Audit outcomes of local government 4 August 2015

1. MFMA Audit outcomes of local government 4 August 2015

2. 2013-14 MFMA Reputation promise The Auditor-General of South Africa (AGSA) has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

3. Our annual audits examine three areas 2013-14 MFMA 1 2 3 FAIR PRESENTATION AND RELIABILITY OF FINANCIAL STATEMENTS RELIABLE AND CREDIBLE PERFORMANCE INFORMATION FOR PREDETERMINED OBJECTIVES COMPLIANCE WITH KEY LEGISLATION ON FINANCIAL AND PERFORMANCE MANAGEMENT

4. Our message Key role players should provide extensive assurance Improvement in audit outcomes Third level of assurance External independent assurance and oversight Second level of assurance Internal independent assurance and oversight First level of assurance Management/leadership Treasuries, cooperative governance departments, premier’s offices Municipal managers/ chief executive officers Senior management Portfolio committees on local government Mayors Municipal public accounts committees Municipal councils Audit committees Internal audit units 335 auditees 333 auditees 330 auditees 338 auditees …the key role players need to ... To improve/maintain the audit outcomes ...

5. Our message (continued) Key controls Risk areas Root causes Quality of submitted financial statements Quality of submitted performance reports Financial and performance management Leadership Governance Slow response to address the root causes of poor audit outcomes of the auditees (decrease of 3 auditees) 69% Supply chain management Financial health Key positions vacant or key officials lacking appropriate competencies of the auditees (increase of 2 auditees) 63% Human resource management Information technology Inadequate consequences for poor performance and transgressions of the auditees (decrease of 48 auditees) 50% Improved Unchanged Regressed ... pay attention to the key controls, … … the risk areas, and … … the root causes.

6. Improvement in overall audit outcomes – all auditees 2013-14 MFMA Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Audits outstanding 335 auditees 333 auditees 330 auditees 327 auditees 321 auditees 338 auditees

7. Audit outcomes in relation to budgets of municipalities 2013-14 MFMA 27% (R83 543 million) Convert audit outcomes to the expenditure (budget) they represent Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Audits outstanding Financial statements of auditees with 82% of budget allocation were qualified 49% (R155 057 million) 16% (R51 130 million) 1% (R1 596 million) 6% (R20 394 million) 1% (R3 470 million) Total budget: R315 190 million

8. WC/KZN/GP: Fairly strong financial management and control disciplines in most municipalities with remaining areas of control deficiency still common even in improved areas. NC/EC/MP: Limited progressive positive movement with significant financial management and control deficiencies. Deficient control renders the system vulnerable to widespread abuse and sometimes loss of adequate audit trails to substantiate transactions. FS/NW/LP: Financial management disciplines are very weak with significant control weaknesses in most municipalities. Deficient control renders the system vulnerable to widespread abuse and often loss of adequate audit trails to substantiate transactions.

9. Outcomes improved since 2007-08 in all provinces – to a lesser degree in Mpumalanga 2013-14 MFMA Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Audits outstanding

10. Eastern Cape 2013-14 MFMA • Performance status • Audit outcomes improved slightly with two municipalities achieving clean audits • Sustainability remains a concern due to inadequate internal controls • Irregular expenditure of R3,35 billion and unauthorised expenditure of R2 billion • Attention should be paid to: • Basic financial and performance management disciplines • Building a culture of zero tolerance for inadequate execution of controls and proper performance management • Enforcing consequences for poor performance and transgressions of legislation • Progress made on commitments since 2010 (AG’s door-to-door visits) • Audit outcomes have improved since door-to-door campaign • Critical success factor from door-to-door is awareness created of accountability at all levels and that everyone, from the premier to municipal officials, has specific responsibilities • Critical commitments taken over by new political Troika and that have a direct impact on improved outcomes are: • Outcomes and progress will be standing agenda item at all Exco meetings (premier) • Improved liaison between the provincial treasury and CoGTA (MEC Finance and MEC CoGTA) • Provincial treasury, CoGTA and district municipality to provide oversight and review state of projects and municipalities on a quarterly basis (MEC Finance and MEC CoGTA) • MEC to drive leadership stability at the highest level within the municipalities that are politically unstable (MEC CoGTA) Needing special intervention OR Tambo District, Great Kei, Inxuba Yethemba, Ngqushwa, Mbizana, Inkwanca, Ntabankulu, Ndlambe, Makana, Sundays River Valley, Lukhanji

