final management report - africa check · 2019-03-28 · legislation (including supply chaim...

FINAL MANAGEMENT REPORT City of Tshwane Metropolitan Municipality 30 June 2018

Communicated to the accounting officer on: 16 November 2018

MANAGEMENT REPORT CITY OF TSHWANE METROPOLITAN MUNICIPALITY 30 June 2018

CONTENT

Introduction 4

Overall message 7

Section 1: Interactions with stakeholders responsible for oversight and governance

9

Section 2: Matters relating to the auditor’s report 10

Audit of the financial statements 10

Matters to be brought to the attention of users 16

Audit of the annual performance report 17

Audit of compliance with legislation 19

Other information 21

Internal controls 21

Other reports 25

Section 3: Assurance providers and commitments and status of implementation of commitments and recommendations

26

Assessment of assurance providers 26

Status of implementing commitments and recommendations 28

Section 4: Specific focus areas 29

Financial viability 29

Procurement and contract management 32

Fraud and consequence management 36

Use of conditional grants 38

Public participation 39

Use of consultants 39

Water and sanitation 40

Roads infrastructure 45

Value chain of key projects 47

Section 5: Using the work of internal auditors 49

Section 6: Emerging risks 49

Section 7: Entities controlled by the municipality 51

Section 8: Ratings of detailed audit findings 52

Section 9: Conclusion 52

Section 10:Summary of detailed audit findings 52

Detailed audit findings: Annexures A to C [xx]

Annexures D: Performance management and reporting framework 53

Annexures E: Auditor-general’s responsibility for the audit of the reported performance information

57

Annexures F: Assessment of internal controls 59

Management report of City of Tshwane Metropolitan Municipality

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MANAGEMENT REPORT TO THE ACCOUNTING OFFICER ON THE AUDIT OF

THE CITY OF TSHWANE METROPOLITAN MUNICIPALITY FOR THE YEAR

ENDED 30 JUNE 2018

INTRODUCTION

1. The purpose of the management report is to communicate audit findings and other key audit

observations to the accounting officer and does not constitute public information. This

management report includes audit findings arising from the audit of the financial statements,

performance information and compliance with legislation for the year ended 30 June 2018.

2. These findings were communicated to management and the report details management’s

response to these findings. The report includes information on the internal control deficiencies

that we identified as the root causes of the matters reported. Addressing these deficiencies will

help to improve the audit outcome.

3. In accordance with the terms of engagement, our responsibility in this regard is to:

express an opinion on the separate financial statements

express a conclusion in the management report on the usefulness and reliability of the

reported performance information for selected pillars, and report the material findings in the

auditor’s report

report on material findings raised on compliance with specific requirements in key

applicable legislation, as set out in the general notice issued in terms of the Public Audit

Act, 2004 (Act No. 25 of 2004) (PAA).

Our engagement letter sets out our responsibilities and those of the accounting officer in detail.

4. This management report consists of the overall message arising from the audit, summary of

key findings and observations, annexures containing the detailed audit findings, annexures to

the report on the audit of performance information as well as the annexure to internal control

deficiencies reported.

5. The auditor’s report is finalised only after the management report has been communicated. All

matters included in this report that relate to the auditor’s report remain in draft form until the

final auditor’s report is signed. In adherence to section 50 of the PAA, we do not disclose any

information obtained during the audit and contained in this management report, unless

requested in terms of section 18 (4) of the PAA.

6. Please note that the information contained in these documents is confidential, privileged and

only for the information of the intended recipient(s) and may not be used, published or

redistributed without the prior written consent of the Auditor-General of South Africa (AGSA).

Any form of reproduction, dissemination, copying, disclosure, modification, distribution and or

publication of this material is strictly prohibited. Should the information be used or processed in

a manner that contravenes any laws in the Republic, the AGSA is fully indemnified from liability


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that may arise from such contravention.

7. The figure that follows provides a pictorial summary of the audit results and our key messages

on how to improve the audit outcomes with the focus on the following:

Status of the audit outcomes

Status of the level of assurance provided by key role players

Status of the drivers of internal controls

Status of risk areas

Root causes to be addressed

Movement from the previous year is depicted as follows:

/ Improved

/ Unchanged/slight improvement/slight regression

/ Regressed


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Stagnation in audit outcomes

Ty pes of audit outcomes

Unqualified with findings

Qualified with findings

Adverse with findings

Disclaimed with findings

Assurance lev els

First lev el of assurance

Senior management

Second lev el of assurance

Municipal manager

Executive Mayor

Audit committee

Internal audit unit

Provides assurance Provides some assuranceProvides limited/no

assurance

Vacant/ not

established

Root causes should be

addressed

1. Senior management slow in responding and effectively addressing root causes for ex ternal audit findings of the municipality. Basic internal controls are not implemented in all instances.

2. Inadequate consequences for poor performance and transgressions.

To improve/maintain the audit outcomes …

… attention is given to the key contr ols and …5 4

… the key role players need to assur e that …2

… the r oot causes are addressed …

1

… the r isk ar eas and …

Risk areas

Good Concerning Intervention required

Quality of

submitted financial

statement

Financial

health

Human ,

r esour ce

management

Infor mation

technology

Quality of

submitted performance

information

Supply

chain management

3

… the best pr actices are maintained.

Status of drivers of internal controls

Leadership

Effective leadership culture

Oversight responsibility

HR Management

Policies and procedures

Audit action plans

IT Governance


Proper record keeping

Processing and reconciling control

Regular reporting

Compliance monitoring

IT system controls

Financial and performance management

Governance

Risk management

Internal audit

Audit committee

Unqualified with no findings

2015-16 2016-17 2017-18

Third lev el of assurance

Municipal council

MPAC


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OVERALL MESSAGE

8. The 2017-18 audit opinion for the City of Tshwane Metropolitan Municipality (CTMM) remained

stagnant as unqualified with findings on compliance with laws and regulations. As highlighted

during the status of accounting records review, the internal control environment showed little

improvement and action plans did not address the root causes, resulting in repeat findings on,

amongst others, material misstatements in the financial statements, non-compliance with the

legislation (including Supply Chaim Management (SCM) prescripts) and inadequate

performance reporting.

9. Consistent with prior years, the CTMM submitted financial statements for audit on time,

however the quality of the annual financial statements is still a concern as material

misstatements were identified and corrected during the audit process. Overall there is a lack of

accountability for implementing basic financial disciplines to ensure financial reporting is

credible, accurate and complete. The CFO and finance officials have not taken full

responsibility for credible financial reporting as evidenced by the number of corrections made

to the financial statements, however support is also needed from other user departments to

ensure credible supporting schedules and listings in the financial statements preparation

process. More stringent review processes should be implemented to eliminate material

misstatements to the financial statements. The continued reliance on auditors to identify errors

in the financial statements, which are then subsequently corrected, is not a sustainable

practice. Adequate records keeping and timely submission of information for audit purposes

remains problematic.

10. During the course of the year, section 56 manager posts had been filled, however the benefits

of these appointments are yet to be realized with the implementation of a new performance

strategy from 2018-19. Some concerns were noted with the appointment processes for officials

as well as senior managers as reported under non-compliance on human resource matters.

11. It must be mentioned that the overall outcome on AOPO improved as no material findings were

raised on the usefulness and reliability of Pillar 1: A city that facilitates economic growth and

job creation and Pillar 3: A city that delivers excellent services and protects the environment.

Non-material findings identified related to eight new indicators included in the SDBIP which

were not well defined for targets to be measurable and verifiable.

12. Matters reported with regards to compliance with laws and regulations are a repeat of those

reported in the prior year audit report and are due to slow response and lack of urgency by

senior management to address prior year findings. Focus areas where instances of non-

compliance were identified include procurement and contract management, expenditure

management, quality of submitted financial statements, revenue management, asset

management and consequence management. In addition, non-compliance findings related to

human resource management were identified in the current year.


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13. Irregular expenditure amounted to R5 017 315 467 (2016-17: R3 370 124 306). Systems to

detect and record irregular expenditure continued to be a concern, as the majority or irregular

expenditure relating to current and prior years, were identified by the auditors. Senior

management should be held accountable for strengthening controls necessary to adhere to

SCM prescripts and prevent irregular expenditure. Irregular expenditure, as well as

unavailability of SCM documents and contracts should be properly investigated and

appropriate consequence management should be instituted against transgressors.

14. The municipality incurred irregular expenditure amounting to R317 834 291 million from non-

compliance with SCM regulation 32 in relation to the appointment of Glad Africa. The non-

compliance could have prevented had the city properly monitored the compliance with the

constitution and SCM regulations.

15. In the context of the current economic climate, the CTMMs financial health remained

constrained. Although the city focussed on improving debt collection, the strategy has not yet

been effective as the debtor collection period has remained 85 days with a provision for

doubtful debts allowance percentage increasing to 67.9% from 62.2%. However, the city’s

current liability position has improved and was driven mainly by an increase in short term

investments, the increase in cash and cash equivalents and the introduction of the sinking fund

during the 2017/18 financial year. However, there was a significant increase in VAT payable

attributable to the VAT rate increase from 14% to 15% during the 2017/18 financial year.

Although the CTMM was solvent as at year-end the majority of the assets are for rendering of

services therefore not marketable. The city’s inability to effectively recover debts will negatively

impact on future capital expenditure and service delivery.

16. The status of the IT environment remained a concern, as the metro still experiences challenges

with implementing basic IT governance principles, IT security and user access policies and

procedures.

17. A follow up audit was done on the multi-year Temba Water Purification Plant project. The

original completion date of August 2015 was not met and due to various delays and extensions

on the project, the completion rate was 99% as at September 2018. The delays resulted in

warranties on project equipment expiring even before the equipment could be installed and the

project cost escalated to R893 million compared to the original contract value of R516 million

with the CTMM also incurring fruitless and wasteful expenditure due to late payments made to

contractors.

