2 Aug

Municipalities In Financial Trouble

Blog, 02/08/2016

While the number of municipalities with clean audits has increased by 14 to 54 in the 2014/15 financial year, the financial health of 92% of the country’s 278 municipalities remains  concerning or requires intervention, the Auditor General Kimi Makwetu found.

Makwetu announced the consolidated report on audit outcomes for local government in Pretoria on Wednesday, which paints a picture of improving financial reporting, but deteriorating financial management. The report is based on audit reports for the financial year ended 30 June 2015. It also gave an overview of the trends over last five years, which constitutes the term of the current elected councils.

A total of 109 municipalities (40%) got an unqualified report with findings, 76 (28%) a qualified report with findings, 4 an adverse report and 29 (10%) a disclaimer. The audit reports of six municipalities (2%) were outstanding.

The improved reporting seems to be largely the result of changes made to the financial statements during the audit process.

Makwetu said while 59% of municipalities received unqualified audit reports (with and without findings), only 26% “would have achieved an unqualified audit opinion had we (his office) not identified the misstatements and allowed them to make corrections.”

The use of consultants did not necessarily ensure fewer misstatements in the financial statements that were submitted. “We found that at 105 municipalities (42%), the financial statements submitted for auditing included material misstatements in the areas in which consultants did work, which meant the misstatements were identified and corrected by the audit process and not by the consultant. This remains a concern regarding the effective use of these consultants,” he said.

During the reporting period 88% of all municipalities, that is a total of 240, incurred R14.7 billion of irregular expenditure. That means that they spent money without following the applicable laws.

It is more than double the amount incurred in 2010/11 and shows an increase of about R3 billion from the previous financial year.

Figure 4

Source: Consolidated General Report on the audit outcomes of local government

The main culprits were:

  • Rustenburg with 2 645 instances totalling R3 billion;
  • Nelson Mandela metro with 142 instances totalling R1.3 billion;
  • Tshwane with 11 instances totalling R1.1 billion;
  • Buffalo City with 359 instances totalling R409 million and
  • uThukela district municipality (KZN) with 1 239 instances totalling R324 million.

Makwetu said the irregular expenditure was largely the result of failure to comply with supply chain regulations. R3.5 billion was spent without a competitive bidding or procurement process, R10 billion as a result of non-compliance with the procurement process requirements and R792 million as a result of non-compliance with legislation relating to contract management.

Almost a third of the irregular expenditure was only identified during the audit process.

During the audit process it was determined that goods and services were received for R10.8 billion (75%) of the irregular expenditure. “However we cannot confirm that these goods and services had been procured at the best price and that value was received for the money spent,” Makwetu said.

Fruitless and wasteful expenditure increased dramatically in 2014/15 to R1.3 billion, compared to R685 million in the previous financial year. This refers to “expenditure that was made in vain and could have been avoided had reasonable care been taken.”

Figure 1

Source:Consolidated General Report on the audit outcomes of local government

The main culprits were:

  • Nelson Mandela Bay metro with 10 instances totalling R423 million;
  • Matjhabeng (FS) with 32 instances totalling R152 million;
  • Emalahleni (MP) with 40 instances totalling R95 million;
  • Maluti-A-Phofung (FS) with 113 instances totalling R78 million and
  • Thaba Chweue (MP) with 322 instances totalling R36 million.

The general nature of fruitless and wasteful expenditure includes interest and penalties on overdue accounts, litigation and claims and other issues like non-refundable deposits for cancelled events and accommodation.

Unauthorised expenditure, which refers to spending outside the budget or not in accordance with the conditions of a grant, increased from R11.7 billion in the previous financial year to R15.3 billion in 2014/15.

Figure 1_2

Source: Consolidated General Report on the audit outcomes of local government

The main culprits were:

  • Mdibeng (NW) R1.2 billion;
  • Mangaung metro R1 billion;
  • Johannesburg R959 million;
  • Maluti-A-Phofung (FS) R958 million and
  • Tshwane R786 million.

Makwetu says 97% of the unauthorised expenditure was the result of overspending. “Poorly prepared budgets, inadequate budget control and a lack of monitoring and oversight were some of the reasons for the overspending,” he said.

The overspending in Johannesburg, Tshwane and Mangaung related largely to non-cash items.

Makwetu said: “The most concerning indicators over the past three years were municipalities spending more than the resources they had available (thus incurring a net deficit); current liabilities exceeding current assets at year-end (net current liquidity position); debtors (ratepayers and consumers of water and electricity) not paying or taking very long to pay their debt; and creditors not being paid on time.

“In total, 26% (just over a quarter) of municipalities were in a particularly poor financial position by the end of 2014/15, with material uncertainty with regard to their ability to continue operating in the foreseeable future – 10 more municipalities that in 2011/12.”

Municipalities that received a clean audit:

EASTERN CAPE:

  • Joe Gqabi district
  • Sarah Baartman district
  • Ingquza Hill
  • Matatiele
  • Senqu

FREE STATE:

  • Thabo Mofutsanyana district

GAUTENG:

  • Ekurhuleni metro
  • Sedibeng district
  • Midvaal
  • Mogale City

KWAZULU-NATAL:

  • eThekwini metro
  • Ilembe district
  • Umgungundlovu district
  • Uthungulu district
  • Zululand district
  • Ezinqoleni
  • Hibiscus Coast
  • Mandeni
  • Masinga
  • Msunduzi
  • Nquthu
  • Okhahlamba
  • Ubuhlebezwe
  • Umdoni
  • uMhlabuyalingana
  • uMhlatuze
  • Umuziwabantu
  • Umzumbe

LIMPOPO:

  • None

MPUMALANGA:

  • Ehlanzeni district
  • Nkangala district

NORTHERN CAPE:

  • Frances Baard district
  • ZF Mgcawu district

NORTH WEST:

  • None

WESTERN CAPE:

  • Cape Town metro
  • Cape Winelands district
  • Eden district
  • Overberg district
  • West Coast district
  • Bitou
  • Breede Valley
  • Cape Agulhas
  • Drakenstein
  • George
  • Hessequa
  • Knysna
  • Langeberg
  • Matzikama
  • Mossel Bay
  • Overstrand
  • Saldanha Bay
  • Stellenbosch
  • Swartland
  • Swellendam
  • Theewaterskloof
  • Witzenberg

Original Article – today.moneyweb.co.za