Musina outperforms Makhado, but technically bankrupt

Although the Musina Municipality could technically be considered bankrupt, it did outperform the Makhado Municipality with regard to the 2015/16 report of the auditor-general (AG).

Musina walked away with an “unqualified” audit for the third consecutive financial year, unlike Makhado, who received a “qualified” report for the second consecutive year. This might all sound a bit confusing, but basically an unqualified report is better than a qualified report. Let us explain:

There are five types of audit outcomes, the best being a “no findings” unqualified opinion. This means the AG can state, without reservation, that the financial statements of the municipality fairly represent the financial position of the municipality and are in line with generally recognised accounting practices (GRAP). The second best is a “emphasis of matter items” unqualified opinion, such as the one Musina received. It is the same as an unqualified opinion with no findings, but the AG wants to bring something particular to the attention of the reader. Next up is the qualified opinion, which Makhado achieved. This is where the AG expresses reservations about the fair presentation of the financial statements, as there is some departure from the GRAP but this is not sufficiently serious to warrant an adverse opinion or a disclaimer of opinion. An adverse opinion is up next. This is expressed when the AG concludes that the annual financial statements do not present the municipality’s financial position, results of operations and cash flows in line with GRAP. A disclaimer of opinion is last in line. This is where the AG does not have all of the underlying documentation needed to determine an opinion. For example, the lack of underlying documentation and the amounts in question may be so great that it is impossible to give any opinion on the matter at all.

Like the article about Makhado’s 2015/16 audit report last week, the Zoutpansberger looked at Musina’s key drivers of internal control, viz. leadership, financial and performance management, as well as governance.

As is the case with his findings regarding Makhado, the AG stated that Musina’s leadership did not detect or prevent the risks of material misstatements to the financial statements and performance, which were only identified during the audit process. He added that the slow response by the leadership to resolve recurring findings and its inability to follow a pro-active approach have resulted in material misstatements in financial and performance reporting. “Those charged with governance have not yet provided adequate evidence to confirm that unauthorised, irregular and fruitless and wasteful expenditure incurred by the municipality in the prior years has been investigated,” stated the AG report.

During the 2015/16 financial year, the AG found that Musina’s unauthorised expenditure amounted to R5 757 290. This, the AG stated, was due to expenditure incurred in excess of the limits of the amounts provided for in the votes of the approved budget. As for fruitless and wasteful expenditure, this amount totalled R10 766 174. This was incurred due to interest on late payments of accounts. Irregular expenditure amounted to R21 104 415 due to contravention of the supply-chain management policy.

One of the most notable findings of the AG was, however, that the Musina Municipality is technically bankrupt. The AG pointed out that the municipality had incurred a net deficit of R70 156 556 (2015: R36 613 580) during the year ended on 30 June 2016 and, as of date, the municipality’s current liabilities exceeded its current assets by R138 695 223 (2015: R79 496 796). The AG specifically referred to this in his remarks regarding leadership. “The municipality’s efforts to address the cash flow and liquidity challenges did not yield the desired results to minimise the municipality’s exposure to cash flow risk and liquidity problems, which leads to going concern and financial viability difficulties,” the AG stated.

As for financial performance, the AG found that the municipality did not adequately oversee the operations of the municipality, as the financial statements and annual performance report contained material misstatements not detected by the municipality’s own system of internal control. “The municipality’s management of records was inadequate in keeping performance information that supported the reported information. This included information that related to the collection, collation, verification, storing and reporting of actual performance information,” the AG found. He added that the implementation of the supply chain management (SCM) processes and procedures were also inadequate, resulting in irregular expenditure.

In regard of the SCM, the AG found that:

* He could not obtain sufficient audit evidence that contracts were only awarded to providers whose tax matters had been declared by the South African Revenue Service (SARS) to be in order;

* Awards were made to providers who were in the service of other state institutions, in contravention of the Municipal Finance Management Act (MFMA), although similar awards were identified during the previous audit year and no effective steps were taken to prevent or combat the abuse of the SCM process;

* Construction contracts were awarded to contractors that did not qualify for the contract;

* Contracts 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; and

* Bid adjudication committees were not always composed in accordance with SCM regulation.

The Makhado Municipality shared similar findings by the AG. It would seem that all municipalities in Limpopo are struggling with regard to leadership and financial and performance management. No single municipality in the province could achieve a clean audit. The Musina Municipality at least seemed to do better than Makhado in accurately summarising their dire financial situation.

Date:16 July 2017

By: Andries van Zyl

Andries joined the Zoutpansberger and Limpopo Mirror in April 1993 as a darkroom assistant. Within a couple of months he moved over to the production side of the newspaper and eventually doubled as a reporter. In 1995 he left the newspaper group and travelled overseas for a couple of months. In 1996, Andries rejoined the Zoutpansberger as a reporter. In August 2002, he was appointed as News Editor of the Zoutpansberger, a position he holds until today.

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