18. On Mamelodi Housing Project, the original contract value as agreed with Gauteng Department

of Human Settlements of R14 million was exceeded when compared to payments of R44

million that were made to contractors. Documentation on the change in budget and agreement

was not made available for audit purposes. The planned completion date of June 2018 was not

met and the project was 60% complete as at September 2018. In addition, sub-contractors did

not sign performance agreements, work done by them was not adequately monitored which

resulted in poor quality of workmanship on units completed.


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19. The level of assurance provided remained stagnant across all role players. Although various

governance structures such as municipal continuous audit monitoring (MCAM) have been

implemented in the city and escalation processes are available to utilise should matters remain

unresolved, the effectiveness of these structures did not yet result in improved audit outcomes.

The City Manager should focus on how to improve the audit outcomes by holding senior

management accountable for implementing the required controls to ensure credible financial

and performance reporting and compliance with laws and regulations. Governance structures

of the audit committee and MPAC continue to provide some assurance.

SECTION 1: Interactions with stakeholders responsible for oversight and

governance

20. During the audit cycle, we met with the following key stakeholders responsible for oversight

and governance to communicate matters relating to the audit outcome and matters identified

during our status of records review of the metropolitan municipality:

Key stakeholder

Purpose of interaction Actual number of meetings

Impact and outcome of interaction

Mayor/MMC As customary, the audit outcomes were shared with the political leadership during December 2017 and February 2018.

2 The Mayor committed to continue efforts in improving audit outcomes and addressing the financial turnaround strategy for the city to ultimately improve financial sustainability.

Accounting officer

Debrief relating to the 2016-17 audit, status of accounting records review, discussion around the commencement of the 2017-18 audit, engagement on the possible bond issue and regular audit progress meetings.

6 The City Manager’s request and commitment in the presence of the CFO was to complete the audit and consolidation by 31 October and 30 November respectively. This commitment was made to assist him in improving governance over the City and implementing corrective measures timeously.

Delays in submission of information meant that the initial deadline agreed with the City Manager could not be met.

Council Table the 2016-17 annual report.

1 The interaction was effective and approval was granted for the annual report tabled. No direct impact emerged to positively enhance the audit outcomes.

Municipal Public Accounts Committee (MPAC)

Briefing on the 2016-17 audit outcomes, quarterly interactions and assessment of MPAC

4 Concerns were raised surrounding the slow progress by officials in addressing prior year audit findings and the quality of the information submitted, credibility of financial reporting by senior management. Further concerns were raised around the control environment resulting in investigations reported and


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Key stakeholder

Purpose of interaction Actual number of meetings

Impact and outcome of interaction

the outcome.

Audit committee

Quarterly interactions around risk, performance, financial and internal audit of the City and its entities.

4 Interactions were robust surrounding the risk management strategy, non-achievement of performance, poor quality financial reports.

Furthermore, the APC interrogated internal audit reports, and conducted thorough reviews on the annual financial statements prior to submission for audit. It is unfortunate that AC recommendations were not timeously implemented by management.

21. At these interactions, we shared the following key matters affecting audit outcomes with the

auditee:

Audit approach and significant risks emanating from the audit;

Root causes and the implementation of adequate action plans to address key control

deficiencies in the internal control environment.

The outcome of the status of records review for the first two quarters of the 2017-18

financial year portrays an overall stagnation in the control environment with similar control

deficiencies identified compared to the previous financial year.

22. Some stakeholders made commitments to implement initiatives that can improve the audit

outcome. The commitments given and the progress of previous commitments are included in

section 3.1, which deals with the assessment of assurance providers.


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SECTION 2: Matters relating to the auditor’s report

AUDIT OF THE FINANCIAL STATEMENTS

23. We identified material misstatements in the financial statements during the audit. These misstatements were not prevented or detected by the

municipality’s system of internal control. These material misstatements also constitute non-compliance with section 122 of the Municipal Finance

Management Act (MFMA).

Material misstatement Impact

R current year

Impact

R previous year

Financial statement item

Finding (Include a brief description of the misstatement as

per the findings and the auditor’s report. Include the reasons for the auditee not correcting the

misstatement when applicable.)

Occurred in prior year

(Insert Yes/No)

Material misstatements corrected

Receivables Overstatement of consumer debtors due to the change in the impairment methodology

Yes 2 692 920 472 2 292 345 541

Debt impairment Understatement of debt impairment in the statement of financial performance due to the change in the impairment methodology

No 395 995 240 139 264 237

Cash flow statement Cash Flow Statement

No 581 263 914

Disclosure

Irregular expenditure Completeness of irregular expenditure (Irregular expenditure identified prior year but not disclosed in the current year)

No 837 785 048

Commitments Overall misstatements identified Yes 1 220 120 399 26 573 982 650


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MATTERS TO BE BROUGHT TO THE ATTENTION OF USERS

Key audit matters

24. Key audit matters are those matters that, in our professional judgement, were of most

significance in our audit for the current period. These matters were addressed in the context of

our limited audit of the financial statements as a whole and in forming an opinion thereon and

we do not provide a separate opinion or conclusion on these matters. The following key audit

matter will be included in our auditor’s report.

Key audit matter How the matter was addressed in the audit

Significant difficulties encountered in obtaining information requested for audit purposes

The engagement letter signed by the accounting officer agreed to provide requested documents within five working days. The municipality was unable to provide in some cases the requested documents within the agreed time. These significant difficulties adversely impacted the allocated time for audit execution and the evaluation of audit evidence.

Accordingly, the significant difficulties in providing requested information on time and aiding the audit team with access to the SAP system has impacted on the audit and is considered a key audit matter.

To monitor the submission of documents in response to the request for information, a tracking mechanism was set up between the municipality and senior members of the audit team. Where information was not provided timeously, concerns were escalated to leadership through the submission of progress reports to the accounting officer on a weekly basis and holding weekly audit steering committee meetings.

Some long outstanding information has only been made available in November for audit purposes however constraints over access to the SAP system have been resolved.

I am satisfied that all material outstanding information has been provided and sufficient time was available to assess and report where applicable.

Material uncertainty relating to financial sustainability 25. As disclosed on note 65 to the financial statements, the liquidity ratios were below the

acceptable norm as result of the non-achievement of debtor’s collection rate which will impact

negatively on future cash flows.

Emphasis of matter paragraphs

26. The following emphasis of matter paragraphs will be included in our auditor’s report to draw the

users’ attention to matters presented or disclosed in the financial statements:


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Restatement of corresponding figures

27. As disclosed in note 46 to the financial statements, the corresponding figures for 30 June 2017

were restated as a result of errors in the financial statements of the municipality at, and for the

year ended, 30 June 2018.

Material uncertainties

28. With reference to note 54 to the financial statements, the municipality is a defendant in various

lawsuits. The outcome of these matters cannot presently be determined and/or reliably

measured and no provision for any liabilities that may result has been made in the financial

statements.

Material impairments

29. As disclosed in note 22 to the financial statements, the consumer debtors’ balance has been

significantly impaired. The allowance for impairment of consumer debtors’ amounts to

R8,172 billion (2016-17: R6,133 billion), which represents 70.9% (2016-17: 60.7%) of total

consumer debtors. The contribution to the provision for debt impairment, as disclosed on note

35 to the financial statements, was R1,712 million (2016-17: R1,272 million).

Material losses

30. As disclosed in note 59 to the financial statements, material electricity losses of R1,524 billion

(2016-17: R1,563 billion) was incurred, which represents 20,32% (2016-17: 20.58%) of total

electricity purchased. Technical losses amounted to R525 million (2016-17: R531 million) and

was due to the electricity that was lost when it was distributed from the source of generation

through the transmission and distribution network to the final consumer. Non-technical losses

amounted to R999 million (2016-17: R1,031 billion) and were due to administrative and

technical errors, negligence, theft of electricity, tampering with meters and connections which

form part of illegal consumption and faulty meters.

Other matter paragraphs

31. The following other matter paragraph will be included in our auditor’s report to draw the users’

attention to matters regarding the audit, the auditor’s responsibility’s and the auditor’s report:

Unaudited disclosure note

32. In terms of section 125(2)(e) of the MFMA, the municipality is required to disclose particulars of

non-compliance with the MFMA in the financial statements. This disclosure requirement did not

form part of the audit of the financial statements and accordingly we do not express an opinion

thereon

AUDIT OF THE ANNUAL PERFORMANCE REPORT

Introduction and scope

33. We have undertaken a reasonable assurance engagement on the reported performance

information for the following selected pillars presented in the annual performance report of the

municipality for the interim period ended 30 June 2018:


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Pillars Pages in annual

performance

report

Opinion on

usefulness

and reliability

assessment

Movement

Pillar 1: A city that facilitates economic growth and job creation

x – x

Unqualified

Pillar 3: A city that delivers excellent services and protects the environment

x – x

Unqualified

34. We conducted our reasonable assurance engagement in accordance with the International

Standard on Assurance Engagements, ISAE 3000: Assurance engagements other than audits

or reviews of historical financial information.

35. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis

for our opinions.

Pillar 1: A city that facilitates economic growth and job creation

Unqualified opinion

36. In our opinion, the reported performance information for Pillar 1 – A city that facilitates

economic growth and job creation, is useful and reliable, in accordance with the applicable

criteria as developed from the performance management and reporting framework as set out in

annexure D to this report.

Pillar 3 – A city that delivers excellent services and protects the environment

Unqualified opinion

37. In our opinion, the reported performance information for Pillar 3 – A city that delivers excellent

services and protects the environment, is useful and reliable in accordance with the applicable

criteria as developed from the performance management and reporting framework as set out in

annexure D to this report.

