MUNICIPAL AUDIT OUTCOMES

1. MUNICIPAL AUDIT OUTCOMES PRESENTATION TO THE PORTFOLIO COMMITTEE ON COOPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS

2. PRESENTATION OUTLINE • Purpose of presentation and background • The historical background to the audit outcomes • Ensuring that all municipalities perform their basic responsibilities: Back To Basics • Confusion in definitions • Exploring a differentiated approach • Key achievements in municipal financial management and audit outcomes • Response to audit outcomes • Audit outcomes support to municipalities • Key challenges affecting municipal financial management and audit outcomes • Conclusion

3. PURPOSE AND BACKDROUND PURPOSE: The purpose of the presentation is to provide a response to the 2012/13 audit outcomes as presented by the Auditor General. The response constitutes a joint effort by DCoG and National Treasury. BACKGROUND: The Auditor General has presented the audit outcomes of local government for the 2013/14 financial year. In aggregate, a slight improvement is observed in the audit outcomes from 2009 to 2013. It is clear that it is extremely necessary to further improve transparency, accountability, governance and overall financial management.

4. THE HISTORICAL BACKGROUND TO THE AUDIT OUTCOMES The audit outcomes need to be read with an an appreciation of the background to the reform program for financial management in local government. These reforms are designed to modernise the systems and operations of municipalities, including accounting standards against which auditor’s audit. Changes in reporting standards Central to the reform agenda was one of the biggest financial management reforms in local government - the conversion from the previous local government reporting framework to the standards of Generally Recognised Accounting Practice (GRAP). This GRAP standards reform by its nature is a professionalisation reform which required a drastic shift in local government reporting and consequently different training and personnel competencies to what municipalities generally had at their disposal. The conversion was implemented incrementally from 2005/06 to 2009/10.

5. THE HISTORICAL BACKGROUND TO THE AUDIT OUTCOMES Implications of the change to the GRAP standards • The GRAP conversion reforms were substantial. • They set much higher standards for local government financial accounting and required higher training and personnel competencies to what municipalities generally had at their disposal. • For example, the GRAP standard requires municipalities to know not only the existence of infrastructure assets but also the value and condition of each asset, including underground assets such as water pipes. • Many municipalities did not have historical information on these infrastructure assets. This was as a result of the transition from the previous dispensation (1100 municipalities) which included changes in boundaries, amalgamation of a number of municipalities, transfers of functions, etc. • The increased complexity of these standards in reporting for property, infrastructure and equipment resulted in 36 per cent or 116 municipalities received qualifications in this regard.

6. ENSURING THAT ALL MUNICIPALITIES PERFORM THEIR BASIC RESPONSIBILITIES: BACK TO BASICS The previous administration introduced and implemented a programme called “Operation Clean Audit 2014”. • The term “clean audit” was viewed by many as technically undefined. Confusion still exists in many municipalities on how to achieve “clean audits” and what it actually represents. • In addition, among many commentators, the perception has been created that the achievement of a “clean audit” directly implies service delivery optimisation on the part of the municipality. In some instances, municipalities that have indeed received clean audits are still facing service delivery and financial health challenges. • The audit outcomes need to be considered within a holistic context of municipal performance, which incorporates service delivery, good governance and financial health. • Our strategy for the new administration is to set clear benchmarks of performance to ensure that all municipalities perform their basic responsibilities, every day, without fail.

7. CONFUSION IN DEFINITIONS The terminology used in financial reporting e.g unauthorised, irregular and fruitless and wasteful expenditure are often misunderstood by the public. An annexure has been attached to the narrative report, it provides the definitions and explanations of each of these terms. The example of the confusion is that when mention is made of irregular expenditure, commentators automatically conclude that the expenditure is associated with fraud and corruption. In certain instances this might have merit. The fact of the matter is that considerable amounts of irregular expenditure has nothing to do with fraud and corruption but are more related to procedural deficiencies. The department in partnership with National Treasury will put a concerted effort to educate the public about true meaning of the terminology used in financial management and audit reporting.

