure incurred that should have been prevented by the municipalities, while figure 10 shows that such expenditure totalling R251,8 million had not been written off as required by the MFMA. There was an encouraging overall trend in that the municipalities undertook investigations to determine whether the expenditure resulted in money being wasted or whether the incidents related to fraud. In the case of two auditees (6%), unauthorised, irregular and fruitless and wasteful expenditure amounting to R144,9 million was not investigated as required, resulting in material non-compliance being reported.

Figure 9: Trends in unauthorised, irregular as well as fruitless and wasteful expenditure

R14,8 million

R14,6 million

R12,3 million

R106 million

R99 million

R162 million

R1,1 billion

R495 million

R628 million

2011-12

2012-13

2013-14

2011-12

2012-13

2013-14

2011-12

2012-13

2013-14

Unauthorised

expenditure

Irregular

expenditure

Fruitless and

wasteful

expenditure


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31

Figure 10: Previous year’s unauthorised, irregular and fruitless and wasteful expenditure not dealt with

R18,8 million

R60,7 million

R172,3 million

2013-14

2013-14

2013-14Unauthorised

expenditure

Irregular

expenditure

Fruitless and

wasteful

expenditure

Unauthorised expenditure

Unauthorised expenditure refers to expenditure that was not incurred in accordance with the approved budget. Unauthorised expenditure reported during 2013-14 amounted to R628 million, an increase of R133 million (27%) compared to R495 million (which includes various adjustments as indicated in figure 9 reported in 2012-13. All the reported unauthorised expenditure for 2013-14 (i.e. 100%) occurred as a result of overspending the approved budgets, with 88% of the expenditure identified by the auditees’ own internal controls.

We noted that unauthorised expenditure reported on in the previous year was investigated (to determine whether any officials could be held liable) except at one auditee. This suggests that adequate follow-up and investigation (to determine accountability and to promote a culture of intolerance for transgression of legislation) are undertaken by management.

The increase in unauthorised expenditure related mainly to non-cash items, consisting predominantly of actuarial losses on employee benefits as well as impairments – items which are included in the approved municipal budgets. The incorrect estimation of these items accounted for 76% of the unauthorised expenditure incurred by local government in the province during 2013-14.

The lack of adequate budget processes, credible in-year reports and monitoring of expenditure incurred during the year was the main factor that gave rise to 24% of unauthorised expenditure, other than those related to incorrect estimates as mentioned above.

Irregular expenditure with a focus on supply chain management

Irregular expenditure refers to expenditure that was not incurred in the manner prescribed by legislation. Such expenditure does not necessarily mean that money was wasted or that fraud had been committed, but is rather an indicator that legislation was not adhered to. This includes legislation aimed at ensuring that procurement processes are competitive and fair. It is the role of council to investigate all irregular expenditure to determine whether it was incurred due to misconduct or fraud and should be recovered.

Virtually all irregular expenditure incurred (99%) was the result of non-adherence to supply chain management prescripts. During the audit of compliance with the requirements of supply chain management legislation, we tested awards consisting of 862 contracts with an approximate value of R2 billion, as well as 1 519 quotations with an approximate value of R71 million.

Figure 11 below shows the number of auditees with supply chain management findings as well as the number of municipalities with material compliance findings reported in their respective audit reports.

Figure 11: Status of supply chain management

22% (7)

38% (12)

59% (19)

53% (17)

19% (6)9% (3)

2013-14 2012-13

32 auditees 32 auditees

With findings With material findingsWith no findings


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Although the number of auditees incurring irregular expenditure (both audit report and management report findings) has decreased, the rand value of irregular expenditure increased by 64% from R99 million reported in the prior year to R162 million in 2013-14.

Figure 12: Findings on supply chain management

Figure 12 shows the number of auditees with findings in the key supply chain management risk areas that we audit, as well as an indication of the movement since the previous year.