Other matters

38. We draw attention to the matters below. Our opinion is not modified in respect of these matters.

Achievement of planned targets

39. Refer to the annual performance report on pages x to x; for information on the achievement of

planned targets for the year.


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Adjustment of material misstatements

40. We identified material misstatements in the annual performance report submitted for auditing.

These material misstatements were on the reported performance information of Pillar 3 – A city

that delivers excellent services and protects the environment. As management subsequently

corrected the misstatements, we did not raise any material findings on the usefulness and

reliability of the reported performance information.

Responsibilities of the accounting officer for the reported performance information

41. The accounting officer is responsible for the preparation of the annual performance report in

accordance with the prescribed performance management and reporting framework, as set out

in annexure D to this report and for such internal control as the accounting officer determines is

necessary to enable the preparation of performance information that is free from material

misstatement in terms of its usefulness and reliability.

Auditor-general’s responsibilities for the reasonable assurance engagement on the

reported performance information

42. Our objectives are to obtain reasonable assurance about whether the reported performance

information for the selected pillars presented in the annual performance report is free from

material misstatement, and to issue a management report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that the assurance

engagement conducted in accordance with the relevant assurance standards will always detect

a material misstatement when it exists. Misstatements can arise from fraud or error and are

considered material if they could reasonably be expected to influence the relevant decisions of

users taken on the basis of the reported performance information.

43. Our procedures address the reported performance information, which must be based on the

approved performance planning documents of the municipality. We have not evaluated the

appropriateness of the performance indicators established and included in the planning

documents. Our procedures do not extend to any disclosures or assertions relating to planned

performance strategies and information relating to future periods that may be included as part

of the reported performance. Accordingly, our opinion does not extend to these matters.

44. A further description of our responsibilities for the reasonable assurance engagement on

reported performance information is included in annexure E to this report.

AUDIT OF COMPLIANCE WITH LEGISLATION

45. Included below are material findings on compliance with selected specific requirements of

applicable legislation, as set out in the general notice issued in terms of the PAA.

Annual financial statements

46. The financial statements submitted for auditing were not prepared in all material respects in

accordance with the requirements of section 122(1) of the MFMA. Material misstatements of

the cash flow statement, receivables, commitments and irregular expenditure identified by the

auditors in the submitted financial statements were subsequently corrected and/or the


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supporting records were provided subsequently, resulting in the financial statements receiving

an unqualified audit opinion.

Revenue management

47. An effective system of internal control for consumer debtors and revenue was not in place as

required by section 64(2)(f) of the MFMA. A high number of consumer debtors were billed on

estimates instead of actual meter readings, while the impairment principles applied for

receivables were revised during the year.

Asset management

48. An effective system of internal control for assets including an adequate asset register was not

in place as there was insufficient accounting over new and completed assets, as required by

section 63(2)(c) of the MFMA.

Expenditure management

49. Money owed by the municipality was not always paid within 30 days or an agreed period, as

required by section 65(2)(e) of the MFMA.

50. Reasonable steps were not taken to prevent irregular expenditure disclosed in note 49, as

required by section 62(1)(d) of the MFMA. The majority of the disclosed irregular expenditure

was caused by non-compliance with regulation 32 of the municipal supply chain management

regulations.

Human resource management

51. Financial interests were not disclosed by the senior managers within 60 days from date of appointment, as required by regulation 36(1)(a) on appointment and conditions of employment of senior managers.

52. Appointments were made in posts which were not provided for in the approved staff establishment, as required by section 66(3) of the MSA.

53. We were unable to obtain sufficient appropriate audit evidence that job descriptions were

established for all posts in which appointments were made, as required by section 66(1)(b) of MSA.

Procurement and contract management

54. Some of the goods and services of a transaction value above R200 000 were procured without

inviting competitive bidding bids, as required by SCM regulation 19(a). Deviations were

approved by the accounting officer even though it was not impractical to invite competitive bids,

in contravention of SCM regulation 36(1). Similar non-compliance was also reported in the

previous year.

55. Measures to combat the abuse of the SCM system were not implemented as per the

requirements of SCM regulation 38(1), because some of the contracts were awarded to


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providers who during the last five years, failed to perform satisfactorily on a previous contract

with the other organ of state.

56. Sufficient appropriate audit evidence could not be obtained that all extensions or modifications to contracts were approved by a properly delegated official, as required by SCM regulation 5.

Consequence management

57. Some of the fruitless and wasteful expenditure incurred by the municipality were not investigated timeously to determine if any person is liable for the expenditure, as required by section 32(2)(b) of the MFMA.

OTHER INFORMATION

58. The accounting officer is responsible for the other information. The other information comprises

the information included in the annual report. The other information does not include the

financial statements, the auditor’s report and those selected pillars presented in the annual

performance report that have been specifically reported in the auditor’s report.

59. Our opinion on the financial statements and findings on the reported performance information

and compliance with legislation do not cover the other information and we do not express an

audit opinion or any form of assurance conclusion thereon.

60. In connection with our audit, our responsibility is to read the other information and, in doing so,

consider whether the other information is materially inconsistent with the financial statements

and the selected pillars presented in the annual performance report, or our knowledge obtained

in the audit, or otherwise appears to be materially misstated.

61. We have nothing to report in this regard.

INTERNAL CONTROLS

62. The significant deficiencies in internal control which led to our overall assessment of the status

of the drivers of key controls, as included in the figure in paragraph 7, is described below. The

detailed assessment of the implementation of the drivers of internal control in the areas of

financial statements, performance reporting and compliance with legislation is included in

annexure F.

Leadership

Effective leadership and oversight

63. The accounting officer and senior management did not adequately perform oversight

responsibility over financial and performance reporting which resulted in material adjustments

required on the financial statements, performance reports and non-compliance with the MFMA

and SCM regulations.

Human Resource management


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64. The appointment process for senior managers is guided by the regulations, however the city

did not comply with these regulations in all instances. Some staff members were appointed

without the necessary qualifications.

Policies and procedure

65. Although policies and procedures are available, there were inadequate monitoring processes in

place to ensure they are complied with. This is evidenced by the misstatements on service

charges, property rates in interest on consumer receivables. The consequences for non-

compliance were not routinely communicated to all staff.

Action plans

66. Although MCAM meetings has been established to track the progress of the implementation of

corrective action taken by the city to avoid repeat findings, the concern was raised that the

corrective action is not taken timeously and that poor attendance and commitment by key city

officials and divisional heads is common practice and compromises the success of the MCAM

process, as evidenced by repeat findings.

Information technology governance framework

67. Progress was made with the implementation of Information technology governance processes

however the following internal control deficiencies should still be addressed by management:

Delays in internal governance processes resulted in the IT security policy, backup and

recovery policy, user access management policy still not yet being updated and/or finalised.

The SAP systems management policy was still not reviewed and updated since 2014 due

to a lack of skills within the information systems division. As a result, there was inadequate

administration of users on the SAP system.

A lack of internal capacity within IT resulted in an ineffective patch management process

and inadequate backup practices.


Proper record keeping

69. Senior management did not ensure the proper record keeping of documents within the finance

unit including human resources, supply chain management, contract management, roads,

water and sanitation and housing departments responsible for service delivery as information

requested for audit purposes were not provided within the agreed timeframe of five (5) days.

Processing and reconciling control

70. Reconciliations between GIS, valuation roll and SAP billing system performed by management

is not effective in identifying accounts not being billed for property rates, which resulted in

material misstatement on revenue. In addition, service charges are estimated for more than 12

months, instead of obtaining actual meter readings, which caused service charges revenue to

be misstated.


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Regular reporting

71. There were inadequate processes in place to ensure KPI’s were well defined, verifiable and

measurable to meet usefulness criteria.

72. Adequate processes are not in place relating to the compilation of underlying records

supporting the financial and performance reporting as material adjustments were required on

the submitted financial statements and annual performance report. Difficulties were

experienced during the audit process in obtaining credible information relating to supporting

schedules specifically on human resource related matters.

73. In addition, there are no adequate processes in place to identify and accurately report on

irregular and fruitless and wasteful expenditure. The audit process is used to identify simple

errors on registers which ideally should be identified by management if proper review process

on supporting schedules were taking place.

74. Information from the accounting (SAP) system does not allow senior management to

adequately monitor contracts and projects in relation to expenditure incurred to date. Adequate

and complete contract and project registers are not maintained to compensate for the lack of

information from the accounting system. This lead to imitation of scope on contract

management and material misstatements on commitments. Instances were also identified were

payment was made for goods and services not received, resulting in additional irregular,

fruitless expenditure.

75. Although there are policies and procedures in place, these are not adequately implemented

since material misstatements were identified revenue and receivables.

Compliance monitoring

76. Systems and processes are in place to monitor non-compliance with applicable laws and

regulations, however not all non-compliance was identified and adequately detected as

reported in paragraphs 51 to 64 above.

IT system controls

77. IT controls pertaining to security management; user access management and change control

were not effectively designed and implemented due to the following key internal control

deficiencies:

SAP systems management policy was still not reviewed and updated due to lack of skills

within the information systems division.

Inadequate administration of users on the SAP system was due to the outdated systems

management policy that was last revised in 2014

User access of terminated users not timely deactivated on the SAP system and this was

due to non-compliance to the defined policy

Access to client administration function was still not restricted and this was due to user

access restrictions not being defined by ICT management


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Access to the transport organiser, transport workbench organizer, custom programs

lock/Unlock transactions in SAP, modify critical tables, maintain profile parameters,

ST_CODE object development related objects were still not restricted and this was results

to the user access restrictions not being defined.

Review of user access rights was still not implemented and this was a result of the systems

management policy that does not provide step by step process to be followed when

reviewing user access rights.