8. EXPLORING A DIFFERENTIATED APPROACH The fruits of the financial management reform agenda for local government are evident in the higher levels of transparency and accountability in the municipal accountability cycle. However, it is clear that the transition to GRAP needs more time and work to achieve excellence. • The department, together with National Treasury, is exploring whether a uniform system of accounting is appropriate for municipalities and entities of differing complexities and sizes. • The two departments are considering simplifying the compilation of annual financial statements taking into account the size and complexity of municipalitiesand the needs of the users of thesestatements.

9. KEY ACHIEVEMENT: IMPROVED TRANSPARENCY IN FINANCIAL MANAGEMENT There has been a significant improvement in transparency in reporting. • An example which illustrates the improved transparency is that the reporting of aggregate year-on-year irregular expenditure has increased. It could easily be concluded that performance has regressed. • In the past, limited emphasis was placed on the disclosure of these types of expenditure and only through the implementation of the various reforms that higher levels of transparency and accountability have been achieved. • The other indicator for improved transparency is the significant reduction in disclaimers in the period from 2009 to date. This is an indication that municipalities are improving in keeping records of their operations, which leads to better transparency.

10. RESPONSE TO AUDIT OUTCOMES In his report, the Auditor General highlights areas that are contributing to weak audit outcomes. The following is a summary of key areas that require a focussed and immediate response in facilitating improved audit outcomes and service delivery. 1. Management and accounting for property, plant and equipment • The contributing factors include challenges with the physical verification of assets owing to incomplete asset registers, inconsistencies with the application of asset valuation, and a lack of supporting documentation. Response: • Asset management, including asset renewal and operational repairs and maintenance must be considered a priority for all municipalities and consequently Government’s response will include targeted support in dealing with among others: asset management practices; updating asset registers; and asset renewal strategies.

11. RESPONSE TO AUDIT OUTCOMES 2. Irregular expenditure owing to supply chain management deficiencies • The Auditor General found that the completeness of irregular expenditure as disclosed could not be determined owing to inadequate processes to account for irregular expenditure. Response • Municipalities will be further capacitated in implementing adequate supply chain management processes and procedures in proactively dealing and reporting on irregular expenditure. • Governance arrangements around these types of expenditure will be strengthened and the office of the Chief Procurement Officer will play a significant role in reducing the Supply Chain Management deficiencies

12. RESPONSE TO AUDIT OUTCOMES 3. Receivables (Debtors) • 25 per cent or 80 municipalities were found to have deficient revenue management practices. Although varying, municipalities are largely own funded through the rendering of trading services and property rates. Response • In strengthening the ability of municipalities to maximize their fiscal capacity; focus will be on addressing inadequacies within the systems and processes across the revenue value chain, including the billing systems and cost reflective tariffs.

13. RESPONSE TO AUDIT OUTCOMES 4. Compilation of weak annual financial statements and use of consultants • The overall weak practices in the compilation of annual financial statements have consistently been raised as a concern by the Auditor General. There is a prevalent use of consultants by municipalities in the preparation of annual financial statements. Response • We will improve the competency of personnel though training and skills transfer as well as enforcing regulations on minimum standards for municipal managers and senior officials. • The inclusion of skills transfer and empowerment clauses in all consultant contracts will be imperative. • A centralised procurement of financial management consultants for local governemnt has been initiated.

14. RESPONSE TO AUDIT OUTCOMES 5. Fraud and corruption • The department will, in this term of Government, place a robust focus on actions to fight fraud and corruption. • The department will induce a new set of values through the enforcement of the financial misconduct legislation as well as ensuring that all convicted individuals face appropriate consequences. • We will analyse the types of corruption and categorise them to receive appropriate responses. For example: • where the SIU involvement or the asset forfeiture unit are necessary, these cases will be referred & progress monitored closely. • The available government avenues such as the South African Revenue Services for cases of lifestyle audits will be exploited to maximise impact and set firm examples. • We will also explore the institution of civil claims against those found guilty of fraud. • In addition, the department maintains a database of all these convictions which is made available to Municipalities to prevent these individuals from entering the employ of other municipalities.

