1. Audit outcomes of local government 2 September 2014 MFMA 2012-13

2. Our reputation promise/mission 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. Auditees with a qualified or an unqualified with findings opinion are struggling to… Produce financial statements without material misstatements. They rely on the auditors to detect errors and omissions, so they can correct them. This was the case in 110 auditees (35%) who had unqualified opinions 84 auditees (25%) could not effect the required corrections and received qualified opinions Align their performance reports to the predetermined objectives they committed to in their IDP Set clear performance indicators and targets to measure their performance against their predetermined objectives Report reliably on whether they achieved their targets Determine which legislation they should comply with and implement the required policies, procedures and controls to ensure they comply 2012-13 MFMA 3 Auditees with clean audits were able to… Produce financial statements free from material misstatements Measure and report on their performance in accordance with the predetermined objectives in their IDP in a manner which is useful and reliable Comply with key legislation Also referred to as “unqualified with no findings” Auditees with adverse and disclaimer opinion are… Unable to provide sufficient supporting documentation for amounts appearing in financial statements and the achievements they report in their annual performance reports Not complying with key legislation

4. 2012-13 MFMA Unqualified with no findings Unqualified with findings Qualified with findings Adverse or disclaimer with findings 4 Movements of the 319 auditees reported on ImprovedUnchangedRegressedNewOutstanding Unqualified with no findings = 30 1713 Unqualified with findings = 138 194112121 Qualified with findings = 84 234521312 Adverse or disclaimer with findings = 67 581813 63 16 3 3 25 228 Improved from opinion indicated by arrow Regressed from opinion indicated by arrow Of the 16 outstanding audits, three audits remain outstanding from the 2011-12 financial year.

5. 5 Slight improvement in audit outcomes Adverse/Disclaimed with findings Outstanding audits Unqualified with no findings Unqualified with findings Qualified with findings Quality of submitted financial statements Information technology controls Financial health Supply chain management Quality of performance reports Human resource management Six risk areas should receive attention No findings Findings Material findings Drivers of internal control should be improved LEADERSHIP FINANCIAL AND PERFORMANCE MANAGEMENT GOVERNANCE Good Concerning Intervention required Root causes should be addressed Key positions vacant or key officials lacking appropriate competencies A root cause at of the auditees (2011-12: 76%) 69% Lack of consequences for poor performance and transgressions A root cause at of the auditees (2011-12: 75%) 71% Slow response by the political leadership to address the root causes of poor audit outcomes A root cause at of the auditees (2011-12: 80%) 77% Improved Unchanged Level of assurance provided by key role players should be improved Provides assurance Provides some assurance Provides limited/ no assurance Not established Senior management Municipal managers/ chief executive officer Mayors Internal audit units Audit committees Coordinating/ monitoring departments Municipal public accounts committees Legislature/ NCOP and portfolio committees Municipal councils First level of assurance Second level of assuranceThird level of assurance The current audit outcomes are the result of the attention given to the six key risk areas, the drivers of the key controls and the root causes as well as the level of assurance that was provided by the key role players.

6. Population Households Average household size Average dwelling type per no. of households Average household income Basic services of the households have access to electricity Education Labour Population statusAge Male/Female 2001 1996 2011 of the households have access to piped water of the households have access to toilet facilities 95% Higher education GR12 No schooling EmployedUnemployed ElectricityNo electricity In house Communal No access Flush/Chemical Pit/Bucket No access 0-14 15-64 65+ MaleFemale 2001 1996 2011 2001 1996 2011 2001 1996 2011 The statistics depicted above do not reflect persons with only partial primary or secondary schooling. The graphic therefore does not add up to 100%. Formal dwelling Traditional dwelling Informal dwelling SOUTH AFRICA The statistics reflected in these graphics were sourced from the 2011 Census (STATS SA) and do not constitute information collated and/or audited by AGSA. The colours of the legends used for these census graphics do not have the same meaning as those used in the rest of this report. 91% 85% 20011996 2011 20011996 2011 2001 1996 2011 2001 1996 2011 2001 2011 2001 1996 2011 2001 1996 2011

7. 2012-13 MFMA 1 7 What is the status and progress of the audit outcomes of local government? 1