Approximately, one thousand seven hundred (1700) hosts were detected and scanned for

vulnerabilities. The hosts included servers, switches, routers, client machines, printers, etc.

of which four hundred and one (401) had missing patches or were running unsupported

software. Missing patches were attributed to the lack of a formally designed information

communication technology (ICT) security policy and management not performing risk

assessments.

Approximately, seven hundred and sixty-one (761) contained weak/ vulnerable

configurations. The operating system configuration settings were either inadequate or not

configured. Weak configurations were attributed to lack of a formally designed ICT security

policy.

Governance

78. Internal audit had issued reports according to the plan which were relied on for risk

identification however internal audit faces capacity constraints, specifically related to technical

skills which were supplemented by external service providers.

79. Effectiveness of the audit committee was hindered as senior management had not adequately

supported members and timeously implemented recommendations, which could have

prevented some material misstatements on the financial statements, for example the revised

methodology on receivables impairment.

Summary

80. The matters above, as they relate to the findings on compliance with legislation, will be

summarised in the auditor’s report as follows:

81. The accounting officer did not adequately perform oversight responsibilities over financial and

performance reporting resulting in material adjustments required on the financial statements,

performance reports and non-compliance with the MFMA and SCM regulations.

82. The accounting officer and senior management developed a plan to address audit findings, but

adherence to the plan on key items such as procurement, contract management and financial

reporting were not monitored adequately, resulting in a number of repeat findings. The city

failed to properly analyse the control weaknesses and implement appropriate follow up actions

that addressed the root causes of prior year audit findings.


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83. Effective financial and internal control disciplines were not implemented to ensure that the

financial statements are fairly presented. The preparation and review processes were

ineffective which resulted in material adjustments to the annual financial statements.

OTHER REPORTS

84. We draw attention to the following engagements conducted by various parties that have or

could potentially have an impact on the municipality’s financial statements, reported

performance information and compliance with applicable legislation and other related matters.

The reports noted do not form part of the opinion on the financial statements or findings on the

reported performance information or compliance with legislation.

Investigations

85. Thirty-one investigations into alleged irregularities, financial misconduct and fraud were

completed during the year under review. Various measures were recommended, including

taking action against the identified officials, and these were in the process of being

implemented. The recommendations were at various stages of implementation.

45. Three hundred and nineteen cases of alleged irregularities relating to financial misconduct,

fraudulent acts, theft and non-compliance were investigated during the year. The

investigations, including award made to Glad Africa were still in progress at the reporting date

with due date for finalisation not confirmed.

SECTION 3: Assurance providers and status of implementation of

commitments and recommendations

ASSESSMENT OF ASSURANCE PROVIDERS

86. The annual report is used to report on the financial position of auditees, their performance against predetermined objectives and overall governance. One of the important oversight functions of the municipal council is to consider auditees’ annual reports. To perform this oversight function, they need assurance that the information in the annual report is credible. To this end, the annual report includes our auditor’s report, which provides assurance on the credibility of the financial statements and the annual performance report, as well as on the auditee’s compliance with legislation.

87. Our reporting and oversight processes reflect on past events, as they take place after the end

of the financial year. However, management, the leadership and those charged with

governance contribute throughout the year to the credibility of financial and performance

information and compliance with legislation by ensuring that adequate internal controls are

implemented.

88. We assess the level of assurance provided by these assurance providers based on the status

of internal controls (as reported in section 2.6) and the impact of the different role players on

these controls. We provide our assessment for this audit cycle below.

First level of assurance


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Senior management: provides limited assurance

90. Senior management provides limited assurance on the financial and performance

management as well as compliance with laws and regulations. Senior management did not

exercise adequate oversight responsibility regarding financial and performance reports,

compliance with laws and regulations and related internal controls. Furthermore, senior

management had not supported the audit process adequately as information requested was

not provided within the five days agreed, thus audit findings were not responded to in a timely

manner.

Accounting officer: provides some assurance

91. The Accounting officer provides some assurance on the financial and performance

management as well as compliance with laws and regulations. The accounting officer did not

implement adequate consequence management for poor performance and non-compliance

with legislation as the findings identified were similar to those raised previously.

92. Action plans developed to implement internal controls were not monitored effectively by the

accounting officer. MCAM meetings did not yield the required results of improved audit

outcomes. Concerns were raised that corrective action is not implemented timeously, that poor

attendance and commitment by key city officials and divisional heads is common practice and

this compromises the success of the MCAM process. The accounting officer failed to ensure

they take full advantage of the Audit Committee in ensuring his senior managers are held

accountable.

Mayor: provides some assurance

93. The Mayor of the city provides some assurance as the commitments made in the previous

financial year are in progress. However, the financial health of the metro, which is one of the

focus areas for the Mayor has not improved significantly and this was evidenced by the high

debtor’s collection period as well as creditors’ payment period.

94. Although the mayor performed his duties as prescribed by the MFMA, his oversight over the

responsibilities assigned to the accounting officer was not effective in positively influencing

good governance and clean audit administration of the municipality evidenced by the significant

findings and non-compliances identified.

Second level of assurance

Internal audit unit: provides some assurance

95. Legislation in South Africa requires the establishment, roles, and responsibilities of internal

audit units. Internal audit units must form part of the internal control and governance structures

of the municipality and must play an important role in its monitoring activities. Internal audit

must provide an independent assessment of the municipality’s governance, risk management

and internal control processes.


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96. The internal audit unit of a municipality must prepare a risk-based audit plan and internal audit

programme for each financial year. It must advise the accounting officer and report to the audit

committee on implementation of the internal audit plan and matters relating to internal audit;

internal controls; accounting procedures and practices; risk and risk management; performance

management; loss control and compliance with the MFMA. The internal audit unit must also

perform such other duties as may be assigned by the accounting officer.

97. The internal audit unit has made some progress in addressing capacity constraints, although

reliance was still placed on consultants where technical skills were not available within the unit

in the current year. Furthermore, Internal audit is also responding and addressing the prior year

findings reported by the National Treasury Support Unit on their readiness for an external

quality assurance review, although the full implementation will only be evident in future periods.

Of the 67 audits planned for the year, 48 were completed, with most of those being deferred to

the next financial period being of ICT related matters.

Audit committee: provides some assurance

98. The audit committee must be an independent advisory body to the accounting officer and the

management and staff of the municipality on matters relating to internal financial control and

internal audits; risk management; accounting policies; the adequacy, reliability and accuracy of

financial reporting and information; performance management; effective governance; the

MFMA and any other applicable legislation; performance evaluation and any other issues. The

audit committee is also expected to review the annual financial statements to provide an

authoritative and credible view of the municipality, its efficiency and effectiveness and its

overall level of compliance with the applicable legislation.

99. The audit committee had met according to the charter and adequately reviewed financial and

performance reports before submission to the AGSA for audit. Management need to better

support the audit committee by ensuring relevant staff who can respond to questions raised

attend meetings, providing the necessary and requested reports on a timely basis for oversight

and effectively implementing recommendations made by the APC members.

Third level of assurance

Municipal council: provides some assurance

100. The municipal council provides some assurance. Although the municipal council has

established committees to ensure the effective and efficient performance of its oversight role,

this has proved not to be effective since the municipality still has repeat findings. The tone at

the top from council to achieve a clean audit outcome is lacking and concerns were raised on

the reliability of reporting to council since weaknesses were identified on quarterly performance

reports and financial reporting. The council failed to ensure that all cases of unauthorised,

irregular and fruitless and wasteful expenditure are investigated timeously as there were

instances from 2016/17 that were not investigated during the 2017/18 cycle.


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Municipal public account committee (MPAC): provides some assurance

101. The extent to which the council adopted the MPAC guides has been considered in the

assessment of MPAC as an assurance provider. Although MPAC holds robust meetings, often

transgressors were not held accountable for poor performance and other non-compliance

issues. Management can better support the committee by ensuring the right level staff is in

attendance during meetings and that resolutions are effectively implemented.

STATUS OF IMPLEMENTING COMMITMENTS AND RECOMMENDATIONS

102. Below is our assessment of the progress in implementing the commitments made by the

municipality to address the previous and current years’ audit findings.

Key Stakeholder No. Commitment Made by Date Status

Mayor & City Manager

1

Improving the financial health of the metro through the review of legacy contracts, revenue enhancements, eliminating unauthorized, irregular and fruitless and wasteful expenditure and optimizing assets.

S.Msimanga

M. Mosola

January 2018

In progress The financial turnaround strategy was tabled at Council and monitored monthly. Concerns are still raised on the financial health of the municipality and of particular concern is the debtor recovery.

2

Implementing the e-Procurement system to enhance the credibility of the metro’s procurement processes.

In progress The e-Procurement system is still in developmental stages as it is currently only utilized for procurement below R30 000. The system was reviewed and weaknesses were identified within IT governance, security and controls including parameter settings. The system does not reduce instances of cover quoting.

Capacitating the finance department with the required skills and competencies

Addressed Three CA(SA)’s appointed to support the CFO in addition to the CTMM TA scheme that is up and running. The additional capacity in the finance department has not


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yet addressed the concern of credible financial reporting, although support provided to the audit team on components such as asset and verifications improved.

Audit committee 1

Holding senior management accountable for non-attendance and submission of quarterly reports

P. Fourie

November 2017

In progress The City Manager has subsequent to year-end implemented processes to hold senior management accountable. Concerns still exists around the submissions made by finance.

SECTION 4: Specific focus areas

FINANCIAL VIABILITY

103. Our audit included a high-level overview of the City of Tshwane Metropolitan Municipality’s

financial viability as at year-end 30 June 2018. The financial viability assessment provides

useful information for accountability and decision-making purposes and complements the

financial statements by providing insights and perspectives thereon. The financial viability

assessment is expected to enhance timely remedial decision-making and policy reforms where

financial viability may be at risk. It will also highlight to management those issues that may

require corrective action and the urgency and magnitude of the reforms and decisions

necessary to maintain operations. The information should be used to complement, rather than

substitute, management’s own financial assessment.

