Western Cape:

Stagnant audit outcomes in the Western Cape

The Swartland Municipality and the West Coast District Municipality attained clean audits in the current year, due to the sustained efforts of the municipal leadership to effectively monitor the implementation of a credible action plan to address past audit findings. The majority (73%) of other Western Cape's municipal audit outcomes for 2010/11 were characterised by stagnation at the level of unqualified audit opinions, while 9% were still qualified and 12% did not submit financial statements in time for audit purposes.

Auditor-General (AG) Terence Nombembe remarked that the stagnant audit outcomes are a clear indicator that the leadership needs to increase their level of oversight in line with their commitment to move towards clean audit outcomes. In addition, a clear commitment is required from the leadership to reduce the frequency of changes at the levels of municipal manager and chief financial officer.

The key obstructions to clean audits in the province are control weaknesses in supply chain management, human resource management, information technology controls and significant errors in financial reports, most of which are identified and corrected at the time of conducting the audits.

The province showed minimal improvement in service delivery reporting; yet it remains a significant control area for clean audit outcomes. This situation is underpinned by the status of key internal controls that require urgent intervention at 29% of the municipalities, with 27% being in the process of improving their internal controls and 44% having good internal controls that need to be sustained and consistently observed throughout the year to avoid instances of errors that are picked up by the audit process at year-end. 

Nombembe further attributed the stagnant audit results to a failure to take corrective action on internal control shortcomings at 63% of the municipalities, a lack of consequences for poor performance and transgressions at 50% of the municipalities, and a lack of appropriate skills at senior official level at 47% of the municipalities.

Greater coordination between the public accounts committees and the portfolio committees responsible for municipalities would promote the frequency of municipal monitoring by the province's committees.

He urged mayors and municipal managers to enhance their oversight and also to implement all elements of key controls. Strengthening the coordination between the Provincial Department of Cooperative Governance and Traditional Affairs and the provincial treasury could also benefit municipalities.

To give support and guidance to the auditees, the Auditor-General of South Africa is maintaining its quarterly municipal door-to-door visits, with a view to monitoring and evaluating the status of improvements and the sustainability of key internal controls and leadership tone that would be a catalyst for the realisation of clean administration in municipalities in the province.

These insights will continue to be shared with the provincial executive and oversight leadership quarterly, to create a platform for forward momentum towards clean audits while also working closely with internal audit units and audit committees.

Gauteng:

Gauteng local government to increase drive towards clean audits

Local government's progress towards clean audits in Gauteng had a setback, with five of the municipal entities that had achieved clean audits at the Johannesburg Metropolitan Council having regressed to unqualified audit opinions, leaving only two municipal entities with clean audit status in 2011. Also noteworthy is the elimination of the disclaimers of audit opinion that were received in the previous year at the Tshwane Metropolitan Council. 

At Gauteng's 15 municipalities and 27 municipal entities, there were two clean audit opinions at the Johannesburg Civic Theatre and the Johannesburg Social Housing Company (5%), while 95% of the municipalities and municipal entities received either unqualified opinions with other findings or qualified audit opinions. This is a clear indication that the majority of municipalities could, with extra effort, migrate towards clean audits. 

There is an opportunity in Gauteng to reverse the slow progress in outcomes at municipalities, which is due to the fact that at nearly 50% of municipalities, the political leadership is not taking ownership of the internal control shortcomings as pointed out by the Auditor-General of South Africa (AGSA). At nearly two-thirds of the municipalities there were no consequences for repetitive neglect of internal control disciplines that result in the stagnation of municipal performance. 

Other than the chief financial officer (CFO) positions that are substantially filled with adequately skilled personnel, there is a need to look into skills levels of other officials in key positions within the finance and other departments at 70% of the municipalities.

A significant effort needs to be made to address all the obstacles towards attaining clean audits in the province, which emanate from little or no progress in dealing with control weaknesses in supply chain management, service delivery reporting, human resource management, information technology controls as well as significant errors in financial reports due to a lack of skills at finance units and a lack of basic discipline in financial management. 

The provincial treasury, the provincial department of local government and housing and the South African Local Government Association (SALGA) need to enhance the support and monitoring of municipalities to ensure ongoing capacity building. 

There is also a need for sustained cooperation between the provincial public accounts committee and the portfolio committee on local government to deal with the challenges in local government. 

The AGSA municipal door-to-door visits are continuing on a quarterly basis, with a view to monitoring and evaluating the status of improvements and sustainability of the key internal controls and leadership tone that would be a catalyst for the realisation of clean administration at municipalities in the province. These insights will continue to be shared with the provincial executive and oversight leadership quarterly, to create a platform for movement towards clean audits while also working closely with internal audit units and audit committees.