Three municipalities accounted for R134,5 million (83% of the total) in irregular expenditure. These transgressions were caused by the political and administrative leadership not setting a tone for low tolerance of deviations from controls and a lack of consequences. The political and administrative leadership was slow to respond to findings reported in the prior year, resulting in repeat findings and root causes. Vacancies and lack of competencies also contributed to irregular expenditure at some of these auditees.

Findings on uncompetitive or unfair procurement processes (including procurement without a competitive bidding process and non-compliance with procurement process requirements) relate to specific procurement processes that should have been followed. The most common findings in this area relate to procurement without obtaining three written quotes or deviations not justified, as well as declarations of interest not submitted by suppliers. These irregular awards expose municipalities to the risk of not getting the best quality goods

and services at the best prices and/or awarding contracts to suppliers that might not have capacity to deliver.

Contract management refers to how contracts are managed after they are awarded. The most common findings relate to contracts amended or extended without tabling the reasons before council; a lack of or inadequate contract performance measures and monitoring; and failure to register construction projects with the Construction Industry Development Board within 21 days. Inadequate contract management contributed to only 1% of the total irregular expenditure incurred.

Awards were made to close family members of councillors and employees to the value of R71 million, of which R0,2 million resulted in irregular expenditure. These awards are not specifically prohibited, but legislation requires disclosure by both the supplier and employee of their interests. It also requires municipalities to have processes in place to ensure fair, transparent and cost-effective procurement that guarantee the effective, efficient and economical use of resources. The audit report finding related to persons with such interests failing to make the required disclosure.

Awards to the value of R123 million were made to other state officials. These awards are prohibited by legislation, but municipalities face the challenge that 96% of the R123 million related to false declarations made by suppliers. Awards made to suppliers that had made false declarations do not give rise to irregular expenditure - municipalities do not have access to the database of government employees in order to verify declarations relating to directors or owners of suppliers not being in the employ of the state.

Documentation requested for auditing awards to the value of R21 million was not submitted by management, thereby limiting the scope of the audit. Although this scope limitation was not treated as irregular expenditure, the actual value of irregular expenditure incurred by the province may not be complete. The possibility that these awards were deliberately withheld to conceal fraudulent transactions cannot be ruled out and requires further investigation.

The contribution that the risk areas highlighted above made to irregular expenditure of R162 million incurred during the year is estimated as follows:

Non-compliance with procurement process requirements – R138,3 million (86%)

Procurement without a competitive bidding or quotation process – R21,7 million (13%)

Non-compliance with legislation on contract management – R2 million (1%).

We did not investigate the irregular expenditure as that is the role of the council with the assistance of the accounting officer and oversight bodies. We determined through our normal audits that R160,6 million (99%) of the irregular

3% (1)

6% (2)

13% (4)

13% (4)

63% (20)

25% (8)

3% (1)

3% (1)

13% (4)

3% (1)

16% (5)

With findings

Improved Regressed

Awards to close family members of employees

Limitation on planned scope of audit of awards

Awards to employees and councillors

Uncompetitive or unfair procurement processes

Inadequate contract management

With material findings

Awards to other state officials


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expenditure represented goods and services that were received despite the normal processes governing procurement not being followed. The irregular expenditure reported above occurred at 17 (53%) of the auditees – a risk which may in future be compounded by the fact that 31% of the heads of supply chain management at the auditees had not achieved the minimum competency levels. Of particular concern are the gaps in the internal control environment which led to the high value of irregular expenditure arising from non-compliance with supply chain management laws and regulations at the three highest contributing municipalities. This will require decisive action to prevent undesirable and possibly more material deviations in future.

Sixty-nine per cent (69%) of the reported irregular expenditure was identified by the auditors and only 31% was identified by the auditees’ internal controls. The portion of irregular expenditure identified by auditors has increased steadily when compared to prior years (2012-13: 63%; 2011-12: 55%). This increase in irregular expenditure identified by the auditors suggests that processes and controls to detect and record such expenditure need to be strengthened.