8. 2012-13 MFMA Unqualified with no findings Unqualified with findings Qualified with findings Adverse or disclaimer with findings Audits outstanding Slight improvement in audit outcomes over past five years 8 335 auditees 320 auditees 324 auditees 330 auditees 332 auditees

9. Audit outcomes in provinces 2012-13 MFMA Limpopo Mpumalanga KwaZulu-Natal Gauteng North West Free State Northern Cape Eastern Cape Western Cape 9 Unqualified with no findings Unqualified with findings Qualified with findings Adverse or disclaimer with findings Audits outstanding Improved Regressed Stagnant or little progress

10. 10 Eastern Cape Performance status Some improvement in outcomes Sustainability remains a concern, due to inadequate internal controls Irregular expenditure highest in the country (R 3.3 bn), with R 2 bn being the Metros Unauthorised expenditure (overspending on budgets) remains high (R 2 bn), with R 1.2 bn at King Sabata Dalindyebo Local Municipality (lack of supporting documentations) Attention should be paid to: Basic financial and performance management discipline Culture of tolerance for inadequate execution of controls Development of skills for administration and oversight The following municipalities need special intervention: Alfred Nzo District, OR Tambo District, Emalahleni, Great Kei, Intsika Yethu, Inxuba Yethemba, King Sabata Dalindyebo, Kou Kamma, Kouga, Ngqushwa 2012-13 MFMA

11. 11 Free State Performance status Day-to-day internal controls not improving High reliance on consultants and external audit process 100% with material non-compliance, including high irregular expenditure (R 1 bn) Unauthorised expenditure remains high at R 2 bn Attention should be paid to: Appoint skilled individuals and provide for stability Consequences for poor performance/transgressions The following municipalities need special intervention: Matjhabeng, Nala, Naledi, Ngwathe 2012-13 MFMA

12. 12 Gauteng Performance status Improvement in outcomes not supported by robust internal controls Transgressions against legislation remain high, especially in procurement processes Attention should be paid to: Consequences for transgressions Stability in administrative leadership 2012-13 MFMA

13. 13 KwaZulu-Natal Performance status Improved audit outcomes not supported by improved internal controls Leadership and governance elements of key controls deteriorated Non-compliance remains high, especially on procurement Attention should be paid to: Continuous focus on strengthening internal controls Compliance with supply chain regulations Leadership to set the right tone and effect appropriate consequences The following municipalities need special intervention: uMkhanyakude District, uThukela District, Abaqulusi, eDumbe, Newcastle 2012-13 MFMA

14. 14 Limpopo Performance status Regression in outcomes, with high number of late submissions Poor basic internal controls Lack of skills and culture of no consequences Attention should be paid to: Skills (administration and oversight) Basic internal control disciplines Consequence management, with leadership setting the tone The following municipalities need special intervention: Ba-Phalaborwa, Ephraim Mogale, Mogalakwena, Molemole 2012-13 MFMA

15. 15 Mpumalanga 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 The following municipalities need special intervention: Bushbuckridge, Emalahleni, Thaba Chweu 2012-13 MFMA

16. 16 Northern Cape Performance status Slight improvement not supported by robust key controls 2 (out of 26) auditees submitted AFS with no material misstatements Non-compliance with procurement regulations remains high (93% auditees) Attention should be paid to: Implementing basic financial disciplines and controls Compliance with SCM legislation Skills (administration and oversight) Setting the right tone and implementing consequence management The following municipalities need special intervention: !Kheis, Ga-Segonyana, Joe Morolong, Kai !Garib, Kgatelopele, Magareng, Mier, Phokwane, Renosterberg, Siyathemba, Thembelihle, Tsantsabane 2012-13 MFMA

17. 17 North West Performance status Increased submissions for audit, driven by political leadership Poor quality of AFS due to lack of basic controls 100% with material non-compliance, especially SCM High levels of irregular expenditure at R 2.8 bn Attention should be paid to: Implementing basic financial disciplines and controls Compliance with SCM legislation Setting the right leadership tone Skills and stability in administration The following municipalities need special intervention: Ngaka Modiri Molema, Ditsobotla, Madibeng, Tswaing, Ventersdorp 2012-13 MFMA

