Home Accounting and Auditing 60% of municipal “revenue” will never be recovered – AG

60% of municipal “revenue” will never be recovered – AG

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Municipalities in SA are in a sorry state. Auditor-General (AG) Kimi Makwetu just released audit results for municipalities for 2018/9 and says there is a growing trend of established businesses across the chain showing signs of a diminishing ability to pay for these services, or completely refusing to pay.

Individuals and households also feel the same pressures and are not forthcoming with payments for these consumed goods and services. To illustrate the prevalence and pervasiveness of this across the country, on average almost 60% of the revenue shown in the books will never find its way into the bank accounts of the municipality.

This is surely an opportunity for Saiba members to step up to the plate and assist many of these delinquent municipalities to get their finances and their books in order.

Municipalities have been unsuccessful in converting their debtors books to cash, though this “does not mean that the constant pursuit of this money should cease,” says the AG report.

When it comes to paying contractors their fees, municipalities are relying almost exclusively on transfers from central government.

Here are pockets of relative excellence, most of them in the Western Cape. Also receiving honourable mentions are Capricorn district in Limpopo. Midvaal in Gauteng, Gert Sibanda and Nkangala district municipalities (Mpumalanga), and John Taolo Gaetsewe district municipality (Northern Cape).

The best practices at these municipalities included a stable leadership that is committed to a strong control environment and effective governance. Continuous monitoring of audit action plans in order to timeously address any audit findings and a proactive approach to dealing with emerging risks were also common features at these municipalities.

The AG then lays out the wall of shame – the Free State, a perennial delinquent in audit outcomes, continues to regress. The Eastern Cape and North West also look rather hopeless. Gauteng held steady compared to the previous year, while Kwazulu-Natal showed little improvement, with most district municipalities continued to struggle with basic financial and performance management processes.”

Ten Free State municipalities did not submit financial statements on time, while three received disclaimer opinions. This means nearly half the municipalities in the Free State “have not yet accounted for the manner in which they used taxpayers’ money in 2018-19 or did it so poorly that their financial statements cannot be trusted.”

The AG’s report tells a story of a widespread lack of financial controls and project monitoring, an ongoing culture of a lack of accountability as well as a tolerance of transgressions, which resulted in a further regression in audit outcomes in the province – improvements were rare and the general trend over the past three years remained negative. Eight municipalities were unable to adequately support the information reported in their financial statements and received disclaimed opinions.

The province spent a total of R118 million on consulting costs for financial reporting. Of this, R2 million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

Limpopo improved their audit outcomes in six districts (while three regressed). The improvements were mostly consultant-driven – proof that intervention by accounting consultants has had a beneficial effect. The impact of the R1,2 billion loss following the liquidation of VBS Mutual Bank is still being felt by the municipalities concerned, where service delivery has been affected, though it is worth noting that Capricorn – whose chief financial officer successfully recovered illegal transferred to VBS – emerges as on the province’s shining stars.

However, there was a “high reliance on consultants, skills were not transferred, and some officials became complacent when consultants were appointed and did not perform the jobs they were appointed to do, raising questions about municipalities paying for officials and consultants to do the same job. Millions were spent to improve the outcomes, but there were no consequences for poor performance.”

This is an important point for accounting consultants to bear in mind: any engagement must result in transfer of skills and an actual handover of functions to the personnel employed to do the job. These functions cannot remain in consultants’ hands, even though this may be attractive from a financial point of view. The AG is paying close attention to this.

Municipalities spent R1,26 billion on consultants for financial reporting services, of which only 7% was as a result of vacancies in municipal finance units. This amount includes R522 million for consultant costs at municipalities with outstanding audits where financial statements were received. Only 14% of the municipalities using consultants showed an improvement in their audit outcomes, while 22% regressed.

“The inability to collect debt from municipal consumers was widespread. In these circumstances, it is inevitable that municipalities will struggle to balance the books. Overall, 34% of the municipalities disclosed a deficit (in other words, their expenditure exceeded their income) – the total deficit of these municipalities amounted to R6,29 billion.

“The financial woes of local government also weighed heavily on municipal creditors. The average creditor-payment period was 180 days. At year-end, R53,52 billion was owed to municipal creditors but the cash available amounted to only R43,20 billion. The money owed to Eskom by year-end was in arrears of R11,31 billion, of which R9,02 billion had already been outstanding for more than 120 days. The water boards also struggled to collect money owed by municipalities – their accounts were R6,24 billion in arrears, of which R5,38 billion was for more than 120 days,” notes the AG.