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Buffalo City Metropolitan Municipality Audit Report For the year ended 30 June 2018 Report of the auditor-general to the Eastern Cape Provinclal Legislature and the council on the Buffalo City Metropolitan Municipality Report on the financlal statements Introduction 41. have qucited the sinancial slatemants of tho Bufialo City Metropofitan Municipality sat but on pages... 19 ... which comprise the statement of inarcial postion a8 at 30 June 2076, the statement of financial performance, statement of changes in net ‘esate, caah flaw statement and statement of comparison of budget and actual amounts Terthe year then ended, 2s well as the notes, comprising a aummary of significant ‘acoaunting policies and other explanatory infomation, Accounting officer's responsibility for the Financial statements 2. The accounting officer is responsible forthe preparation and far presentation of these financial statements in socardance with South Akican Standards af Generally Recognised Accounting Practice (SA Standards of GRAP) and the requirements ofthe ‘Municipal Finanee Management Act of South Attics, 2003 (Act No. 56 of 2003) {MFMA) ‘and the Division of Revenue Act of South Alea, 2015 (Act No. 1 of 2015) (DORA), ant for euch internal control gs the accaunting officer determines is necessary to anable the praparation of financial stalements thal are free from material miestaternent, whether due to fraud or error. Auditor-general's responsibillty 3. My responelilly is to exaress an opinion on these tihancial statements based on my audi. Toonducted my audit in accordanca with international Standarda on Auditing. Those slandarde require thot | comply with ethical equlrsments, and plan and perform the audit 1 obtain reasonable assurance about whether the financial statements ate {foe trom material misstatement, 4, An audi involves performing procedures to obiain auclt evidenca shout ihe amounts: ‘and disclosures in the financial statements, The procedures elacted depend on the auditor's judgement, including the assesment ofthe risks of material misstatement of the financial statements. whethor due ta fraud or error. In making thoee tsk ‘assessments, the audiar considers internal control relevant te the municipality's preparation and fair presentation. of the financial statements in order to design audtt ppmeadures that are appropriate in the cicumstances, but not forthe PurpoeS of expressing an opinion on tha effectiveness of the munleipaliy’s intarnal control, An aut ‘lea Includes evaluating the approprislaness of accounting palcies used and the Feasonableness of accounting estimates made by management, a6 well as evaluating tha overall presentation ofthe financial statements. 5. I belleve that the ault evidence | have obtained fe sufficient and appropriate to provide: ‘a basie-for my qualified audit opinion Basis for qualified opinion imegulor expenditure 6. Section 125(2))() of the MFMA requires the municipality to disclose iregulat ‘expenditure in the notes tothe financial statererts, Ieguler expencture dleclogad In ‘ote 62 tothe financial statements at R236 rlllan (2014-18: REB4 milion) was Lniderstated by at least R227millon 2 a rau ofthe inappropriata application of $36 of ‘tha Supply Chaln Managament (SCM) Regulations. This was due to an inadequete system in place forthe managernent of contracts. As a reeuit the municipality Nad inaufficent time 10 folow the normst procurement processes which resulted in slonificant increase in the use of deviations, Due to the inadequate oystem It wee impracticable for me to determine the full extort of tha understatement. Accordingly, I ‘was unable to determine whether any further adjustments ware necessary fo the Irregular expenciture disclosure note. Aggregation of immaterial uncorrected misstatements 7. Tha financial statements are materially misstated duo to the cumulative effect of individually immaterlal uncorrected misstatements in the folowing Hers making up the total acts tothe financial statements: + Iwas unable to obtain sufficient appropriota aux avidance for work in progress {WIP included in property. plant and equipment {PPE} disclosed in the financial statements or confirm by allemative means that involoee for Infrastructure were actualy received due to inadequate aseet management systom in piace. ‘Congequenty | wes unable to determing whether adjustments were necessary {or tha amount of R33 milion ta the PPE (WIP) as stated in note 4 ofthe financial staterarts, ‘+ Consumer Debtors included in the receivables from exchange transaction in the Francia statements are overstated by R31 millon dus Inadequate intemal ‘control aystems to record and collect revenue from bling, Qualtiied opinion 8. Inmy opinion, except far the effects of the matters described in the basis of qualified opinion paragraphs, the financial statements present fairly in all material reapecte. he ‘nancial postion of the Buffaio City Metropolitan Munizipallty a8 at 30 June 2016 and its financial performance and caeh flow for the yaer than ended, in accordance with SA Standards of GRAP and the raquiremants of the MFMA and DoRA, Emphasis of matters 8, | draw ettontion to the matters below. My opinion is not moctfied in reepect af thea matters Impairments 40, Cumulative debt impaimment provisions of P11 billon (2018: R899.8 milion) are disclosed in note 12 and 14 19 the financial statements, 11. A disclosed in inthe statement of fhancia performance and note 36 to the financial statements, debt Impalrments totaling R210,1 milion (2016; R985, million} have bean expensed Material losses 412. The munieipaity incurred material logs9s as diecloeed in nate 54 ta the financlal statomanis. Thess