KwaZulu-Natal:

KwaZulu-Natal shows improvement in move towards clean audits

KwaZulu-Natal (KZN) municipalities made significant strides towards clean audits during the 2010/11 financial year, moving from no clean audits in the previous financial year to five clean audits this year.

The five municipalities with clean audits are Umzinyathi District Municipality, eMadlangeni Local Municipality, Richmond Local Municipality, Umdoni Local Municipality and Umtshezi Local Municipality.

Auditor-General (AG) Terence Nombembe remarked: "This is an indication that clean audits are achievable with leadership's consistent commitment to take ownership of municipal performance and insistence on adequately qualified staff and effective performance management practices."

"The next logical step for these municipalities is to institutionalise these gains so as to sustain the continued culture of clean administration. This will surely sustain the public confidence that we witnessed during the presentation of clean audit awards at each of the municipalities, and provincially as led by the premier."

The vast majority of municipalities, 47 out of 61 (77%), registered unqualified audit opinions (with findings or concerns), while seven (11%) were qualified, one (2%) was disclaimed and one (2%) received an adverse opinion. 2

However, the greatest effort is required from the municipal leadership to deal with the real obstacles to clean audits, such as weaknesses in supply chain management, service delivery reporting, human resource management, information technology controls as well as significant errors in financial reports that are detected and corrected at the time of conducting the audits.

This situation is underpinned by the status of key internal controls that require urgent intervention at 14% of the municipalities, with 31% are in the process of improving their internal controls and 55% have good internal controls.

To sustain clean administration in the province, Nombembe cited three challenges to be addressed by municipal government leadership.

These are:

• Lack of appropriate skills at the majority (61%) of municipalities;
• Poor performance management practices resulting in a lack of formal consequences for poor performance and transgressions at 51% of municipalities and
• A few municipal leaders who still do not demonstrate the appetite to take ownership of good governance practices at their institutions, as is evident from the disregard for challenges previously identified by the audits at 21% of the municipalities in the province.

The Auditor-General of South Africa (AGSA) continues to work with the provincial government on the three critical issues that KwaZulu-Natal needs to address. In this regard he mentioned heightened coordination among provincial oversight structures; strengthening coordination between the provincial department of cooperative governance and traditional affairs and the provincial treasury to effectively guide and assist municipalities; as well as enhancing provincial skills and diagnostic tools, especially for the strategic municipal finance teams.

The AGSA has continued with its quarterly municipal "door-to-door" visits aimed at monitoring and evaluating the status of improvements and the sustainability of key internal controls and leadership tone that would be a catalyst for the realisation of clean administration in municipalities in the province. 3

Insights gathered during these visits will also continue to be shared quarterly with the provincial executive and oversight leadership in order to create a platform for forward momentum towards clean audits while also working closely with internal audit units and audit committees.

Media note: The General report on the Municipal Finance Management (MFMA) provincial audit outcomes of KZN is available on www.agsa.co.za.

About the AGSA: The Auditor-General of South Africa (AGSA) is the country's supreme audit institution. It is the only institution that, by law, has to audit and report on how government is spending taxpayers' money. This has been the focus of the AGSA since its inception in 1911 - the organisation celebrated its 100-year public sector auditing legacy last year, 2011.

Limpopo:

Mayors and Councillors need to take ownership of internal controls

Two municipalities in Limpopo managed to achieve clean audits in the 2010/11 financial year, with the Waterberg District Municipality joining Fetakgomo in celebrating this achievement. 

While about 12% of the municipalities received unqualified audit opinions with findings, 82% received qualified, disclaimed or adverse opinions or did not submit financial statements for auditing. 

"The province's latest local government audit results also showed a number of regressions and an increase in unauthorised, irregular as well as fruitless and wasteful expenditure," remarked Auditor-General Terence Nombembe. 

Only 8% of the municipalities have implemented good internal controls that ultimately resulted in good outcomes. At 46% of the municipalities key controls are in the process of being implemented while 44% of the municipalities need serious intervention to implement basic accounting controls. All the areas of internal control (namely supply chain management, management of human resources, information technology controls, reporting against predetermined objectives as well as the quality of financial statements submitted for auditing) reflected a deterioration during the year.

This status of audit outcomes stems from the slow response to the audit recommendations and leadership not implementing the commitments made during the previous year at 87% of the auditees. 

