IMFO WOMEN IN LOCAL GOVERNMENT SEMINAR ACHIEVING 2014 CLEAN AUDIT OBJECTIVES PRESENTED BY: MS E WASSERMANN CHIEF FINANCIAL OFFICER STEVE TSHWETE LOCAL MUNICIPALITY 7 MARCH 2014 E MPERORS P ALACE, K EMPTON P ARK 1

PRESENTATION OUTLINE Root causes why municipalities do not achieve clean audits. What a clean audit report entails. Elements of a clean audit. Core compliance aspects. General financial management. Other important matters to be considered. Relationship with Auditor-General. STLM approach. Challenges for 2013/2014 financial year. Root causes why municipalities do not achieve clean audits. What a clean audit report entails. Elements of a clean audit. Core compliance aspects. General financial management. Other important matters to be considered. Relationship with Auditor-General. STLM approach. Challenges for 2013/2014 financial year. 2

R OOT CAUSES WHY MUNICIPALITIES DO NOT ACHIEVE CLEAN AUDITS Property Plant and Equipment (GRAP 17). No, or incorrect assessment of impairment and review of useful lives. Fixed asset register incomplete and not updated. Reconciliations of registers with GL not performed. No supporting documentation to support evidence. Performance Information and Predetermined Objectives. (74% of auditees) Performance reports not submitted. Usefulness and reliability of reported information. (Performance indicators not well defined). No supporting documentation to support evidence. Non-Compliance with Laws and Regulations (94% of auditees) Unauthorised, irregular & fruitless and wasteful expenditure. Submitted financial statements required material adjustments. Non-functional audit committee & internal control. Property Plant and Equipment (GRAP 17). No, or incorrect assessment of impairment and review of useful lives. Fixed asset register incomplete and not updated. Reconciliations of registers with GL not performed. No supporting documentation to support evidence. Performance Information and Predetermined Objectives. (74% of auditees) Performance reports not submitted. Usefulness and reliability of reported information. (Performance indicators not well defined). No supporting documentation to support evidence. Non-Compliance with Laws and Regulations (94% of auditees) Unauthorised, irregular & fruitless and wasteful expenditure. Submitted financial statements required material adjustments. Non-functional audit committee & internal control. 3

R OOT CAUSES WHY MUNICIPALITIES DO NOT ACHIEVE CLEAN AUDITS Supply Chain Management General non-compliance to procurement and contract management. (Bid committees, quotations etc.). Awards made to persons in the service of the state. Uncompetitive bids or unfair procurement processes. Lost procurement documentation. CIBD requirements and Restricted Suppliers Database. Unauthorised, irregular and wasteful expenditure. Governance Lack of leadership. Internal audit & audit committees. Risk and fraud prevention. Key positions vacant or key officials lacking skills. Lack of proper record keeping. 4

W HAT A CLEAN AUDIT REPORT ENTAILS The municipality must be no material findings in the report on the following matters: Misstatements in the financial statements. Emphasis of matters. Annual performance report. Compliance with laws and regulations. Internal control. Significant findings from the audit on procurement and contract management. The municipality must be no material findings in the report on the following matters: Misstatements in the financial statements. Emphasis of matters. Annual performance report. Compliance with laws and regulations. Internal control. Significant findings from the audit on procurement and contract management. 5

ELEMENTS OF A CLEAN AUDIT Clean Audit Political: Oversight & Monitoring Finance: Unqualified Report Governance: Performance & Legislative Compliance 6

P REPARATION OF FINANCIAL STATEMENTS Outsourced versus In-House 71% of municipalities were assisted by consultants. Audit outcomes statistics (includes municipal entities). 70 out of 85 - Adverse/Disclaimed 56 out of 71 – Qualified 93 out of Unqualified with findings 7 out of 17 - Unqualified with no findings Consultants were able to correct parts of financial statements that had been misstated but were not necessarily able to ensure that auditees progress towards unqualified reports. Disadvantages Consultants are appointed close to financial year-end – No real impact. Poor accounting information and record keeping. Un-reconciled registers limit ability to prepare GRAP compliant statements. Vacancies and capacity of finance staff. Outsourced versus In-House 71% of municipalities were assisted by consultants. Audit outcomes statistics (includes municipal entities). 70 out of 85 - Adverse/Disclaimed 56 out of 71 – Qualified 93 out of Unqualified with findings 7 out of 17 - Unqualified with no findings Consultants were able to correct parts of financial statements that had been misstated but were not necessarily able to ensure that auditees progress towards unqualified reports. Disadvantages Consultants are appointed close to financial year-end – No real impact. Poor accounting information and record keeping. Un-reconciled registers limit ability to prepare GRAP compliant statements. Vacancies and capacity of finance staff. 7

P REPARATION OF FINANCIAL STATEMENTS Prepare financial statements in-house. Benefits: Build in-house capacity. Responsibility/Ownership rests within the municipality. Better control over balancing and verification of figures in general ledger with source documents. Informed responses to Auditor-General enquiries. Better understanding of accounting records and procedures followed. Defend fairness of queries raised. Accurate and timeous response to Auditor-General. Prepare financial statements in-house. Benefits: Build in-house capacity. Responsibility/Ownership rests within the municipality. Better control over balancing and verification of figures in general ledger with source documents. Informed responses to Auditor-General enquiries. Better understanding of accounting records and procedures followed. Defend fairness of queries raised. Accurate and timeous response to Auditor-General. 8