11. Free State 2013-14 MFMA • Performance status • Slow improvement in audit outcomes with no clean audits • Key controls stagnated, casting doubt on the sustainability of progress • Metro (and entity) improved to unqualified audit opinions – due to leadership involvement administratively and politically • Unauthorised expenditure remained unchanged at R2,3 billion and irregular expenditure increased to R934 million – largely due to unwillingness to comply with legislation • Severe financial health concerns in province – Eskom debt is R1,5 billion • Attention should be paid to: • Filling key vacancies with skilled individuals and stability insuch positions • Appointing engineers at district level to assist local municipalities • Implementing consequences for poor performance and transgressions • Improving slow response by leadership to address root causes and implement actions • Progress made on commitments since 2010 (AG’s door-to-door visits) • Despite commitments there has been little progress, due to the following: • Key controls and preparation of financial statements are a year-end effort • Province throws money at the problem instead of addressing it, resulting in consultants and external audit process being put under undue pressure and relied upon to improve audit outcomes • There is a clear lack of ownership in the province Needing special intervention Letsemeng, Mafube, Maluti-A-Phofung, Mantsopa, Matjhabeng, Moqhaka, Nala, Ngwathe, Phumelela

12. Gauteng 2013-14 MFMA • Performance status • Significant improvement – from 3 clean audits last year to 13 this year • Improvement supported by marked improvement in compliance with legislation from 9% last year to 44% this year • Status of predetermined objectives remained stagnant, with a slight improvement relating to usefulness being offset by a similar regression relating to reliability • Attention should be paid to: • Addressing lapse in controls to address irregular and unauthorised expenditure, which increased significantly from the previous year • Holding the senior management team accountable for the timely implementation of action plans and honouring commitments • Prioritising the review of financial statements and key performance information reports • Progress made on commitments since 2010 (AG’s door-to-door visits) • Most commitments made during the visits honoured and translated into the significantly improved audit results • Embracing the clean audit concept and making it a standing agenda at key meetings Needing special intervention Westonaria, Randfontein, West Rand Development Agency

13. KwaZulu-Natal 2013-14 MFMA • Performance status • Improvement in audit outcomes supported by strengthened internal controls and assurance • Improved quality of financial statements and performance reports due to diligence in monthly and daily disciplines, although material misstatements identified during audits are still concerning • Attention should be paid to: • Monitoring and implementing action plans addressing key audit findings • Filling key vacancies in good time with skilled and competent officials • Continuously training staff to enable the consistent application of policies, procedures, emerging risks and internal controls • Progress made on commitments since 2010 (AG’s door-to-door visits) • Municipalities improved due to implementation of basic controls • CoGTA and provincial treasury implemented joint support plan, together with a recovery plan for municipalities that required intervention • Assurance from MPACs slowly improving with the support of SALGA and CoGTA • SCM and irregular expenditure management still need attention Needing special intervention uMkhanyakude District, uThukela District, Newcastle, Amajuba District, Hlabisa, Jozini

14. Limpopo 2013-14 MFMA • Performance status • Significant improvement in the audit outcome- 19 unqualified audit opinions from zero in prior year, • Improved response by political leadership-supported by involvement of mayors in the audit process • Status of predetermined objectives remained stagnant, with a slight improvement from prior year • Concern over key positions that remain vacant or officials lacking appropriate competencies- it raises increased concern on sustainability of audit outcome taking into consideration material correction made to submitted AFS. • Significant increase in unauthorised, fruitless and wasteful expenditure • Attention should be paid to: • Strengthening basic financial and performance management disciplines • Critical review of financial statements and performance reports prior to submission for audit • Consequence management, with leadership setting the tone • Developing skills for administration and oversight • Progress made on commitments since 2010 (AG’s door-to-door visits) • Revived energy in improving audit outcomes of municipalities by political leadership- evident by increased interest in audit process by Mayors • Attention been given to action plans to address findings and a generally improved engagement with external auditors in finding solutions Needing special intervention Ba-Phalaborwa, Vhembe District, Ephraim Mogale, Greater Tubatse, Thabazimbi