The province continues to be plagued by inappropriate skills, especially at chief financial officer level, at 87% of the municipalities. The results are also driven by a lack of implementing consequences for poor performance or regressions at more than 90% of the municipalities. 

Nombembe called for better coordination among local government structures. "The effort by the standing committee on public accounts to provide guidance to municipal public accounts committees can be further enhanced through greater coordination between the standing committee on public accounts and other portfolio committees of the legislature that are responsible for municipal oversight." 

"The strengthening of the coordination between the provincial department of cooperative governance and traditional affairs and the provincial treasury could also assist the municipalities," he said. 

To give support and guidance to the auditees, the Auditor-General of South Africa is maintaining its quarterly municipal door-to-door visits, with a view to monitoring and evaluating the status of improvements and the sustainability of key internal controls and leadership tone that would be a catalyst for the realisation of clean administration in municipalities in the province. These insights will continue to be shared with the provincial executive and oversight leadership quarterly, to create a platform for forward momentum towards clean audits while also working closely with internal audit units and audit committees. 

Eastern Cape:

Eastern Cape Local government audit results show a mixture of stagnation and slight improvement

The audit outcomes of the Eastern Cape local government revealed minimal improvement and general slow progress towards unqualified opinions (with findings or concerns), with the province showing an overall improvement in four of the audit outcomes.

Of the 45 municipalities and 10 municipal entities audited by the Auditor-General of South Africa (AGSA) in the Eastern Cape, no municipality received the desired clean audit opinion (unqualified without findings). Thirteen municipalities (29%) received financially unqualified opinions with findings, 13 (29%) were qualified, while two (4%) received an adverse opinion and 17 (38%) disclaimers.

This situation is reinforced by the status of internal controls that require urgent intervention at roughly half of the municipalities. A third of the municipalities are in the process of improving their internal controls, while the remainder have adequately addressed internal control challenges.

The three most prominent reasons for the poor audit opinions in this province are a lack of political will at approximately 50% of the municipalities, where political leaders are not taking the AGSA's message towards ownership of key controls seriously a lack of consequences for poor performance in the majority 98% of cases, and failure to appoint adequately qualified, skilled and competent individuals at 58% of municipalities.

"We are seeing the impact of the lack of skills, the slow response of leadership to owning key controls as well as the absence of managing poor performance in the risks that municipalities continue to face. At the moment these risks are beyond tolerable levels," said Auditor-General 

Terence Nombembe, who explained that the five major risks related to supply chain management, predetermined objectives (service delivery reporting), IT controls, human resources management and material errors in financial statements.

"Despite the regressions and lack of progress, I take note of the latest commitments by the province's leadership to address these challenges," concluded Nombembe, who had visited all the Eastern Cape municipalities in the past few months to discuss the state of the audit outcomes and explore ways to create momentum together with role players towards clean audits.

He said the provincial executive, the provincial treasury, the provincial department of local government and traditional affairs as well as the South African Local Government Association must build on the experiences of the door-to-door visits to enhance the coordination of their ongoing capacity-building efforts at municipalities.

Elevated cooperation between the provincial public accounts committee and the portfolio committee on local government would also improve oversight in dealing with the challenges faced by local government.

The AGSA will maintain its quarterly municipal visits, which are aimed at monitoring and evaluating the status of improvements and the sustainability of key internal controls and leadership tone that would be a catalyst for the realisation of clean administration in municipalities in the province. 

Insights gathered will continue to be shared with the provincial executive and oversight leadership each quarter, to create a platform for forward momentum towards clean audits while also working closely with internal audit units and audit committees.

North West:

North West in need of sustainable leadership and a strong culture of accountability

For the second consecutive year none of the 24 municipalities and four municipal entities in the province received a clean audit. Two municipalities (8%) and one entity (25%) received unqualified audit opinions with findings, while 29% of the municipalities and entities received either qualified or disclaimed/adverse audit opinions. 

These results do not reflect the complete picture, as the outcomes of 15 municipalities (63%) and two entities (50%) are not included in this analysis due to the late or non-submission of financial statements.

"The local government leadership in the province does not take the message from my office seriously," said Auditor-General (AG) Terence Nombembe, highlighting one of the reasons for the regression in audit outcomes.

According to the AG, this province has stagnated in five critical areas, namely supply chain management, predetermined objectives (service delivery), human resource management, information technology controls, and material errors and omissions in the financial statements.

This situation is underpinned by the status of internal controls which require urgent intervention (75%), with only a few municipalities in the process of improving their internal controls (23%), and only a few (2%), showing good internal controls.