AS AT 30 JUNE

2018

RESTATED AS AT 30 JUNE

2017*

EXPENDITURE MANAGEMENT

1.1 Creditor-payment period 74 Days 78 Days

REVENUE MANAGEMENT

2.1 Debtor-collection period (after impairment) 78 Days 89 Days

2.2

Debtors impairment provision as a percentage of accounts receivable

70.9% 60.7%

Amount of debtors impairment provision

Amount of accounts receivable

R8 172 340 918

R12 289 719 577

R6 133 922 416

R10 098 684 470


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AS AT 30 JUNE

2018


2017*

ASSET AND LIABILITY MANAGEMENT

3.1

A deficit for the year was realised (total expenditure exceeded total revenue)

No No

Amount of the surplus / (deficit) for the year R2 354 250 734 R2 396 909 676

3.2

A net current liability position was realised (total current liabilities exceeded total current assets)

Yes Yes

Amount of the net current assets / (liability) position

(R2 169 096 198) (R2 554 853 355)

3.3

A net liability position was realised (total liabilities exceeded total assets)

No No

Amount of the net asset / (liability) position R24 955 305 604 R22 577 198 467

CASH MANAGEMENT

4.1

The year-end bank balance was in overdraft No No

Amount of year-end bank balance (cash and cash equivalents) / (bank overdraft)

R482 680 683 R389 527 161

4.2

Net cash flows for the year from operating activities were negative

No No

Amount of net cash in / (out)flows for the year from operating activities

R5 703 702 941 R4 086 776 402

4.3

Creditors as a percentage of cash and cash equivalents

662.8 % 847.1%

Amount of creditors (accounts payable)

Amount of cash and cash equivalents / (bank overdraft) at year-end

R3 202 847 921

R482 680 683

R3 299 626 402

R389 527 161

4.4

Current liabilities as a percentage of next year’s budgeted resources **

42.0% 43.7%

Amount of current liabilities

Amount of next year’s budgeted income **

R11 774 118 343

R28 001 199 000

R10 625 420 339

R24 292 272 010

OVERALL ASSESSMENT

Overall assessment

Red

(Unfavourable –

Intervention

required)

Yellow (Concerning)

* This (these) amount(s) has (have) been adjusted for uncorrected misstatements that resulted in the modification of the audit opinion and will therefore not agree with the financial statement


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AS AT 30 JUNE

2018


2017*

amounts.

** This amount excludes the portion of next year’s budgeted resources that is budgeted to be spent on “employee costs” and "remuneration of councillors”.

Expenditure management

104. The creditor payment period had decreased to 74 days (2016-17: 78 days) driven by trade

payables of R3,202 billion (2016-17: R3,299 billion), which indicates that the days in which the

invoice remains outstanding are still outside the prescribed period of 30 days. The city has

prioritised the payment to suppliers and maintained a tracking system however this has not

been effective since the payment period is outside the prescribed period of 30 days.

Revenue management

105. The debt collection period has remained 85 days with a provision for doubtful debts

allowance percentage increasing to 67.9% from 62.2%. The overall number of days to collect

debtors is due to the current economic environment as consumers are taking longer to pay.

The municipality’s debt collection strategy has also seen a significant increase in the long-term

receivables due to more consumer debtors making arrangements to settle their outstanding

debts, which can negatively impact on the cash flow of the municipality. It is concerning that

revenue generated from other services has decreased by R81,6 million which is mainly due to

the significant reduction in newly identified assets.

Asset and liability management

106. A current asset position was realised in the current year from a current liability position from

the prior year and driven mainly from new call investments of R453 and the introduction of a

sinking fund values at a fair value of R581.

107. The short term investment comprises mainly of unspent grants totalling R469 million

indicating slow movement on CAPEX projects. The municipality is only limited to the DORA

allocation and no additional funding from the national revenue fund has been secured. It is

unlikely that the municipality will be required to sell its non-currents assets, which mainly

consist of service delivery infrastructure, and the likelihood of continued government funding is

not questionable at this stage since there has been no known intention to withdraw funding by

the National/Provincial Treasuries. Additional funding was planned to be obtained through the

planned R1,5 billion bonds issue which has since not materialised. However, given the ratios

above, the municipality might have difficulties with paying some of its long term and short term

debt on time, resulting in additional costs to the municipality in the form of interests and

penalties.


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Cash management

108. Cash on hand at year end had increased to R482,6 million (2016-17: R398,6 million) and

there was also a significant increase in net cash flows from operating activities.

109. Although the creditors as a percentage of cash and cash equivalents improved from

847.1% to 663.6%, creditors are still not paid on time as evidence by the average days it takes

to settle creditors of 74 days, compared to the prescribed 30 days.

PROCUREMENT AND CONTRACT MANAGEMENT

110. The audit included an assessment of procurement processes, contract management and

the related controls in place. These processes and controls must comply with legislation to

ensure a fair, equitable, transparent, competitive and cost-effective supply chain management

(SCM) system and to reduce the likelihood of fraud, corruption, favouritism and unfair and other

irregular practices. A summary of the findings from the audit are as follows:

Irregular expenditure

111. R1 647 191 170 (100%) of the irregular expenditure incurred in the current financial year

was as a result of the contravention of SCM legislation. 91% of this irregular expenditure was

identified during the audit process and not detected by the municipality’s monitoring processes.

The root cause(s) of the lack of effective prevention and detection are inadequate monitoring of

SCM regulation and SCM policy. Of the irregular expenditure incurred, goods and/or services

were not received for expenditure amounting to R3 427 254.

Awards to persons in the service of the state

112. Regulation 44 prohibits awards to persons in the service of the auditee (i.e. employees and

councillors), persons in the service of any other state institution and entities owned/managed

by them. The audit included the identification of such prohibited awards. Further testing was

also performed to determine whether the legislated requirements with regard to declarations of

interest were adhered to.


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113. The findings were as follows:

Finding Number and value of awards made

Number and positions of official/ councillor identified

Number of suppliers identified

Further non-compliance or irregularities regarding the awards

Supplier did not submit declarations of interest

Supplier did not declare interest (false declaration)

Official/ councillor did not declare interest

Official/ councillor was involved in awarding the contract/ quotation

Awards to persons in the service of other state institutions

117

R392 933 895

117 104 25 79

Awards to close family members of persons in the service of the state

114. Awards to providers owned/managed by close family members of persons in the service of

the state, whether at the municipality or any other state institution, are not prohibited. However,

such awards of more than R2 000 must be disclosed in the financial statements of the

municipality for the sake of transparency and as required by SCM regulation 45. The audit

included the identification of awards to close family members. Further testing was performed to

determine whether the financial statement disclosure was made and the legislated

requirements with regard to declarations of interest were adhered to.

The findings were as follows:

Close family members of thirteen officials and councillor had an interest in awards made to the

value of R108 867 715.34. Four of these officials and councillor did not declare their interest.

29% of the awards to close family members, amounting to R73 971 were not disclosed in the

financial statements.

Four providers in which close family members had an interest did not submit their declarations

of interest.

Procurement processes

115. The table below is a summary of findings identified on procurement processes:

Total Quotations Contracts

Number

Value R Number Value R Number Value R

Awards selected for testing

276 4 033 291 856 154 8 291 285 122 4 025 000 571

Expenditure incurred on selected awards –

806 709 889 3 151 920 803 557 969


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Total Quotations Contracts

Number

Value R Number Value R Number Value R

current year

Limitations – awards selected but could not be tested

0 0 0 0 1 536 851 872

Awards on which non-compliance was identified

12 135 907 340

1 94 544 11 4 599 368 797

Irregular expenditure identified

10 587 203 904

1 94 544 9 580 789 950


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Procurement processes – general

The following awards were made to suppliers that are listed on the National Treasury’s

database as persons prohibited from doing business with government.

o Dumela k solutions (pty)ltd (Various quotations)

Twelve deviations with a value of R187 321 035 were procured without inviting competitive

bids, and the deviations were approved even though it was practical to invite competitive bids.

Eleven quotations and contracts with a value of R2 140 288 were awarded to bidders who did

not submit a declaration on whether they are employed by the state or connected to any

person employed by the state.

Seventeen contracts were awarded to bidders based on preference points that were not

calculated according to the requirements of the Preferential Procurement Policy Framework

Act and its regulations.

Seventeen quotations with a value of R262 345 were awarded to bidders who submitted

evidence of cover quoting.

Contract management

Sufficient appropriate audit evidence could not be provided that contracts were amended or

extended with approval by a delegated official, that performance of contractors or providers

was monitored monthly, contract performance and monitoring measures and methods applied

in monitoring contracts were sufficient to ensure effective contract management.

Payments amounting to R3 427 254 were made for goods and services that were either not

received or were not delivered according to the criteria documented in the contract. This

relates to one contract.

Internal control deficiencies

116. Failure to address the internal control deficiencies and audit matters resulting in repeat

audit findings, lack of controls to detect and verify employees and service providers doing

business with the state and lack of policies and procedures on irregular expenditure detection,

identification and investigation resulting in non-compliance findings and material misstatements

in the financial statements submitted for audit.


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FRAUD AND CONSEQUENCE MANAGEMENT

117. The primary responsibility for preventing and detecting fraud rests with management and

those charged with governance. We are responsible for obtaining reasonable assurance that

the financial statements are free from material misstatement, whether caused by fraud or error,

and to issue an auditor’s report that includes our opinion. Due to the inherent limitations of an

audit, there is a risk that some material misstatements, including fraud, may not be detected.

