1 Progress Report on Operation Clean Audit by 2014 Presentation to Select Committee on Appropriations 29 August 2012

Outline of Presentation 2 1. Introduction 2. Background on Operation Clean Audit 3. Audit Outcomes: local, provincial and national spheres of government 4. Observation of the AGSA in respect of root causes behind municipal audit outcomes 5. Priority areas for responding to municipal audit outcomes 6. Conclusion

Introduction (1/2) 3  We hereby present to the Select Committee on Appropriations, a comparative state of Municipalities on Audit Outcomes for the Financial Years 2010/2011, 2009/2010 and 2008/2009, with a view to allow the Committee to get progress update towards the 2014 target. We also submit, for the Committee to note too, the state of performance by Provincial and National Departments including National Parliament and Provincial Legislatures.  We also present the consolidated support aimed at improving municipal audit outcomes.

Introduction (2/2) 4  This we do as we analyse how big the challenge is and how much we have to do, in mobilising all actors to work together, in the spirit of Cooperative Governance, to turn the situation around, with the aim of achieving the Local Government Turn Around Strategy’s two aims, namely: Build Confidence between the people and Government and build a model Municipality characterised by the ability to provide quality services, uphold good governance, enhance sound financial management, roll out and maintain infrastructure as well as fight corruption effectively.

Background on Operation Clean Audit (1/2) 5  Audit Outcomes are financial performance accounting systems in terms of which the AG presents a report on the performance of Government Departments, Municipalities and State-owned Entities, reflecting on actual performance and providing details in dedicated Management letters indicating what each Unit should do  The picture of performance should be viewed against the background that Government has set a target in terms of one of the Turn-Around Strategy Projects: Operation Clean Audit, directing as follows: That no Municipality should achieve a disclaimer or adverse rating by 2010/2011. That at least 60% of the 278 Municipalities should receive unqualified Audit Opinion by 2011/2012; That Municipalities achieving unqualified Audit Opinion should increase to 75% by 2013; and That all Municipalities shall achieve a Clean Audit opinion by These targets are the same for provinces.

Background on Operation Clean Audit (2/2) 6  The department has also provided information on the state of performance by Municipalities in terms of which it is indicated as to which Municipality in a particular Province received a Clean, Unqualified, Qualified, Adverse or Disclaimer rating, with the understanding that: A Clean Audit rating is a performance level where the municipality is found to have satisfied all the audit expectations. An Unqualified Audit rating is a performance level where there are matters that are courses for concern and which the AG gives a specific directive that such should be attended to. An adverse rating is a performance level where there is just nothing on the basis of which the AG can express an opinion. A Disclaimer rating is a performance level where a Municipality fails to provide recorded information to validate its facts on issues they have to account on.

THE AUDIT OUTCOMES 7  The details of the Audit outcomes are: The three year comparison for municipalities, refer to Annexure A - it must be noted that this is the status quo as at 27 th July 2012 based on the 278 existing municipalities (i.e. disestablished municipalities have been excluded). The three year comparison for Provincial Departments and Provincial Legislatures, National Departments and National Parliament, refer to Annexure B.

Observations of the AGSA 8  The AGSA outline root causes. These are: Key officials lacking minimum competencies and skills; Lack of consequences for poor performance and transgression; Slow response to AGSA message and not taking ownership of key controls; None compliance with Laws and regulations. None reporting of performance information.

Priority Actions for Responding to Municipal Audit Outcomes (1/2) 9  The department has started a process of intensive engagement with municipalities to understand root causes to performance linked to the 5 LGTAS priority areas.  In this regard the department has engaged with 3 municipalities, namely, Mamusa Local Municipality in the North West, eMadlangeni Local Municipality in KwaZulu-Natal and Ehlanzeni District Municipality in Mpumalanga which shared their lessons. Mamusa Local Municipality: Has not submitted Annual Financial Statements (AFS) for the past 3 financial years. Financial management matters relating to compilation of AFS was given to the district municipality. Within 5 years, Mamusa had 5 Mayors, 4 CFO’s, and 3 Municipal Managers. eMadlangeni Local municipality made significant stride from being qualified in 2009/10 to Clean Audit in 2010/11. Ehlanzeni District Municipality received Clean Audit for the last 2 consecutive years, and has in-house capacity in terms of compiling its AFS.

Priority Actions to Respond to Municipal Audit Outcomes (2/2) 10  The department will engage with all municipalities that did not obtain financially unqualified audit opinions over the next 3 months in terms of the 5 LGTAS priority areas.

Conclusion 11  The Department is committed, working with all stakeholders, to continue implementing measures aimed at building a responsive, accountable, effective and efficient local government system. Thanks