15. RESPONSIBILITY FOR AUDIT OUTCOMES Improved audit outcomes are realised when there is extensive assurance which key role players jointly provide. The AG categorises the role players into the following 3: • First level of assurance: Management/leadership. • Second level of assurance: Internal independent assurance and oversight. • Third level of assurance: External independent assurance and oversight. The first level of responsibility lies with The Accounting Officer i.e The Municipal manager supported by the administrative leadership which includes the CFO. Councils are ultimately responsible to enforce the fulfilment of this responsibility. Crucial to this is the role is the of the Mayor and that of the Speaker in channelling these issues effectively into the Council agenda on a continuous basis. The second and third levels of assurance are there to provide Councils with the necessary information and support to monitor the effectiveness of the accounting officer and to take the timely corrective action where necessary. Councillor support will be channelled to strengthening their ability to be effective in performing this first level of assurance and appreciating the seriousness of this role.

16. AUDIT OUTCOMES SUPPORT TO MUNICIPALITIES • On an annual basis, after the release of the Local Government audit outcomes by the Auditor General, the Department co-ordinates the development of a standard integrated support plan for audit outcomes. • The plan is developed after the analysis of the annual financial statements and audit outcomes of municipalities, in response to Section 131 of the MFMA. • The provinces share municipal finance support responsibilities, which include the development and implementation of audit remedial plans between the Provincial Treasuries and Provincial CoGTAs. • The reporting on the implementation of the plan is quarterly to the Premier Co-ordination Forums / Committees, the Provincial MUNIMEC’s as well as a consolidated report to the CoGTA MINMEC. • The province who are doing well in this regard are Gauteng, Western Cape and Kwa-Zulu Natal. The other 6 provinces require increased support and improvement in their provincial capacities in order to effectively to support municipalities.

17. AUDIT OUTCOMES SUPPORT The standard areas of focus in the response plan remain the following, based on the AG report: • Actions to ensure that quality Annual Financial Statements (AFS) are submitted timeously. • Actions to ensure that key controls are in place and that corrective measures are implemented to address key control deficiencies. • Actions to improve the efficient use of service providers • Actions to ensure the development and implementation of audit remedial plans • Actions to improve leadership involvement in guiding and directing the implementation of audit remedial plans. • Actions to create a platform for consequence management, politically and administratively. • Actions to improve performance reports • Actions to improve asset management, Records management, Supply Chain Management, addressing unauthorised, irregular, fruitless and wasteful expenditure. • Actions to improve Information Technology Controls, • Actions to ensure improved HR practices • Actions to improve the capacity of Provinces to support municipalities. • Actions to ensure effective oversight - Audit and Public Account Committees

18. KEY CHALLENGES AFFECTING MUNICIPAL FINANCIAL MANAGEMENT AND AUDIT OUTCOMES Although progress has been made within the municipal finance arena, municipalities face a number of historical challenges. These include: • A history of receiving qualifications and inability to turn them around due to unresolved historical transactions (legacy issues) that affect the opening balances. • The instability within some municipalities, both at a political level as well as administratively. • The high vacancy rate of CFOs and other key personnel due to the suspensions and resignations. • Lack of funds for asset management to facilitate a complete disclosure of infrastructure assets. • Non-functional Municipal Public Account Committees (MPAC) as well as MPAC chairpersons being changed regularly which affect the committee’s stability and progress. • Lack of capacity in Internal Audit units and inadequate functionality of Audit Committees. • Inadequate information communication technology (ICT) systems to support financial management.

19. CONCLUSION • The audit outcomes present a compelling necessity for more effort in municipal financial management and governance 2014 and beyond. • Jointly with National Treasury, we will explore new forms of monitoring, interaction and consequence management. • The department will refocus all municipalities and municipal entities on striving to achieve unqualified audit opinions over the medium term while focussing on improved service delivery outputs. • Emphasis will be placed on municipalities that were qualified or received adverse or disclaimer opinions for further support, capacitation and proactive intervention. THANK YOU