15. Mpumalanga 2013-14 MFMA • Performance status • Regression in outcomes • High levels of non-compliance with procurement regulations • Lack of consequences for transgressions • Poor internal controls • Attention should be paid to: • Compliance with SCM legislation and consequences for transgressions • Setting the right leadership tone • Skills in administration and oversight • Basic internal control disciplines • Progress made on commitments since 2010 (AG’s door-to-door visits) • MPACs continuously trained: capacity challenges and knowledge gaps remain • Although most municipalities have audit committees and internal audit units, most not fully functional • Although tasked with finance-related support, Finance did not assist municipalities with effective action plans • Compliance is still a big challenge in most municipalities, especially relating to SCM • Internal controls in most municipalities have not been designed yet; and where they have been designed, they have not been implemented and monitored for effectiveness Needing special intervention Emalahleni, Bushbuckridge, Thaba Chweu, Msukaligwa, Mkhondo

16. Northern Cape 2013-14 MFMA • Performance status • Some improvement in financial outcomes • Sustainability remains a concern due to reliance on consultants • Compliance with legislation and reporting on performance information stagnated at concerning level • Attention should be paid to: • Implementing basic financial disciplines and controls • Skills and experience (administration, performance and oversight) • Setting the right tone and implementing consequence management • Progress made on commitments since 2010 (AG’s door-to-door visits) • Some improvement in record keeping • Audit committees and internal audit units established at some municipalities and the functioning of some units has improved • MPACs established at all municipalities, but most not functioning effectively Needing special intervention Dikgatlong, Phokwane, Ga-Segonyana, Kamiesberg, Thembelihle, Kgatelopele, !Kheis, Tsantsabane, Karoo Hoogland, Renosterberg, Nama Khoi, Magareng, Mier

17. North West 2013-14 MFMA • Performance status • Improved outcomes at eight municipalities and municipal entities • Improved cooperation of municipalities in resolving audit matters • 100% had material non-compliance findings, especially relating to SCM • Attention should be paid to: • Sustainability of audit outcomes • Skills transfer by consultants • Ineffective oversight structures resulting in recurring non-compliance with legislation and lack of consequence management • Progress made on commitments since 2010 (AG’s door-to-door visits) • Some commitments realised • Commitments that still need urgent attention relate to human capital deficiencies, skills audit, existing CFO capacity to deliver, vacancies and strengthening oversight structures Needing special intervention Tswaing, Mamusa, Lekwa Teemane, Maquassi Hills, Greater Taung, Ventersdorp, Ditsobotla

18. Western Cape 2013-14 MFMA • Performance status • Significantand sustained improvement in outcomes (50% increase in clean audits from 2012-13) • Sustainability remains a focus area, even though there were no regressions during 2013-14 cycle • Attention should be paid to: • Quality of submitted financial statements (9 auditees [28%]) and annual performance reports (7 auditees [22%]) • Increase in unauthorised expenditure from R505 million in 2012-13 to R628 million in 2013-14 (24% increase) • Increase in irregular expenditure from R100 million in 2012-13 to R162 million in 2013-14 (62% increase) • Progress made on commitments since 2010 (AG’s door-to-door visits) • Four of the five districts and the metro have made good progress in implementing commitments made Needing special intervention Kannaland, Oudtshoorn

19. Improvement in quality of financial statements 2013-14 MFMA Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Audits outstanding 335 auditees 333 auditees 330 auditees

20. Quality of submitted financial statements improved 2013-14 MFMA Outcome after corrections Outcome if NOT corrected (325 auditees) 2013-14 114 auditees Financially unqualified (clean audit / unqualified with findings) Financially qualified (qualified / adverse / disclaimed with findings) Avoided qualifications by correcting material misstatements during audit process Outcome after corrections Outcome if NOT corrected (323 auditees) 2012-13 112 auditees Material misstatements and limitations in financial statements submitted for auditing remains the most common non-compliance finding – 74% of auditees (2012-13: 83%)

22. Most common financial statement qualification areas 2013-14 MFMA Repeat qualification New qualification Qualification addressed from previous year Improved Stagnant or little progress Regressed

23. Recommendations 2013-14 MFMA • Proper record keeping and the availability of the evidence that supports all amounts and disclosures in the financial statements are key, as most of the qualifications were as a result of missing supporting documentation or documentation that could not be submitted. • Daily disciplines, such as reviewing and approval processes and reconciliations of key accounts, should be normal practice. This will reduce errors and omissions in financial reports. • Action plans should be implemented and monitored. The plan should include definite actions to address findings and assign timelines and responsibilities. Progress should be reported to the audit committee. • Capacity constraints in finance units need to be addressed. Vacancies within the unit should be filled officials that have the required minimum competences. • Treasuries should intensity support to auditees and focus on sustainable solutions, such as training, guidance, standard operating procedures and knowledge-sharing forums.