There are three underlying challenges to be addressed by the municipal government leadership in order to achieve clean administration in the province, namely a lack of appropriate skills at all 100% the municipalities, poor performance management practices, with no formal consequences for poor performance and transgressions at 92% of the municipalities and an inability on the part of most municipal leaders to demonstrate an appetite for taking ownership of good governance practices required in their institutions, as evidenced by their disregard for deficiencies previously identified at 92% of the municipalities.

"A culture of accountability can only be enforced by a strong and committed leadership," said Nombembe, who stressed the need for effective internal audit units, audit committees and municipal public accounts committees. The provincial treasury, the provincial department of Local Government and Housing, the South African Local Government Association (SALGA) and the University of the North West need to partner with the municipalities to ensure ongoing capacity building, a process being driven by the premier.

There is also a need for elevated cooperation between the provincial public accounts committee and the portfolio committee on local government to deal with the challenges in local government.

To give support and guidance to the auditees, the Auditor-General of South Africa is continuing with its quarterly municipal door to door visits with a view to monitoring and evaluating the status of improvements and the sustainability of key internal controls and leadership tone that would serve as a catalyst for realising clean administration in municipalities in the province.

These insights will continue to be shared with the provincial executive and oversight leadership on a quarterly basis to create a platform for forward momentum towards clean audits while also working closely with internal audit units and audit committees.

Mpumalanga:

Mpumalanga shows a mix of sterling and poor audit outcomes

The Mpumalanga province received four clean audits in the 2010/11 local government audit results - the highest percentage of clean audits in the country for this period. 

Auditor-General Terence Nombembe attributed the improvement to strong internal controls and management's implementation of the previous year's action plans. "With the right leadership focus, determination and commitment, it is possible for the province to attain even more clean audits, but most importantly, to eradicate disclaimers," he said. 

Of Mpumalanga's 21 municipalities, four (19%) received clean audits, namely Ehlanzeni District Municipality, Gert Sibande District Municipality, Steve Tshwete Local Municipality and Victor Khanye Local Municipality. Seven (33%) municipalities were unqualified with findings, while 48% of the municipalities received qualified or disclaimed opinions or had outstanding audits as at 31 January 2012. 

The current audit results can be attributed to three underlying challenges that municipal government leadership in Mpumalanga needs to address. Around half (48%) of the local government political leadership is not taking the message of the Auditor-General of South Africa (AGSA) seriously. At 67% of the municipalities there were no consequences for poor performance and at most of the municipalities (81%) officials did not have minimum competencies and skills. 

The obstacles to attaining clean audits in the province emanate from control weaknesses in supply chain management, service delivery reporting, human resource management, information technology controls as well as significant errors in financial reports due to a lack of skills in finance units. 

This situation is underpinned by the status of key internal controls that require urgent intervention at 28% of the municipalities, with 41% of the municipalities being in the process of improving their internal controls and 31% having good internal controls. 

Honouring the commitments given by the leadership would provide an enhanced and clear level of oversight and coordinated monitoring of municipal results by the provincial legislature committees. 

Strengthening the coordination between the provincial department of cooperative governance and traditional affairs and the provincial treasury to effectively guide and assist municipalities will also positively impact on the results. 

The AGSA's quarterly municipal door-to-door visits are continuing. These are aimed at monitoring and evaluating the status of improvements and the sustainability of key internal controls and leadership tone that would be a catalyst for the realisation of clean administration in municipalities in the province. 

These insights will continue to be shared with the provincial executive and oversight leadership quarterly, to create a platform for forward momentum towards clean audits while also working closely with internal audit units and audit committees. 

Free State:

Free State's high number of disclaimer a worry

Apart from one dormant entity in the Free State, no municipality or entity received a clean audit in the 2010/11 financial year, revealed the Auditor-General of South Africa (AGSA).

However, the 23% of municipalities and entities who received unqualified audit opinions are closer to clean audits. Included in the unqualified opinions are all the district municipalities, the Nketoana Local Municipality and some public entities.

The results show that more than 75% of the Free State's municipalities and entities received either qualified, disclaimed or adverse audit opinions or did not submit financial statements on time during the 2010/11 financial year. The high-capacity municipalities (namely Moqhaka, Metsimaholo, Matjhabeng and Maluti-a-Phofung) sitting at disclaimers of opinion for a number of years.

"The current audit opinions do not bode well for the drive towards clean administration," said Auditor-General (AG) Terence Nombembe, adding that, "the lack of progress is due to the lack of basic accounting disciplines and a failure to retain supporting documentation."