18. 18 Western Cape Performance status Improved audit outcomes, driven by leadership commitment Sustainability concerns as basic controls need attention Compliance findings improved but still high (62%), especially SCM Attention should be paid to: Basic financial management disciplines Implementation of best practice across all districts and municipalities The following municipalities need special intervention: Kannaland, Oudtshoorn 2012-13 MFMA

19. KwaZulu-Natal (1) Umtshezi Limpopo (1) Waterberg District Progressed to clean [17] Eastern Cape (1) Mandela Bay Development Agency Gauteng (1) Sedibeng District KwaZulu-Natal (7) Msinga Ntambanana Okhahlamba Ubuhlebezwe uMhlathuze uMzimkhulu Uthungulu District Northern Cape (1) ZF Mgcawu District Western Cape (7) Breede Valley Cape Town International Convention Centre City of Cape Town Metro Knysna Overstrand Theewaterskloof Witzenberg 2012-13 MFMA Clean audits Regressed from clean audit to unqualified with findings Regressed from clean audit to financially qualified Movements in clean audits 19 KwaZulu-Natal (1) ICC, Durban (Pty) Ltd Retained [13] Gauteng (2) Johannesburg Fresh Produce Market Johannesburg Social Housing Company KwaZulu-Natal (4) Durban Marine Theme Park (Pty) Ltd Safe City Pietermaritzburg uThungulu Financing Partnership uThungulu House Development Trust Mpumalanga (1) Ehlanzeni District Western Cape (6) George Langeberg Mossel Bay Steve Tshwete Swartland West Coast District Clean audits

20. 20 Property, infrastructure and equipment 66 auditees could not physically verify or determine the ownership or value of assets as a result of incorrect and incomplete asset registers and inadequate or missing supporting documentation. At 50 auditees, the value of some assets was not reviewed annually or calculation was incorrectly performed, resulting in assets being included in the AFS at unrealistic values. Irregular expenditure Could not determine completeness of irregular expenditure disclosed in AFS due to inadequate processes to account for irregular expenditure Receivables Could not determine whether debtors are shown at correct values as a result of inadequate systems, processes and supporting documentation to account for the completeness of the debtors and whether what they owe can be recovered. Most common areas of qualifications on financial statements Urgent attention should be implementing the basic controls of daily and monthly processing and reconciling of transactions as well as proper record keeping and document control 2012-13 MFMA Improved Regressed Stagnant or little progress

21. Significant non-compliance with legislation by 88 of the auditees Slight improvement over 2011-12 90% Status of compliance with legislation 21 With no findings With findings 2012-13 MFMA

22. 2012-13 MFMA These areas must receive attention: Findings on non-compliance with legislation 22 Improved Regressed Stagnant or little progress Management of strategic planning and performance

23. 2012-13 MFMA Auditees incurred unauthorised expenditure 23 Identified by the auditees Identified during the audit Reduction in unauthorised expenditure At 78 auditees (42%) the unauthorised expenditure of the previous year was not investigated by the municipal manager and council to determine if any person was liable for the expenditure. R9 195 million [170 (53%) auditees] R4 680 million [157 (50%) auditees] R10 110 million [184 (58%) auditees] Overspending of budget/ main sections in the budget is the cause of 96,7% of the unauthorised expenditure Reasons for overspending include poorly prepared budgets, inadequate budget control and lack of monitoring and oversight Municipal budgets also include non-cash items, such as impairments and provision. Part of the unauthorised expenditure was as a result of incorrect estimation of these items Nature

24. 2012-13 MFMA Auditees incurred irregular expenditure 24 Identified by the auditees Identified during the audit R9 740 million (21 304 instances) R8 170 million (21 067 instances) Procurement that could not be audited as documentation was missing (not included in total) Increase in irregular expenditure Non-compliance with SCM legislation is the cause of 98% of the irregular expenditure At 92 auditees (34%) the irregular expenditure of the previous year was not investigated by the municipal manager and council to determine if any person was liable for the expenditure. R11 600 million [265 (83%) auditees] R6 768 million [236 (75%) auditees] R9 323 million [267 (84%) auditees]