24. Figure 1: Three-year trend – compliance with key legislation Figure 3: Most auditees did not comply with key legislation in the following areas Table 1: Status of compliance with key legislation Management of procurement and/or contracts 63% (205) 69% (224) Prevention of unauthorised, irregular and/or fruitless and wasteful expenditure 60% (196) 63% (208) Consequence management 42% (138) 41% (133) Establishment and/or control of expenditure and/or payment within 30 days 42% (138) 52% (170) Preparation and/or control of budgets 42% (135) 335 auditees 333 auditees 330 auditees 46% (148) Figure 2: Compliance with key legislation per auditee type Management of assets 39% (127) 45% (145) Operations and/or effectiveness of audit committees 38% (124) Municipalities 40% (130) Human resource management 36% (117) 43% (139) Billing and control of revenue 33% (106) 36% (116) Municipal entities Timing and/or content of financial statements, performance reports and annual reports 27% (87) 44% (144)

25. Figure 1: Status of supply chain management Figure 3: Findings on supply chain management Table 1: Progress made with regard to supply chain management by provinces Uncompetitive or unfair procurement processes Awards to other officials of the state Inadequate contract management Awards to close family members of employees and councillors Limitation on planned scope of audit of awards Awards to employees and councillors Figure 2: Supply chain management findings per auditee type Figure 4: Extent of awards to employees, councillors, close family members and other officials of the state; and declarations by suppliers and employees/councillors Awards to employees and councillors 72 auditees / 304 instances / R60 million 268 municipalities Awards to other officials of the state 221 auditees / 4 043 instances / R3 731 million Awards to close family members of employees and councillors 100 auditees / 818 instances / R781 million 53 municipal entities Supplier did not declare the interest 181 auditees / 3 033 instances / R3 526 million Employee or councillor did not declare the interest 47 auditees / 234 instances / R31 million

26. Decrease in irregular expenditure 2013-14 MFMA • Nature • 99% of occurrences caused by non-compliance with SCM legislation • Main areas of non-compliance within SCM that caused irregular expenditure: • Procurement without competitive bidding or quotation process (39%) • Non-compliance with procurement process requirements (53%) • Non-compliance with legislation on contract management (8%) • Highest contributors • Nelson Mandela Bay (EC)R1 052 million (2012-13: R1 844 million) • Matlosana (NW)R630 million (2012-13: R399 million) • uMkhanyakude (KZN)R556 million (2012-13: R249 million) • Buffalo City (EC)R409 million (2012-13: R332 million) • King Sabata Dalindyebo(EC)R367 million (2012-13: R201 million) R12 228 million (270 auditees [84%]) R11 473 million (264 auditees [81%]) R9 798 million (270 auditees [84%]) Identified by auditees Identified during audit 29 012 instances 28 246 instances 29 294 instances • Included in 2013-14 is R2 082 million disclosed to address prior year qualifications • At 113 auditees (35%), irregular expenditure of previous years was not investigated by the municipal manager and council to determine if anyone was liable for the expenditure

27. Decrease in fruitless and wasteful expenditure 2013-14 MFMA Nature R860 million (222 auditees [69%]) • Interest on overdue accounts and late payments caused 80% of the fruitless and wasteful expenditure • Highest contributors • Matjhabeng (FS)R103 million (2012-13: R76 million) • Ngwathe (FS)R58 million (2012-13: R21 million) • Emalahleni (MP)R56 million (2012-13: R12 million) • Maluti-A-Phofung (FS)R32 million (2012-13: R11 million) • Umtshezi (KZN)R29 million (2012-13: R0) R687 million (250 auditees [77%]) R633 million (205 auditees [64%]) Identified by auditees Identified during audit • At 94 auditees (29%), the fruitless and wasteful expenditureof previous years was not investigated by the municipal manager and council to determine if any person was liable for the expenditure

28. Increase in unauthorised expenditure 2013-14 MFMA R11 402 million (190 municipalities [71%]) • Nature • 95% of occurrences caused by overspending of budget / main sections in budget • Reasons include poorly prepared budgets, inadequate budget control, and lack of monitoring and oversight • Municipal budgets include items such as impairments and provisions – accounting estimates and not actual expenditure; 61% of the unauthorised expenditure was due to the incorrect budgeting of these non-cash items • Highest contributors • Tshwane (GP)R1 194 million (2012-13: R598 million) • Nelson Mandela Bay (EC)R744 million (2012-13: R271 million) • Matlosana (NW)R655 million (2012-13: R477 million) • Mangaung (FS)R498 million (2012-13: R20 million) • Amajuba District (KZN)R470 million (2012-13: R38 million) R10 265 million (185 municipalities [69%]) R8 502 million (175 municipalities [65%]) Identified by auditees Identified during audit • At 100 auditees (37%), unauthorised expenditure of previous years was not investigated by the municipal manager and council to determine if anyone was liable for the expenditure