This situation is underpinned by the poor status of internal controls that require urgent attention, as only 10% of the auditees have implemented adequate controls, 41% are in the process of implementing controls while the internal controls of 45% need urgent intervention.

The areas that need robust controls include supply chain management, reporting on predetermined objectives, the management of human resources, information technology controls and the quality of financial statements submitted for auditing.

Although there are still challenges regarding officials in key positions who lack the required competencies at 88% of the auditees, the province made a concerted effort to appoint qualified chief financial officers (CFOs) at the majority of the municipalities.

"Although these CFOs have the correct competencies, they have not implemented the correct accounting disciplines to bring about better audit outcomes," said Nombembe. The lack of ownership at 80% of the municipalities combined with the lack of implementing consequences for poor performance, also at 80% of the municipalities, further worsened the situation in the Free State.

The effort by the standing committee on public accounts could be enhanced by the speedy implementation and training of municipal public accounts committees as well as improved coordinated oversight by the public accounts and portfolio committees responsible for local government in the province.

Strengthening the coordination between the provincial department of cooperative governance and traditional affairs and the provincial treasury could also assist the municipalities.

The AGSA's quarterly municipal "door-to-door" visits are continuing, with a view to monitoring and evaluating the status of improvements and the sustainability of the key internal controls and leadership tone that would be a catalyst for the realisation of clean administration in municipalities in the province.

"These insights will continue to be shared with the provincial executive and oversight leadership quarterly, to create a platform for forward momentum towards clean audits while also working closely with internal audit units and audit committees," concluded Nombembe.

Northern Cape:

Northern Cape audit outcomes remain stagnant

Eight of the 21 municipalities received an unqualified opinion (with findings or concerns), with 59% of the municipalities receiving either qualified or disclaimed opinions. Of the nine (9) municipalities that submitted financial statements late for audit, eight had their audits completed subsequent to 31 January 2012 and were all in the qualified or disclaimer categories.

Auditor-General (AG) Terence Nombembe remarked: "There is an opportunity for the few municipalities with unqualified audit opinions to set an example in the province of political leadership and municipal management that can achieve clean audit outcomes".

The poor audit outcomes in the province reflect the serious skill and internal control deficiencies at municipalities. As a result, there has generally been little or no progress in the areas of supply chain management, service delivery reporting, human resource management, information technology controls, and material errors in the financial statements.

This situation is underpinned by the status of internal controls where the necessary internal controls are not in place in about half of the municipalities, thus requiring urgent intervention at the respective municipalities. Half of the necessary controls are in the process of being improved or implemented, while no municipality has good internal controls in all areas.

The AG highlighted as reasons for the status quo in audit outcomes in the province, the inadequately skilled staff in key positions at 90% of the municipalities, failure to enforce accountability for poor audit results and the late submission of financial statements at 76% of the municipalities, as well as failure by mayors and councillors of 71% of the municipalities to implement the Auditor-General South Africa's (AGSA) recommendations and to take ownership of the key controls for clean administration.

In light of these findings, Nombembe urged local government in the Northern Cape to urgently address skills shortages at its municipalities, especially at municipal manager and chief financial officer (CFO) levels. "The province's local government leadership will do well to fast-track the implementation of the revised Municipal Systems Act, which is aimed at addressing skills shortages," remarked Nombembe.

The AGSA is continuously working with the provincial government to focus on three critical issues that the Northern Cape government needs to perfect, namely heightened coordination among provincial oversight structures; strengthening coordination between the provincial Department of Cooperative Governance and Traditional Affairs and the provincial treasury, using the Operation Clean Audit Forum to effectively guide and assist municipalities; and enhancing provincial financial management skills. In this regard, the initiative by the province of undertaking a CFO skills audit is commended as a significant step to addressing the financial management skills.

The provincial legislature could also enhance its oversight of municipalities, particularly the tracking of resolutions and in-year monitoring of action plans and progress made by municipalities to address long-outstanding issues.

The AGSA's municipal door-to-door visits are continuing on a quarterly basis with a view to monitoring and evaluating the status of improvement and sustainability of the key internal controls and gauging the leadership tone. This will serve as a catalyst for realising clean administration at municipalities in the province. 

These insights will continue to be shared with the provincial executive and oversight leadership on a quarterly basis to create a platform for forward momentum towards clean audits. Close collaboration with the internal auditors, audit committees and municipal public accounts committees (MPACs) would also enhance the combined assurance efforts that are directed towards clean audits at the municipalities.

Statement issued by the Auditor General of South Africa, July 23 2012. The full reports can be accessed here.

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