118. The MFMA and its regulations clearly stipulate that matters such as incurring unauthorised,

irregular and fruitless and wasteful expenditure; the possible abuse of the SCM system

(including fraud and improper conduct); and allegations of financial misconduct should be

investigated. Disciplinary steps should be taken based on the results of the investigations. Our

audits included an assessment of the municipality’s management of consequences. The

significant findings are provided below:

Measures to manage consequences

119. The following measures were not implemented to ensure that the environment is conducive

to effective consequence management:

Although the municipality adopted a policy to investigate allegations of misconduct and

disciplinary procedures, the policy was not effectively implemented in all cases.

There was lack of proper record keeping to ensure that complete, relevant and accurate

information is accessible and available to support the processes followed for financial

misconduct, transgressions committed by officials and suppliers of the municipality

Ongoing investigations

120. A total of 319 investigations was ongoing at year-end on allegations relating to financial misconduct, fraud or improper conduct in SCM. Some of these investigations have been ongoing for a long time. The Municipal Regulations on Financial Misconduct, Procedures and Criminal Proceedings and the Disciplinary Regulations for Senior Managers require that each investigation must be completed within 30 days from the date of appointing the investigator. The table below provides a summary of investigations which had not been completed as at year-end:

Total number of ongoing investigations as at year-end 319

Number of SCM-related investigations 22

Number of fraud-related investigations 297

Number of investigations exceeding a period of 3 months 200


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Failure to properly deal with allegations reported in the prior year

121. The table below provides a summary of transgressions from the previous year that were

either not investigated or proper disciplinary steps were not taken after investigation.

Fruitless and wasteful expenditure

Finding Value R

Fruitless and wasteful expenditure

Fruitless and wasteful expenditure identified in the previous year was not investigated to determine whether any person was liable for the expenditure

41 502 534

Allegations of financial misconduct, fraud and improper conduct in SCM

Finding Number of

instances

Allegations against senior manager

Allegations of financial misconduct against senior managers were investigated without

council approved terms of reference

3

Disciplinary hearings were not instituted/held for confirmed cases of financial

misconduct committed by senior managers

3

Allegations against other officials other than senior managers of municipalities

Allegations of financial misconduct against officials were investigated without council

approved terms of reference

10

Disciplinary hearings were not instituted/held for confirmed cases of financial

misconduct

9

Transgressions reported to management for investigation

122. During the previous year’s audit, we reported findings relating to transgressions by officials

or other role players, for management to investigate. During the current year audit, we

performed follow-up tests to determine whether the matters reported were dealt with by

management.

123. The table below provides a summary of the transgressions reported in the previous year

and the year under review that must be investigated and disciplinary steps taken based on the

results of the investigations.


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Finding

Findings raised in the previous year Findings reported in current year

Number of instances

Number of instances investigated

Number of instances resolved from those investigated

Number of instances

Value

(R)

A: Improper conduct in SCM by suppliers

Supplier submitted false declaration of interest

1 0 0 79 73 971.74

Other improper conduct in SCM by suppliers

2 0 0 117 R473 824 704,51

B: Improper conduct in SCM by officials / role players

Official failed to disclose their own interest or that of close family members, partners or associates

1 0 0 4 73 971.74

Other improper conduct in SCM by officials or SCM role players

28 0 0 7 804 323,84

C: Other fraud/corruption allegations (not included above)

Suppliers submitted cover quoting through e-procurement system

2 0 0 17 247 695

124. Unauthorised/irregular/fruitless and wasteful expenditure disclosed in note 47 to 49 to the

financial statements must be investigated to determine whether any official is liable for losses

incurred as a result of this expenditure. Disciplinary steps must be taken against officials who

caused or permitted the unauthorised/irregular/fruitless and wasteful expenditure and losses

incurred must be recovered from the person liable.

125. In terms of section 225 of the IESBA code, we have a responsibility to consider reporting

identified and suspected non-compliance with laws and regulations to an appropriate authority.

USE OF CONDITIONAL GRANTS

126. For the financial year under review, the audit included an assessment of the effectiveness

of the municipality’s use of the following conditional grants received:

Urban settlement development grant (USDG)

Public transport infrastructure and systems grant


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Integrated national electrification programme

Neighbourhood development partnership

Integrated city development grant

127. There are no non-compliance findings that were raised on the use of selected grants.

128. For the USDG grant tested, we selected key projects funded by the grant and audited the

use of grant on the projects. Refer the tables below on water and sanitation and roads

infrastructure and other key projects for findings identified.

Key projects/initiatives funded by the grant

Summary of selected key project and result of testing

Details Details Details

Name of grant USDG USDG USDG

Project/initiative funded by the grant Doornkloof Reservoir

Mamelodi Housing

Extension of Rooiwaal Waste water treatment

PUBLIC PARTICIPATION

129. As part of the audit of predetermined objectives we audit compliance with the provisions of

the Municipal Systems Act relevant to community participation. The following findings were

raised:

Ward committees were not established for the wards in the municipality as required by section

73(1) of the Municipal Systems Act relevant to community participation. A process was instituted

during the year to nominate candidates in all 107 wards in preparation for the ward committee

elections. The by-laws adopted in 2017 however contained a specific requirement that nominated

ward committee members should own property in that particular ward to be eligible for committee

membership. This was deemed unconstitutional as it discriminated against people not owning

property. The review of the by-laws is currently being undertaken, and thereafter the process of

appointment will be done.

USE OF CONSULTANTS

130. The City of Tshwane had material findings in the previous years on immovable assets, the

city took a decision to appoint Akhile management and consulting company to compile the

City’s immovable assets register for all categories of assets for a period of 3 years starting from

29 March 2018.

131. Akhile management and consulting was appointed at a total cost of R536 851 872, the total

expenditure made to the consulting company was R59 493 189.78 for the 2017/18 year of

assessment.


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132. A summary of the significant findings from the audit is as follows:

Planning and appointment process

We have issued a limitation of scope communication to management as we did not receive

documents to support the procurement process that was followed

Internal capacity

Consultants were appointed to perform work of a permanent/continuous nature for which

permanent capacity is needed and no formal attempts were made to create a position in the

establishment.

Internal control deficiencies

Material misstatements were identified on the amount of property, plant and equipment

presented on the financial statements even though the consultants were appointed to do

manage the asset register that is being used to compile the annual financial statements.

Communication between the various user departments and the finance unit is not adequate as

gaps exist in the process where information is not communicated to finance timeously to affect

the necessary changes to the fixed asset register and annual financial statements.

Departments do not submit timeously to finance their technical completion (TECO) certificates

which are supported by invoices or completion certificates to allow finance to capitalise these

assets.

WATER AND SANITATION

133. The audit included an assessment of the water and sanitation service delivery objective of

the municipality. Procedures were performed in relation to the following:

Performance planning and reporting on the provision of water and sanitation services

Planning and budgeting for routine maintenance of water and sanitation infrastructure

Planning and budgeting for new water and sanitation infrastructure projects

Reporting on water losses

A summary of the significant findings from the audit are as follows:

Water services

Planning and reporting on the provision of water services

The backlog at COT in the provision of water services is due to some of the following factor:

The increasing population of the City and the improvements in the socialisation of the

residents in terms of knowing what is due to them and demanding it, places a much higher

demand on the provision of basic services.

The growth in the population especially the reported youth budget together with the backlog

in basic services places the City under severe pressure to deliver and sustain the provision

of good quality basic services.


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The growth in the population is further compounded by resource limitations which impede

the reduction of backlogs.

Furthermore, the growth in informal settlements has led to backlogs in the distribution of

metered water to citizens living in these areas.

Planning and budgeting for routine maintenance of water infrastructure

No condition assessments of water infrastructure were performed to inform the water

infrastructure maintenance plan.

Standard procedures on the condition assessments of water infrastructure were not

established.

There are insufficient engineers/technical staff to conduct the condition assessments in

relation to water infrastructure due to 6 vacancies in the division 3 Engineering Consultant

and 6 Systems Inspectors.

Reporting on water losses

Water losses reported at 28.7% for the financial year, in accordance with the NT MFMA Circular 71 that indicates the norm for water losses is between 15% and 30%

Sanitation services

Planning and reporting on the provision of sanitation services

The target for the provision of sanitation services was not achieved (Nr. of households with

access to sanitation service through sewer connections)

The proposed 2016/2021 MTREF funding for the City is insufficient to meet the ideal of

waterborne sanitation in line with the National targets.

Growth in the population and informal settlements has also contributed to the backlogs

Planning and budgeting for routine maintenance of sanitation infrastructure

No condition assessments of sanitation infrastructure were performed to inform the water

infrastructure maintenance plan.

Standard procedures on the condition assessments of sanitation infrastructure were not

established.

There are insufficient engineers/technical staff to conduct the condition assessments in relation

to water infrastructure due to 6 vacancies in the division, 3 Engineering Consultant and 6

Systems Inspectors.

134. The audit included obtaining an understanding of key water and sanitation infrastructure

projects undertaken at the municipality. In the context of these key projects, we evaluated

whether the municipality executed its mandate in accordance with the predetermined

objectives, whether the procurement processes were complied with, whether the transactions

were recorded appropriately in the financial statements, and whether quality goods and

services were delivered which agreed with the initial requirements.