29. Recommendations 2013-14 MFMA • Management to implement processes to identify and monitor all legislation applicable to financial and performance management. • Proper record keeping and specific measures to safeguard documentation, especially in the area of SCM. • Compliance checklists to be implemented as a tool to supplement auditee policies and procedures. • Compliance monitoring to be introduced as a formal process at auditees, with clearly defined responsibilities. • Regular reports to management and governance structures on compliance with key legislation, specifically in the area of SCM. • Policies and procedures to be put into action fully to enable auditees to implement consequence management for officials who do not comply with applicable legislation. • Council to ensure that the position of the head of the SCM unit is filled and that the official has the required minimum competencies. • Improved financial management that strengthens the processes of planning and budgeting.

30. Indicators show regression in financial health 2013-14 MFMA Financial position of auditees (going concern) Revenue collection to ensure a steady stream of income to finance service delivery A net current liability position was realised More than 10% of debt irrecoverable A deficit for the year was realised 2013-14 2012-13 Debt-collection period more than 90 days The year-end bank balance was in overdraft Improved Stagnant or little progress Regressed Management of creditors (meeting financial obligations) Spending patterns Underspending of the capital budget by more than 10% Creditor-payment period more than 90 days Underspending of conditional grants by more than 10% Overspending of the operating budget by more than 10%

31. Figure 1: Three-year trend – findings on annual performance reporting Figure 2: Quality of annual performance reports submitted for auditing (completed audits) Figure 3: Findings on the lack of performance reports as well as the usefulness and reliability of annual performance reports (completed audits) (43 auditees (13%) [2012-13: 28 (8%)] avoided findings due to the correction of material misstatements during the audit process) Outcome if NOT corrected Outcome after corrections All auditees Outcome if NOT corrected Outcome after corrections Municipalities (268 completed audits) Outcome if NOT corrected Outcome after corrections Municipal entities (57 completed audits)

32. Figure 3: Vacancies in key positions (municipalities) Figure 4: Stability in key positions (municipalities) Figure 5: Vacancies in key positions (municipal entities) Figure 6: Stability in key positions (municipal entities)

33. Municipal manager: Average number of months in position – per audit outcome 2013-14 MFMA

34. Minimum competencies not achieved yet 2013-14 MFMA Overall Not meeting minimum competencies Minimum competencies not assessed or limitation Municipalities Improved Stagnant or little progress Regressed Municipal entities

35. Auditees were assisted by consultants 2013-14 MFMA Audit outcomes Financial reporting 265 (82%) of auditees (234 municipalities and 31 municipal entities) were assisted by consultants to the amount of R765 million [2012-13: 258 (80%); R688 million] Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimer with findings 265 Reasons for outcomes in spite of using consultants Quality of annual performance reporting Preparation of performance information 73 (22%) ofauditees (67 municipalities and 6 municipal entities) were assisted by consultants to the amount of R56 million [2012-13: 60 (19%); R37 million] No finding on performance information With findings on performance information 73 Reasons for material findings in spite of using consultants Lack of records and documents Other auditee ineffectiveness Consultant appointed too late Poor project management Consultant did not deliver

36. Figure 1: Some improvement in drivers of internal control Table 1: Progress made in improving drivers of internal control Financial and performance management Leadership Governance Figure 2: Attention should be paid to basic controls Effective leadership Human resource controls ICT governance and controls Audit action plans Proper record keeping Daily and monthly controls Review and monitor compliance

37. Status of information technology controls unchanged 2013-14 MFMA IT governance Security management IT controls embedded and functioning effectively IT controls to be implemented IT controls to be designed Improved Stagnant or little progress Regressed IT service continuity User access management

38. Key role players should provide extensive assurance 2013-14 MFMA First level of assurance Management/leadership Second level of assurance Internal independent assurance and oversight Third level of assurance External independent assurance and oversight Provides assurance Provides some assurance Provides limited/no assurance Not established Treasuries, cooperative governance departments, premier’s offices Municipal managers/ chief executive officers Mayors Municipal councils Audit committees Internal audit units Municipal public accounts committees Senior management Portfolio committees on local government Improved Stagnant or little progress Regressed