CORE COMPLIANCE ASPECTS Identify gaps and ensure the following core aspects are in place and functional: Governance Internal audit and control. Risk assessments including IT risks and fraud prevention. Performance management (reporting & audits). Audit committee. Legislative compliance. Financial Achieve unqualified report. Proper record keeping and documentation. Reporting and legislative compliance. (MFMA & Supply Chain) Understand and adhere to accounting standards framework. (GRAP) Daily and monthly reconciling of transactions. Identify gaps and ensure the following core aspects are in place and functional: Governance Internal audit and control. Risk assessments including IT risks and fraud prevention. Performance management (reporting & audits). Audit committee. Legislative compliance. Financial Achieve unqualified report. Proper record keeping and documentation. Reporting and legislative compliance. (MFMA & Supply Chain) Understand and adhere to accounting standards framework. (GRAP) Daily and monthly reconciling of transactions. 9

G ENERAL FINANCIAL MANAGEMENT Daily, monthly & year-end procedures. Ensure all registers and / or suspense accounts are cleared and balanced monthly for example debtors, creditors, bank reconciliation, stores etc. Commence immediately with audit action plan to rectify findings raised during past audits. At least four months before financial year end prepare financial year-end procedures. Benefits: Immediately detect if monthly accounts are not balanced and correct before next month end. It allows sufficient time to properly review general ledger with account balances. Bring team together to understand roles and responsibilities for financial year-end closure. Daily, monthly & year-end procedures. Ensure all registers and / or suspense accounts are cleared and balanced monthly for example debtors, creditors, bank reconciliation, stores etc. Commence immediately with audit action plan to rectify findings raised during past audits. At least four months before financial year end prepare financial year-end procedures. Benefits: Immediately detect if monthly accounts are not balanced and correct before next month end. It allows sufficient time to properly review general ledger with account balances. Bring team together to understand roles and responsibilities for financial year-end closure. 10

O THER IMPORTANT MATTERS Gap analysis for new accounting standards. Based on the results, prepare an action plan to implement. Capacitate responsible officials who are involved in implementing accounting standards. Ensure each official understands their duties and responsibilities. Understand and apply the policies and procedures especially SCM. Proper segregation of duties. Share best practises with colleagues. Commitment of every official to diligently perform their duties from the lowest to highest level. Gap analysis for new accounting standards. Based on the results, prepare an action plan to implement. Capacitate responsible officials who are involved in implementing accounting standards. Ensure each official understands their duties and responsibilities. Understand and apply the policies and procedures especially SCM. Proper segregation of duties. Share best practises with colleagues. Commitment of every official to diligently perform their duties from the lowest to highest level. 11

R ELATIONSHIP WITH AUDITOR - GENERAL Know the Auditor-General and team. Make sure there is a good and positive working relationship. Listen and adhere to the audit requirements. Establish clear communication lines. Designate an official to be available during the whole audit process. Respond to informal queries quickly and efficiently. Provide information as requested and if not available inform AG accordingly. Have a open office approach and assist as far as possible. Know the Auditor-General and team. Make sure there is a good and positive working relationship. Listen and adhere to the audit requirements. Establish clear communication lines. Designate an official to be available during the whole audit process. Respond to informal queries quickly and efficiently. Provide information as requested and if not available inform AG accordingly. Have a open office approach and assist as far as possible. 12

STLM APPROACH The municipality has achieved unqualified reports since 2002 with emphasis of matters and other matters. With each audit report corrective and preventative measures with action plans were implemented to rectify these issues before the next audit. Eventually everything came together and a clean audit was achieved. The achievement of a Clean Audit is a continuous process. Get the basics right: Submit on time. Accuracy of information. No material misstatements. Supporting documentation. Legislation compliance. The municipality has achieved unqualified reports since 2002 with emphasis of matters and other matters. With each audit report corrective and preventative measures with action plans were implemented to rectify these issues before the next audit. Eventually everything came together and a clean audit was achieved. The achievement of a Clean Audit is a continuous process. Get the basics right: Submit on time. Accuracy of information. No material misstatements. Supporting documentation. Legislation compliance. 13

C HALLENGES FOR 2013/14 AUDITS New Standards of GRAP, effective date of 1 April 2013 i.e. applicable to 2013/2014 financial year. GRAP 25 Employee benefits Corporate governance of information and communication technology (IT) policy framework. Matters raised in previous audit. New Standards of GRAP, effective date of 1 April 2013 i.e. applicable to 2013/2014 financial year. GRAP 25 Employee benefits Corporate governance of information and communication technology (IT) policy framework. Matters raised in previous audit. 14

MUNICIPAL COMMITMENT To always treat everyone with dignity and respect. To perform duties with integrity, honesty and diligence. To diligently apply the principles of Batho Pele in all dealings. OUR STANDARD OF GOOD FINANCIAL GOVERNANCE Discipline AccountabilityFairness Transparency ResponsibilitySocial Responsibility There are many faces in the municipality contributing to a clean audit achievement. 15

T HANK YOU 16