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Report of the auditor-general to the Eastern Cape Provincial Legislature and the council on the Buffalo City Metropolitan Economic Entity Infredyction 1. have aucitad the consolidated financial statements ofthe Buffalo Cty Metropattan Econamle Entity set oul on pages... to... which comprise the consolidated statement of financial postion as at 30 June 2018, the statement of financlal performance, statement of changes in net aasets, cash flow statement and statement of camparison ‘of budlget and actual amounts for the year then ended, ao well as tie natae, comprising a summary of elgnifcant accounting policies ard ather explanatory information Accounting officer's responsibility for the financial statements 2. The accounting office is raspansible forthe preparation and felt presentation of these consolidatad financial statements in accordance with South Afiican Standards of Generally Recogrised Accounting Practica (SA Standards af GRAP) and the requirements of the Rkunicipal Finance Managemant Act of South Arica, 2008 (Act No. 56 of 2003) (MFMA) and tha Divfelon of Revenue Act of South Aca, 2015 (Act Ne, 1 of 2018) (DaRA), and for such infernal cartel as the aecounting officer determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatemert, whether dus to Fraud ot error, Auditor-general's responsibility 3. My responelilly is to expross an opinion on these consolidated! fnancial statementa bbaeed on my aut, | conducted my audk In accordance with Internallone} Standards on Auditing. Those standards require that | comply wth ethical eequiramants, and plan and Perform the aucft to obtain reasonable aesurarica about whether the consolidated financial statements are free from material misatalernent. 4. An audit involves performing procedures ta obtain aucit evidence about the amounts ‘and dlacloeures in the conéolidated financial statemenis, The procedures selected <deperid on the auditor's judgement, Including the assassment of the risks of materlal ‘misetatomant of the consolidated financial stataments, whether due to fraud or aor, In making thoee risk aeseesments, he auditor coneldera internal control relevent tothe: ‘municipaliy’s preparation and fair presentation af tha eoneolidated financial statemeris in ordar ta design audit procedures that are appropriate inthe clrcumstanias, but net for the purpose of expresaing an opinion on the effecivensss of tha munieipalty's intemal ‘control, An aud also ineludea evaluating the appropriateness of accaurting policies Used and the feasonablaness of accounting eslimaias made by management, as well as evaluating the overall presentation of the consolidated financlalelatements. 5. | believe thatthe audit evidence | have obtained is sufficient and appropriate to provide 28 basie fr my qualified suct opinion Basis for qualified opinion inegular expenditure Section 125(2)a)() of he MFMA requires the munlcipalty to disclose irreguar expenditure ia the notes te the conealdated financial statements. regular expendture ‘aclosad in note 56 to tha consolidated financial statements at R235 millon (2014-15; R554 milion} was understated by atleast R227 milion as a reautt of the Inappropriate application of S36 ofthe Supply Ghain Management (&CM) Regulations. ‘This wae due to an inadequate system in place for the management of contracts. Asa resutt the municipality had Ineutfitont tims to folows the normal procurement processes ‘Which raguld in a significant increase in the use of deviations, Due to the Inadequate ystemn it was impracticable for me to determine the fll extent ofthe undersiatement, Accordingly, | was unable to determine whether any further adjustments were necessary to the irregular expenditure cleclosure note. Aggregation of immaterial uncorrected misstatements 7. The consolidated financial statemente are materially misstated due to the cumulative effect of individually Immaterial uncorrected misstatements in the following Iams raking lp the total assets fo the consolktated financial statements: ‘was unable fo obtain sufficient appropriate aucit evidenos for work in progress (WIP) included in property, plant and equipment (PPE) disclosed inthe ‘cansoldated financial atatementa or contin by alternative means that irvoioes {or infraetueture wore actualy received dus to the inadequate asset management system in place, Consequently | was unable to determine whether adjustment were neceseary forthe emnaunt of R38 milion to the PPE (WIP) 96 stated in nole 4 of te conscfiated financial statements, + Gonsumer Debtors Inctuded inthe receivables from exchange transection n the consolidated financial statements are overstated by F1 malllon dua 12 inadequate internal control systems to recerd and callact revenue from biling. Quaified opinion 8. In my opinion, except forthe effects of the metters described inthe basis of qualified pinion paragraphs, tie coneaidated fnarcalstaernonispresert fay, hall ateral raspects he tnancial postin of he Buffalo Cy Metropattan Economic Enily 20 at 50 dune 2016 and ts fvancal performance and cash flows fr the year then ended. in accordance with SA Standards of GRAP and te requrements ofthe MEMA ard DoRA, Emphasis of matters draw attenlion to the matters below. My opinion i¢ not modified in respect of these matter, Impairments 40. Cumulative debt impairment provisions of R1,1 tllon (2015: R699,8 milion) are <diselosed in note 12 and 14 to the consolidsted financial