Include the following: + Etectralty oases totaling Rt80.5 millon (2016: R162;8 milion) of which non-technical losses comprise R99,7 mition (2018: R5,+ milan). + Water losses totaling R116,7 milion (2015: RE8.3 milion) of which non-technical losses ‘comprise R31,3 millon (2015: R12,8 milion Unauthorised expenditure 18. As disclosed in note 60 to the financial statements, unauthorised expenditure of R22 ‘nition (2015: R432,1 millon) wee Incurred ae a reault of overspending on debt impalrmert, depreciation and asset impairments, fhance charges, transfare and grants dua to an Increase in indigents, and transfers baiwean operating and capital expenditure Fruitless and wasteful expenditure 414, As discnsed in note &1 fo the fnancial statemtents, fruitless and wasteful expenditure of 5,2 milion (2018: RS.1 milion) has accumulated over fhe last six yaare and hae not been recovered or vnitten aft. Restatement of comesponding figures 16. As disclosed in note 46 to the financial statements, the corresponding figures for $0 June 2015 have been restatad a6 a reoult of errars discovered during tha year ended 30, ‘lune 2016 in the financial statements of the murigipaliy at, and forthe year ended, 30 ‘lune 2046. Additional matters 16. draw altantion to the matter below. My opinion isnot mediied in respect of thle mater. Unaudited disclosure notes ‘7. In tonne of section 125(2)(e) ofthe MFMA. the municipality is required to dleeloes ppaticulars of non-compliance with ins legislation, This disclosure requiramant didnot form part of the audit ofthe financial statements and, accordingly, | do nat express an opinion theron. Unaudited supplementary information 18. The supplementary information sat out on pages XX:to XX dees not farm part ofthe financial statements and is presented a5 ackltionelInformetion. We have not audited these achedules and, accordingly, we do not express an opinion therbon, 419. In accordance with the Public Audit Act of South Africa, 2004 (Act No. 25 of 2004) (PAA) and the ganeral notce issued in terms thereof, [ave a responsibiiy to report findings on the reported performance information against predetermined objectives for solacted kay performance areas (KPAs) presented in tha anna performance report. ‘compliance vith legislation and intemal contol. The objective of my taste was to identify reportable findings as described under aach suisheading, Sut not te gather evidence to ‘exprees asourance on these matters. Accordingly, Ido Not axprass an gpinion or Conclusion on theeo matters, Predetermined objectives 20. | performed pracedunas to gbtaln evidence about the usefulness and reliability af tho reported performance informalion for KPA 2: base sendea delivery and infrastructure ddavelooment on pages x tox, presented in the annual pertarmance report of the ‘municipalty forthe yaar ended 20 June 2016, 21. | evaluated the reported performance infornation against the overall criteria of usefulness and role, 22.1 evaluated the usofuinees of tha raported performance informalion to determina ‘ehether it was presented in accordance with the Natlonal Treasury's anrwal reporting principles and whether the reported performance was congislent wth the planned KPA, urther performed teste to deterrine whether incioatora and targets were well definad, verifiable, specific, measurable, time bound and relevant, a6 required by the National ‘Treasury's Framework for managing programme performance Mferrnation (MPP £23. assessed the reliability ofthe reparled performance information lo determine whether ‘was val, accurate and complete. 24.1 did not ratee any material findings in respect of the usefulness of the reported performance information for KPA 2: basic servite delivery and infrastructure development. 25. The material finding in respect ofthe reliability ef KPA 2: hasle servioe delivery art infrastructure development is as folows: KPA 2: basle service delivery and Infrasucture development Reliabilty of reported performance information 26, The FMPPI requires aueitees fo hava appropriate systems to calect,calate, verify and store performanes information to ensure reliable reporting of actual achievements agalnet planned objectives, indicators and targets. For important indicators, the reported achievements egainst planned targete were not reliable because we were unable to obiain suffcient appropriate audit evidence for these targets, In addition, the reported ‘athieverients against pianned targets fer mportart indieatare were not reliable when ‘comparad to the evidence provided. Additional matters 27. draw attertion to the folowing matters: Achievement of planned targets 28, Rafer to the annual performancs report on pages xo x for information on the achievement of planned targets for the year. This Information should be considered in tha contort of the findings raised on the reliability of the reported performance information In paragraph 27 of this report Unaudited supplementary schedules 29, The supplementary information set out on pages XX to XX does nat form part of the ‘annual pertormanee report and is presented 2g adkltiona! information. Thave not audited these schedulas and, accoruingly, | do nat report thereen. Compliance with lealslation 30. | performed procedures to obtain evidence that the municipality had complied with applicable legielalion regarding fnancial matters, financial management and other relatad mattors. My rrateral findings on complianes with aperitic matters in key. legislation. ae set aut in the general notice issued in forme of the PAA, are as follows: Annval financial statements 231. The financial statements subrritted for auditing were net prepared in al material respects in accordance with the requirements of sectan 122 