135. The table below summarises the audit findings on the key projects.


38

Summary of selected key projects and results of testing

Water

/Sanitation infrastructure

Water /Sanitation

infrastructure

Water /Sanitation

infrastructure

Water /Sanitation

infrastructure

Key project name NEW DOORNKLOOF RESERVIOR

NEW KLIPGAT HOSPITAL

RESERVIOR

EXTENSION OF ROOIWAAL

WASTE TREATMENT

TEMBA WATER TREATMENT PLANT

Brief description of key project Construction monitoring and construction of the feeder pipe, the outflow pipe

The planning, design, tender

procedure, construction

monitoring and construction of the feeder pipe, the outflow pipe

and the new additional Klipgat

Hospital 10 Ml

Upgrade of the Rooiwaal waste water treatment

plant

Upgrade of the Temba water

treatment plant

Project commenced as planned Yes Yes Project on final stage of tender

process

No

Project completed within defined duration (applicable if completed)

Still within contracting

period

No N/A No

Status of completion (applicable if WIP)

In progress In progress Project on final stage of tender

process

In progress

Available budget for the year

R 9 000 000 R 13 715 573 Project still on tender stage no

budget allocation

R 50 000 000

Actual amount spent in current year

R 8 928 926 R 8 928 926 Project still on tender stage

R 37 166 749

Total project budget (multi-year)

(Include detail) (Include detail) Project still on tender stage

R 516 624 781

Actual amount spent from initiation to date

R 36 731 094 R 57 429 747 Project still on tender stage

R 893 911 337

Source of funding USDG USDG USDG USDG

Key performance indicator and target as per annual or strategic planning document (if applicable)

N/A N/A N/A N/A


39

Summary of selected key projects and results of testing

Water

/Sanitation infrastructure

Water /Sanitation

infrastructure

Water /Sanitation

infrastructure

Water /Sanitation

infrastructure

Key project name NEW DOORNKLOOF RESERVIOR

NEW KLIPGAT HOSPITAL

RESERVIOR

EXTENSION OF ROOIWAAL

WASTE TREATMENT

TEMBA WATER TREATMENT PLANT

Audit findings

Overspending or underspending on budget available for the year

No Yes N/A

Yes

Overspending or underspending on total project budget (multi-year)

No

No

N/A Yes

Planned / Revised annual target was achieved

No

Yes

N/A Yes

Planned /Revised multi-year target was achieved

No Yes

N/A Yes

Findings identified on fruitless and wasteful expenditure

No

No

N/A Yes

Findings identified on consequence management

No Yes N/A Yes

136. For Doornkloof reservoir no findings were identified. The project for Rooiwaal waste water

treatment plant is still in planning phase (final tender stage).


40

137. Key findings on the Klipgat and Temba projects include:

New Klipgat Hospital Reservoir:

During the audit of the New Klipgat Reservoir it was noted that the contract the contractual period for the completion of the project had lapsed, no evidence was provided indicating that the timelines of the contract was revised as the contractor was still on site at the time of the site visit in September 2018.

The initial duration of the project time was from the 24 June 2015 to the 17 of August 2016.

However, the project had constant delays in achieving its original completion date.

The original completion date was then revised from August 2016 to March 2017, the

contractor did not meet the revised completion date and the municipality that further revised

the contractual completion to 28 February 2018.

The project did not achieve its planned completion date and the project was delayed due to

site disruption, site conditions, lack of skilled workers, community demands and continuous

payment delays by the municipality.

The contractor was awarded the contractor for the value of R 36 731 094, the municipality

made payments of 95% of the contract value while no payment was made by the

municipality for four of the payment certificates. The contractor also experienced cash flow

problems due to non-payment that impacted progress on site.

Temba Waste Water Treatment Plan:

The project commenced on 5 May 2013, with a planned completion date of 5 August 2015 ,

the completion date was then revised to 11 January 2018. The project was 99 % complete

and in commissioning phase. The project had still not attained its revised completion date

and the project had only progressed by 5% in the past year.

At the time of the site visit conducted in September 2018, the contractor was on site without

an approved extension for time as the City did not timeously approve the extension of time.

The cost of the project has increased significantly from its inception, furthermore the

contractor charged the municipality for Interest on late payments.

The municipality did not ensure that all staff required the maintenance of the plant was

appointed and that the appointed staff was timeously trained.

Warranties have expired on the equipment that has been procured for the site. The list of

equipment with the expired warranties have not been provided.


41

ROADS INFRASTRUCTURE

138. The audit included an assessment of the roads infrastructure service delivery objective.

Procedures were performed in relation to the following:

Planning for renewal and routine roads maintenance projects

Planning for new or refurbished roads infrastructure projects

Follow-up on the previous year’s findings

139. During the audit conducted, no findings were noted on the planning for renewal routine

maintenance of roads.

Planning for new or refurbished roads infrastructure projects

140. The audit included obtaining an understanding of key roads infrastructure projects

undertaken at the municipality. In the context of these key projects, we evaluated whether the

municipality executed its mandate in accordance with the predetermined objectives, whether

the procurement processes were complied with, whether the transactions were recorded

appropriately in the financial statements, and whether quality goods and services were

delivered which agreed with the initial requirements. No findings were noted on the selected

road infrastructure project.

141. The table below summarises the audit findings on the key projects

Key project name UPGRADE OF SOSHANGUVE BLOCK GG ROADS

Brief description of key project Upgrading of roads and stormwater systems in Soshanguve Block GG Central, (internal roads, road signs, storm water pipes) In and around the area improving the roads systems

Project commenced as planned Yes


Yes


Completed


R 25 925 000

Actual amount spent in current year R 24 924 079


R62 866 420


42

Key project name UPGRADE OF SOSHANGUVE BLOCK GG ROADS


R 69 970 449

Source of funding USDG


N/A

Audit findings No findings were reported. This project was managed well, completed within time and agreed budget.

VALUE CHAIN OF KEY PROJECTS

142. The audit included obtaining an understanding of key projects undertaken at the metro in

order to deepen our understanding of the environment it operates in and its strategic

objectives.

In the context of these key projects, we evaluated whether the municipality executed its

mandate in accordance with the predetermined objectives, whether the procurement

processes were complied with, whether the transactions were recorded appropriately in the

financial statements, and whether quality goods and services were delivered.

143. The table below summarises the audit findings on the key projects.

Key project name FORT WEST HOUSING

PHASE 4 MAMELODI ERF 259355

Brief description of key project Mega Housing Project in Fort west phase 4 & 5 total

of 128 RDP units is a multi-year projects, with

the main aim of provision of housing, roads & water

and sanitation infrastructure.

Construction of 72 walk-up BNG units at Mamelodi, including Bulk services

infrastructure a multi-year project

Project commenced as planned Yes Yes


No No


Completed and Commissioned

In progress


R 193 495 810 Not provided –finding raised


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Key project name FORT WEST HOUSING

PHASE 4 MAMELODI ERF 259355

Actual amount spent in current year Rxx R 44 866 645


R193 495 810 R64 832 651


R 185 865 529 R 44 866 577

Source of funding HSDG & USDG HSDG & USDG


N/A N/A

Audit findings

Planned / Revised annual target was achieved

No Yes

Planned /Revised multi-year target was achieved

No Yes

Findings identified on the quality goods and services delivered

No Yes

Quality goods and services delivered agreeing to initial requirements

No

Yes (Quality issues were noted

on some of the units constructed by sub-

contractors)

144. The key findings from testing the value chain of the key projects are listed below:

MAMELODI ERF 259355:

During the audit it was noted that the appointment letter for the construction of units for

the project and the subsidy agreement was not aligned. No evidence was provided on

the revision of the budget allocation and number of units.

The municipality requested an extension of time from the Gauteng Department of

Human Settlement, the municipality did not provide the motivation for the approval,

number of days requested and associated cost of the approval. At the time of the visit

by the team in September 2018, the project is 4 months behind schedule

Quality issued were noted on some of the completed structures due to a lack of

monitoring by the contractor on the work completed by sub-contractors.


44

SECTION 5: Using the work of internal auditors

145. The auditing standards allow external auditors the optional use of the work of internal audit

for external audit purposes and for direct assistance. We have used the following internal audit

reports for risk assessment:

Abuse of overtime claims report

AOPI report

Corporate governance of ICT policy framework and governance of ICT policy framework

assessment

Computer audit – E-leave review

Supply chain management – irregular expenditure

Supply chain management - EProcurement

EPWP reviews

MSCOA review

SECTION 6: Emerging risks

Accounting, performance management/reporting and compliance matters

New pronouncements

Standards of GRAP

The ASB has issued the following GRAP pronouncements, with effective dates as indicated:

GRAP pronouncement Effective date

GRAP 18 - Segment reporting 1 April 2020

GRAP 20 - Related-party disclosures 1 April 2019

GRAP 32 - Service concession arrangements: grantor 1 April 2019

GRAP 34 - Separate financial statements To be determined

GRAP 35 - Consolidated financial statements To be determined

GRAP 36 - Investments in associates and joint ventures To be determined

GRAP 37 - Joint arrangements To be determined

GRAP 38 - Disclosure of interests in other entities To be determined

GRAP 108 - Statutory receivables 1 April 2019

GRAP 109 - Accounting by principals and agents 1 April 2019

GRAP 110 - Living and non-living resources 1 April 2020

IGRAP 17 - Service concession arrangements where a grantor controls a significant residual interest in an asset

To be determined

IGRAP 18 - Recognition and derecognition of land 1 April 2019


45

GRAP pronouncement Effective date

IGRAP 19 - Liabilities to pay levies 1 April 2019

Subsequent events

146. Subsequent events were identified during the audit process which were not adequately

disclosed in the financial statements. This related to asset write-offs and the Mamelodi

rondawels that burned down. Management subsequently corrected the disclosure note to

account for these matters.

Audit findings on the annual performance report that may have an impact

on the audit opinion in future

147. The planned and reported performance information of selected pillars was audited against

the following additional criteria as developed from the Performance Management Reporting

Framework:

Presentation and disclosure – Overall presentation:

Overall presentation of the performance information in the annual performance report is

comparable and understandable

Relevance – Completeness of relevant indicators:

Completeness of relevant indicators in terms of the mandate of the auditee, including:

o relevant core functions are prioritised in the period under review

o relevant performance indicators are included for the core functions prioritised in the period

under review

No material findings were identified in respect of the additional criteria


46

SECTION 7: Entities controlled by the municipality

148. In terms of the MFMA, the municipality has certain oversight responsibilities regarding

municipal entities over which it has control. The audit outcomes of these entities are

summarised below.