25. 2012-13 MFMA Auditees incurred fruitless and wasteful expenditure 25 Identified by the auditees Identified during the audit Nature Actual fruitless and wasteful expenditure Estimated incurred to prevent further irregular/ loss/ fruitless and wasteful expenditure R 815 million R 815 million R651 million (80%) 140 auditees (64%) R164 million (20%) 83 auditees (38%) Increase in fruitless and wasteful expenditure At 77 auditees (38%) the fruitless and wasteful expenditure of the previous year was not investigated by the municipal manager and council to determine if any person was liable for the expenditure. R815 million [220 (69%) auditees] R273 million [155 (49%) auditees] R623 million [204 (64%) auditees]

26. Quality of annual performance reports 26 With no findings With findings The annual performance reports of only of auditees were useful and reliable Improvement over 2011-12 34% 2012-13 MFMA

27. 2012-13 MFMA 2 27 What are the risk areas that should be focused on? 2

28. 2012-13 MFMA Supply chain management Quality of performance reports Human resource management Quality of submitted financial statements Information technology controls Financial health Risk areas to receive attention 28 With no findings With findings With material findings Improved Regressed Stagnant or little progress

29. 2012-13 MFMA Findings on supply chain management 29 With findings With material findings Improved Regressed Stagnant or little progress Limitation on planned scope of audit of awards Awards to employees and councillors or other officials of the state Awards to close family members of employees and councillors Uncompetitive or unfair procurement processes Inadequate contract management Internal control deficiencies

30. 2012-13 MFMA 30 Supply chain management controls should be improved The most common internal control weaknesses identified were: Inadequate controls to ensure employees and councilors declare their own interest and those of their close family No plans are in place for addressing past audit findings on SCM or adherence to the plan was not monitored regularly No/inadequate record keeping SCM officials were not adequately trained No/inadequate actions are taken to address the SCM risks

31. 2012-13 MFMA 31 Vacancies and instability in key positions and minimum competencies not achieved yet Vacancies at year-end Stability (average number of months in position) Minimum competencies Vacant for less than 6 months Vacant for 6 months or more Not meeting minimum competencies Minimum competencies not assessed or limitation Improved Regressed Stagnant or little progress

32. 2012-13 MFMA Auditees were assisted by consultants 32 Unqualified with no findings Unqualified with findings Qualified with findings Adverse or disclaimer with findings No finding on performance information With findings on performance information Financial reporting 77% of auditees were assisted by consultants to the amount of R695m Preparation of performance information 19% of auditees were assisted by consultants to the amount of R39m Reasons for outcomes in spite of using consultants 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 247 60 Audit outcomes Quality of annual performance reporting

33. 2012-13 MFMA 33 Findings on the management of consultants at 250 auditees No transfer of skills at 62% Contracts did not include any conditions or objective in terms of the transfer of skills from the consultants to the employees Where the transfer of skills was a requirement we could not obtain evidence that skills were transferred The measures to monitor the transfer of skills were not always implemented Poor performance management and monitoring at 52% The measures to monitor the performance of the consultants were either not defined and/or implemented Where contract performance measures and methods were monitored, the monitoring proved to be inadequate as it failed to detect under-performance of the consultants. At some auditees consultants were paid without signed contracts Inadequate planning and appointment processes at 48% Consultants were appointed without conducting a needs assessment or the needs assessment performed was inadequate. The procurement processes followed to appoint consultants did not always comply with the legislated SCM processes.

34. Outcome if NOT corrected Outcome after corrections of auditees avoided qualified audit opinions because they corrected significant AFS errors or omissions during the audit process 35% Quality of submitted financial statements Financially unqualified Financially qualified 34 2012-13 MFMA

35. 2012-13 MFMA IT controls embedded and functioning effectively IT controls to be implemented IT controls to be designed IT governance – the foundation for effective IT Security management User access management IT service continuity Status of IT Controls 35 The improvement in IT governance is due to the approval of the Corporate Governance of Information and Communication Technology (CGICT) by cabinet which is applicable to local government. The Western Cape was the only province where eight municipalities already had IT controls embedded and functioning effectively before the approval of the CGICT by cabinet. Improvement was noted in security management and IT service continuity, while user access management showed little progress from 2011-12 to 2012-2013. The majority of municipalities and municipal entities did not have adequately designed IT controls for security management (60%), user access management (68%) and IT service continuity (62%). Improved Regressed Stagnant or little progress