of the MFMA, Material rmisstatemants in the statement af nancial pasion, financial performance and disclosure items idenitfied by the euctors i the submited nancial statements wera nat ledaquately corrected and the supporting records cauld nat ba eulosequently provided, ‘which repulted in the financial statements receiving a qualfied audit opinion Procurement and contract management 32. Goods and services with a transaction value of balow R200 000 were pracured without ‘biaining the required price quotalions, n contravention of by supply chain management (SCM) regulation 17(a) and (c), ‘33, Goods and services of a transaction valua above R200 000 were procured without inviting competitive bids, a¢ fequired by SCM regulation 18(a), Deviations ware ‘approved by the accaunting officer even though t was nat impractical to invite ‘competitive bid, In cantravertion of SCM regulation 36(1}. 94, Contracts were awarded to bidders based on praferance points that were not allocated ‘and caloulated in accordance with the requirements af the Prafarerdial Procurement Policy Framework Act 5 of 2000 and its ragulations, 35, Awards were made to providers who were In the servica af ether state institutions oF ‘whose directors were in the service of other state insttutons, in contravention of MFMA, °112§) and SCM regulation 44. Similar awards were identified in tha pravious year and no effective stans wers taken to prevent or combat the abuse of the SCM process, a6 ‘mguited by SCM regulation 38( 1) ‘36, Pereans in service of the municipality whose close family members had a private or business interestin contracts awarded by the municipal filed lo discioss auch imarest, in contravention of SCM regulation 46(2){e) andthe cade of conduct far Ccounellrs fesued jn terms of the Municipal Systems Act 32 at 2000 and the code of ‘conduct for staff monibare issued in terms af the Municipal Systems Act Expenditure management ‘ST. Reasonable stape wore not taken to prevent unauthorised and regular expencituna, as raquited by section 62(1}() of tha MMA, Revenue Management 38. Intarost was n the MFMA, arged on all accounts in arreprs, a8 required by section 84(2) (g} of Asset management ‘30, An effective system of internal control for assets (including @ complete and accurate ‘888et register) was notin placa, a6 requlred by section 63(2)e) af the MEMA. Consequence management 40, lmeguiar and Fuless and wasteful expenditure inourred by tha municipalty vies not investigated to detemttine whether any person wes lable for the expenditure, as required by section 32(2)(h) of the MF MA, Internal control 41. | considered internal contol relevant to my aucit ofthe tihancial statementa, annual performance repart and compliance with legislation. The metters reported below are fimited tothe signiEcant intemal control deficiencies that rasufiad in the bale for the {Ualfiad opinion, the findings on the annual performance report and the findings an ‘compfianca with legislation Included inthis repart. Leadership 42, Instability and change in leadership during the year under review have perpetuated a Jack of leadership cciplines to anable oversight and monitering that promote effiency and effectiveness In financial management, performers reparing and compliance wth lews and regulations, This has nat set the carrect tone fr building a high performance ‘environment that prometee aecountabilty 43, Commitments. made by leadership ta fil critical senior and middle management positions were not met, Inadequale planning within tha various directorates’ coupled ‘wth tne continued absence of permanant officals te lead and guide the municipality compromised the effectiveness and stability of the control environment. Ag a rasult performance management is not adequately implemented and moritored and, where ecassary, consequence managements not always applied. Financial and performance management 44, The municipality did not fully implement and monitor all requirad daily and monthiy financial, performance end compliance disciplinas to verily the credivity of in-yaar reporting, This cesuited in key reconciliations and processing only being performed after the financial year-end. 45, The municipality did aot implement an affective performance management system that enabled the leadership to hold el officials accountable fr financial and performance Tepeiting 2s well as compliance wit laws and regulations. 448, Furthermore, there was a lack of precasaes to ensure compliance vith laws and regulations, As @ result, management did not effactively monitor and addrass all arena of non-compliance during the year. Governance 447, &risk aaseesment was conducted by the municipality, however reks identified within this assesament were not apprepristely mitigated by the cartrol enviranment. 448, The intemal control deficiencies identified by intemal audit and recommendations made by both Inarnal auett and the audit comminas were not adequately addressed by managemant. This had an impact on the effectivanass of hago parties in executing their regponsibilties. Other reports Investigations 49, The following invastigatione are in progress oF had been finaliead at the date of my report ‘The State President signed a proclamation subsequent to financial year to institute an inveetigafon into the suppfy chin management unit of the "municipaity by the Special Investigations Unit (SIL). The investigation is ‘currently In progress. ‘+The member of the executive council for Local Gavernment and Traditional Affsira and the Directorate for Prioty Crima Investigation are investigating allegations of inegulanties with respect ta the state funeral procuremer Audttor- Geneca f East London 30 November 2016 PaaS) Aucing be oublis sane