Name of entity Audit outcome Significant deficiencies in internal control

Financial statement

opinion

Findings on the

performance report

Findings on

compliance

Leadership Financial and performance management

Governance

As

se

ssm

en

t

Mo

vem

en

t

As

se

ssm

en

t

Mo

vem

en

t

As

se

ssm

en

t

Mo

vem

en

t

Tshwane Economic Development Agency (TEDA)

Housing Company Tshwane (HCT)

Sandspruit Works Association (SWA) - dormant

Improved Unchanged Regressed



47

SECTION 8: Ratings of detailed audit findings

149. For the purposes of this report, the detailed audit findings included in annexures A to C have

been classified as follows:

Matters to be included in the auditor’s report: these matters should be addressed as a

matter of urgency.

Other important matters: these matters should be addressed to prevent them from leading

to material misstatements of the financial statements or material findings on the

performance report and compliance with legislation in future.

Administrative matters: these matters are unlikely to result in material misstatements of the

financial statements or material findings on the performance report and compliance with

legislation.

SECTION 9: Conclusion

150. The matters communicated throughout this report relate to the three fundamentals of internal

control that should be addressed to achieve sustained clean administration. Our staff remains

committed to assisting in identifying and communicating good practices to improve governance

and accountability and to build public confidence in government’s ability to account for public

resources in a transparent manner.

Yours faithfully

Mabatho Sedikela Corporate Executive

3 December 2018

Enquiries: Belinda Beddie Telephone: 011 703 7629 Email: [email protected]

Distribution: CFO Audit committee Head of internal audit unit

mailto:[email protected]


48

Annexure D: Performance management and reporting framework

The Performance Management and Reporting Framework (PMRF) consists of the following:

Legislation applicable to performance planning, management and reporting, which includes the

following:

Municipal Finance Management Act of South Africa, 2003 (Act No. 56 of 2003) (MFMA)

Municipal Systems Act (Act No. 32 of 2000)

Regulations for planning and performance management, 2001, issued in terms of the Municipal

Systems Act.

Municipal performance regulations for municipal managers and managers directly accountable to

municipal managers, 2006, issued in terms of the Municipal Systems Act.

The Framework for Managing Programme Performance Information (FMPPI), issued by the

National Treasury. This framework is applicable to all spheres of government, excluding parliament

and provincial legislatures.

Circulars and guidance issued by the National Treasury regarding the planning, management,

monitoring and reporting of performance against predetermined objectives.


49

Annexure D – Criteria developed from the performance management and reporting framework

Criteria

References to PMRF per institution

Municipalities Municipal Entities

Consistency: Objectives, performance indicators and targets are consistent between planning and reporting documents.

Reported strategic or development objectives are consistent or complete when compared to planned objectives.

Section 121(3)(f) of the MFMA

Section41 (a) - (c) & 46 of the MSA

Section 121(4)(d) of the MFMA

Changes to strategic or development objectives are approved Section25(2) of the MSA Section54(1)(c) of the MFMA

Reported indicators are consistent or complete when compared to planned indicators Section 121(3)(f) of the MFMA


Section121(4)(d) of the MFMA

Changes to indicators are approved Section 25(2) of the MSA Section54(1)( c) of the MFMA

Reported targets are consistent or complete compared to planned targets Section 121(3)(f) of the MFMA


Section 121(4)(d) of the MFMA

Changes to targets are approved Section25(2) of the MSA Section 54(1)( c) of the MFMA

Reported achievements are consistent with the planned and reported indicator and target

Section 121(3)(f) of the MFMA Section 121(4)(d) of the MFMA

Measurability: Performance indicators are well defined and verifiable, and targets are specific, measurable and time bound.

A performance indicator is well defined when it has a clear, unambiguous definition so that data will be collected consistently and is easy to understand and use.

Chapter 3.2 of the FMPPI

A performance indicator is verifiable when it is possible to validate or verify the processes and systems that produce the indicator.



50

Criteria

References to PMRF per institution

Municipalities Municipal Entities

A target is specific when the nature and required level of performance of the target is clearly identifiable.


A target is measurable when the required performance can be measured. Chapter 3.3 of the FMPPI

A target is time bound when the timeframes for achievement of targets are indicated. Chapter 3.3 of the FMPPI

Relevance: Performance indicators relate logically and directly to an aspect of the institution’s mandate and the realisation of its strategic goals and objectives.

The performance indicator and target relates logically and directly to an aspect of the institution’s mandate and the realisation of its strategic goals and objectives.


Presentation and disclosure: Performance information in the annual performance report are presented and disclosed in accordance with the requirements contained in

the legislation, frameworks, circulars and guidance.

Actual performance compared to planned targets and prior year performance is disclosed in the annual performance report

Section 46 of the MSA Criteria not applicable

Measures taken to improve performance are disclosed in the annual performance report


Measures taken to improve performance are corroborated with audit evidence


Reliability: Recording, measuring, collating, preparing and presenting information on actual performance achievements is valid, accurate and complete.

Reported performance occurred and pertains to the reporting entity.

Section 45 of the MSA

Chapter 5 of the FMPPI

Section 45 of the MSA

Chapter 5 of the FMPPI Amounts, numbers and other data relating to reported performance is recorded and reported correctly.

All actual performance that should have been recorded is included in the reported performance information.


51


52

Annexure E: Auditor-general’s responsibility for the audit of the

reported performance information

As part of our engagement conducted in accordance with ISAE 3000, we exercise professional

judgement and maintain professional scepticism throughout our reasonable assurance

engagement on reported performance information for selected pillars.

We are independent of the metro in accordance with the International Ethics Standards Board for

Accountants’ Code of ethics for professional accountants (IESBA code) together with the ethical

requirements that are relevant to my audit in South Africa. We have fulfilled our other ethical

responsibilities in accordance with these requirements and the IESBA code.

Quality control relating to assurance engagements In accordance with the International Standard on Quality Control 1, the Auditor-General of South

Africa maintains a comprehensive system of quality control that includes documented policies and

procedures on compliance with ethical requirements and professional standards.

Reported performance information In addition to our responsibility for the assurance engagement on reported performance

information as described in the auditor’s report, we also:

identify and assess risks of material misstatement of the reported performance information,

whether due to fraud or error, design and perform audit procedures responsive to those risks, and

obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. In making

those risk assessments, we consider internal control relevant to the management and reporting of

performance information per selected pillars in order to design audit procedures that are

appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the metro’s internal control.

evaluate the documentation maintained by the metro that supports the generation, collation,

aggregation, monitoring and reporting of performance indicators/measures and their related targets

for the selected pillars.

evaluate and test the usefulness of planned and reported performance information, including

presentation in the annual performance report (municipalities only), its consistency with the

approved performance planning documents of the metro and whether the indicators and related

targets were measurable and relevant.

evaluate and test the reliability of information on performance achievement to determine whether it

is valid, accurate and complete.

Communication with those charged with governance We communicate with the accounting officer regarding, among other matters, the planned scope

and timing of the audit and significant audit findings, including any significant deficiencies in

internal control that we identify during our audit.


53

We also confirm to the accounting officer that we have complied with relevant ethical requirements regarding independence, and communicate all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards.


54

Annexure F: Assessment of internal controls

Below is our assessment of implementing the drivers of internal control based on significant deficiencies identified during our audit of the financial statements, the annual performance report and compliance with legislation. Significant deficiencies occur when internal controls do not exist, are not appropriately designed to address the risk, or are not implemented. These either had caused, or could cause, the financial statements or the annual performance report to be materially misstated, and material instances of non-compliance with legislation to occur.

The internal controls were assessed as follows:

The required preventative or detective controls were in place.

Progress was made on implementing preventative or detective controls, but improvement is still required, or actions taken were not or have not been sustainable.

Internal controls were either not in place, were not properly designed, were not implemented or were not operating effectively. Intervention is required to design and/or implement appropriate controls.

The movement in the status of the drivers from the previous year-end to the current year-end is indicated collectively for each of the three audit dimensions under the three fundamentals of internal control. The movement is assessed as follows:

Improved

Unchanged

Regressed

Financial statements Performance reporting

Compliance with legislation

Current year

Prior year Current year


Prior year

Leadership

Overall movement from previous assessment

Provide effective leadership based on a culture of honesty, ethical business practices and good governance, and protecting and enhancing the best interests of the entity

Exercise oversight responsibility regarding financial and performance reporting and compliance as well as related internal controls


55



Current year



Prior year

Implement effective human resource management to ensure that adequate and sufficiently skilled resources are in place and that performance is monitored

Establish and communicate policies and procedures to enable and support the understanding and execution of internal control objectives, processes and responsibilities

Develop and monitor the implementation of action plans to address internal control deficiencies

Establish and implement an information technology governance framework that supports and enables the business, delivers value and improves performance



Implement proper record keeping in a timely manner to ensure that complete, relevant and accurate information is accessible and available to support financial and performance reporting

Implement controls over daily and monthly processing and reconciling transactions

Prepare regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information

Review and monitor compliance with applicable legislation

Design and implement formal controls over information technology systems to ensure the reliability of the systems and the availability, accuracy and protection of information

N/A

N/A

N/A

N/A

Governance



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Current year



Prior year

Implement appropriate risk management activities to ensure that regular risk assessments, including the consideration of information technology risks and fraud prevention, are conducted and that a risk strategy to address the risks is developed and monitored

Ensure that there is an adequately resourced and functioning internal audit unit that identifies internal control deficiencies and recommends corrective action effectively

Ensure that the audit committee promotes accountability and service delivery through evaluating and monitoring responses to risks and overseeing the effectiveness of the internal control environment, including financial and performance reporting and compliance with legislation

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