36. 2012-13 MFMA Financial health 36 With no findings With findings With material findings Improved Regressed Stagnant or little progress More than 10% of debt irrecoverable Underspending of the capital budget by more than 10% Underspending of conditional grants by more than 10% Debtor-collection period more than 90 days Creditor-payment period more than 90 days A deficit for the year was realised Overspending of the operating budget by more than 10% A net current liability position was realised The year-end bank balance was in overdraft

37. 2012-13 MFMA 3 37 What assurances did the key role players provide and what vital actions and interactions should take place? 3

38. 2012-13 MFMA Some improvements over 2011-12 as “intervention required” reduced Leadership Financial and performance management Governance Good Concerning Intervention required 38 Improved Regressed Stagnant or little progress The drivers of internal control should improve

39. 2012-13 MFMA Slow response by political leadership in addressing the root causes of poor audit outcomes A root cause at 77% of the auditees (2011-12: 80%) Lack of consequences for poor performance and transgressions A root cause at 71% of the auditees (2011-12: 75%) Key positions vacant or key officials lacking appropriate competencies A root cause at 69% of the auditees (2011-12: 76%) …and the root causes should be addressed 39

40. 2012-13 MFMA Senior management Municipal manager/ chief executive officer Mayors First level of assurance Management/leadership Provides assurance Provides some assurance Provides limited/no assurance … by the management and leadership 40 Improved assurance Decreased assurance Little progress on assurance Actions to increase level of assurance Senior managers should implement basic financial and performance management controls – proper record keeping, controls over processing and reconciling of transactions, regular and accurate reporting, monitoring of compliance with legislation and IT system controls. Municipal managers should support a strong control environment by providing effective leadership and oversight, implementing effective HR management, policies, procedures, an IT governance framework and appropriate risk management activities, supporting and responding to internal audit and audit committees. Mayors should provide oversight and monitoring as required by the MSA and MFMA and be actively involved in key governance matters and managing the performance of municipal managers. They should obtain regular and credible assurances on the status of internal controls, the reliability of the financial and performance reports submitted to council and the implementation of actions to improve audit outcomes.

41. 2012-13 MFMA Internal audit unitsAudit committees Second level of assurance Internal independent assurance and oversight Provides assurance Provides some assurance Provides limited/no assurance Not established Treasury, cooperative governance department premier’s office 41 Improved assurance Decreased assurance Little progress on assurance Actions to increase level of assurance Internal audit and audit committees should encourage submission of regular financial and performance reports, monitor implementation of action plans, review quarterly reports and the financial statements before submission for audit, monitor actions taken in the case of known transgressions and assign appropriate resources to address the six key risk areas. National coordinating and monitoring institutions should…  Support the training and development of councillors and the effectiveness of councils  Improve the monitoring and oversight over local government and address transgressions and poor performance  Continue with capacity building and municipal improvement programmes in a coordinated and focused manner  Provide further standard operating procedures, checklists and processes to enable municipalities to implement controls and comply with legislation … by the internal independent assurance and oversight

42. 2012-13 MFMA Third level of assurance External independent assurance and oversight Provides assurance Provides some assurance Provides limited/no assurance Not established 42 Municipal public accounts committees Legislature/ NCOP and portfolio committees on local government Improved assurance Decreased assurance Little progress on assurance Municipal councils Actions to increase level of assurance Municipal councils should improve their monitoring and oversight role by: Strengthen the MPACs and audit committees, and support the important role these committees play. Insist, through their speakers, on receiving regular and credible information on the status of the finances and activities of their municipalities. Monitor the implementation of recommendations by the audit committee and internal audit units with a view to remedial action. Deal with transgressions, financial misconduct, fraud and other misconduct or poor performance in a consistent and decisive manner. Take timeous action in instances of identified weaknesses or failure by management and officials to perform statutory duties. Seek out opportunities to continuously develop and improve the knowledge and skills they need to perform their duties and insist on support from national and provincial government in this regard. … by the external independent assurance and oversight

43. 2012-13 MFMA 43 District municipalities need to… Coordinate development and delivery Play a supporting role in financial management Set the example in accountability and reporting Share best practices and assist these to become embedded in local municipalities Ensure that daily financial and performance management are embedded Improve internal control, governance and accountability of local government