Fruitless and wasteful expenditure

Fruitless and wasteful expenditure refers to expenditure that was made in vain and that would have been avoided had reasonable care been taken.

Fruitless and wasteful expenditure reported during 2013-14 amounted to R12,3 million, a 16% decrease compared to R14,6 million reported in the prior year, with most of the expenditure relating to contract prices exceeded as well as costs being incurred without any services being received. Interest on overdue accounts, late payments by the municipality, as well as penalties levied against it for defaulting, contributed to the amounts of fruitless and wasteful expenditure reflected in the current financial year. This was expenditure that could have been avoided.

While best practices suggest that fruitless and wasteful expenditure should be properly investigated and the amounts recovered from officials where possible, it was satisfactory to note that all but two municipalities that reported fruitless and wasteful expenditure had instituted investigations to determine whether any person was liable for the expenditure. Two auditees accounted for 81% of the fruitless and wasteful expenditure reported for the province.

Way forward

• The findings on compliance with legislation, supply chain management and unauthorised, irregular and fruitless and wasteful expenditure were due to weak control environments. Good governance and sound financial management will ensure that local government resources are used in an economical, effective, efficient and transparent manner for the benefit of citizens. The following recommendations should be implemented to strengthen the control environment:

• Political and administrative leadership should set the tone at the top and implement consequences for recurring transgressions.

• Leadership should ensure that the implementation of action plans is reviewed and monitored to address internal control deficiencies, thus effectively avoiding repeat findings.

• Awards to other state officials and the related false declarations remain an issue that needs to be addressed at a national level by giving municipalities access to a database of all state officials that auditees can use to verify the completeness of declarations made. Provincial treasury has embarked on a process to establish a provincial supplier database to be used by all municipalities within the Western Cape. One of the planned controls in the new system is verification of suppliers against the personnel salary system (Persal) database to determine whether they are in service of the state before awards are made. To address the risk related to employees of public entities not on the Persal database a list of all entities and an explanation of the definition of in service of state will form part of the application process so that suppliers are well informed of the requirements.

Human resource management 5.

Human resource management is effective if adequate, sufficiently skilled resources (in other words, staff) are in place, and if staff performance and productivity are properly managed. The effectiveness of human resource management is critical as it has a direct bearing on building and maintaining sound institutional and administrative capabilities.

Our audits looked at the management of vacancies and stability in key positions, the competencies of key officials, performance management as well as consequences for transgressions, as these matters directly influence the quality of auditees’ financial and performance reports and their compliance with legislation. Based on the results of these audits, we assessed the status of auditees’ human resource management controls.

The strength of human resource management in local government in the province contributed significantly towards the improvements in governance and the progress made towards clean audits outcomes. However, the challenges highlighted below prevented some municipalities from making such progress.

Management of vacancies

Figure 13 below shows the correlation between the average number of months that key officials (namely accounting officers, chief financial officers and heads of supply chain management units) had been in their positions and the audit outcomes. It is evident that clean audit outcomes are more prevalent where key officials have been in positions for longer periods of time. This is, however, only


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the foundation required to building a sound financial and performance management control environment that is conducive to oversight and accountability. It is critical that all positions are filled with competent and skilled individuals who can adequately manage and mitigate the risks within the control environment and promote efficient and economic delivery of services. This should also be complemented by quick responses by the leadership to transgressions and poor performance.

Figure 13: Stability in key positions (heads of supply chain management units, chief financial officers and accounting officers) per audit outcome

63 months

30 months

Unqualified with no findings Unqualified with findings

Figure 14: Municipalities with vacancies at year-end

3%

9% 9%

6%

4%

0%

Municipal managers andchief executive officers

(32 auditees)

Chief financial officers

(32 auditees)

Heads ofSCM units

(32 auditees)

Senior managers:Strategic plann

western cape - agsa 2013-14/mfma 2013-2014...swartland theewaterskloof witzenberg cape town...

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