staternents, ‘11. As disclosed in the statement of fnancll performance and note 390 the conabiidated financial statements, debt impairments totaling R210,1 milion (2015: R365." millon} have been expensed Material losses 12. Tha munleipalty inourred material losses as disclosed in note Sa to the consolidated financial statements, These include the faltowing: ++ lactic loeses totaling R'180,5 millon (2018: R182,8 milion} of which non-tehnieal lasses camprise R99,7 milion (2015: R96, rillon. ++ Water losses totaling R116,7 milion (2018; RES, milfan} af which non-technical losses comprise R31,3 milion (2016: R12,8 millon Unauthorised expenditure 19. As ciaclosed in note 54 to the consolidated financlal statements, unautharignd ‘expenditure of R22 million (2045: R432,1 milion} was incurred a8 a reautt of ‘overspencing on debt impairment, depreciation and ageet impairnants, france charges, transfers and grants due to an ineraase in indigonta. and tranefers between ‘operating and capital expendture. Fruttless and wasteful expenditure “14. As dlsclosed in note 85 to (he consolldated financial statements, fruitless and wasteful expenditure of R5,2 milion (2016: R5.1 millon) hee accumulated over the lest ak years sand has not been recevered or varkten off Restatement of comesponding figures 18. As disclosed in note 50 to the consolidated financial statamants, the corresponding figure for 30 June 2015 have been restated as a result of errors alscovered during the year ended 30 June 2016 in the canselidated financial etatemen's af the municipality al, ‘and for the year ended, 20 June 2015. Additional matters 418, draw attarton to the matter belaw. My opinion not modified in respect of this matter. Unaudited disclosure notes 17. In terms of section 125(2Ke) of the MFMA, the municipality is required to disclose particulars of non-compliance with this legislation. This disclosure raquiramant did not form part ofthe aucit of the consoldaled financial statements and, acoordingly,| do not ‘exprese an opinion thereon, Unavaited supplementary information 18. The supplsmentary information sat out on pages XX to XX doos not form patt of the consolidated financial statements and fs prevented as ackitional information. We have not audited these schedules and, accordingly, we do not express an opinion thereon, 19, In aooardance with the Public Audit Act af South Arica, 2004 (Act No, 26 af 2004) {PAA) and tha general netoe lseued In terme thereof, | have a reeponsibity fo report findings on the reported performance information againat predetermined objacthvas for selected key performance areas {KPAs) preserted in the annual parfommance report, ‘compliance wath legislation and internal control. The objective of my toets was to identify reportable findings ae descrined under each subheading, but not to gather evidence to ‘xpress assurance on hase matters. Accordingly, do nl expreee an opinion or ‘conclusion on these matters, Predetermined objectives 20. | performed procedures to obtain evidence about the usetuineas and ralabilty ofthe reported performance information for KPA 2: bate service defvery ant infrastructure development on pages x10 x. presented in the annual performance repot of the murialty forthe year ended 20 June 2018 21, | evaluated the reported performanea information against tho aversl teria of usefulness and reliability, 22, | evaluated the usefulness of the reported performances Information to determine ‘whether it was presented in accordance with the National Treasury's anual reporting Principles and whather the reported performance was consistent wath the planned KPA. [further performed tests ta determina whether indicators and targets were well defined, verifiable, epectic, measurable, time bound and relevant, as raquired by the National “Treasurys Framework for managing programme performance information {MPP} 23, | assessed the reliability of tha rapartad performance information to determine whether it was valid, accurate and complete, 24.1 did not raise any matarial findings in raspect of the usetuinese of the reported. performance infomation for KPA 2: basic service delivery and infrastructure evelopment 25. The materiat finding in reepect ofthe reiabilty of KPA 2: beake service delivery and infrastructure developments as follows: KPA 2: basle service delivery and infrastructure development Reliability of reported performance information 26, The FMPPI requirse audtees to have appropriate systeme to collct, collate, very and ‘lore performance information to eneure raiable reporting of actual achievements ‘against plenced objectives, indicators and targets. For important indicatora, the reported ‘achievements against planned largais wore not relable because we wero Unable to cbisin sufficient appropriate audit evidencs for those targels, in axkition, the reported achievements against planned targets for important indicators were net reliable when compared to the evidence provided Additional matters 27-1 draw attention to the folowing matters: Achievernent of planned targets 28, Reler tothe annual performance report on pages x to x or information on the achlevement of planned targets for the year. This information should be considered in the context ofthe findings raised on the reliability of the reported performance, information In paragraph 27 of this raped Unaudited supplementary schedules 29, The supplementary information set out on pages XX to XX does nat form partof the ‘annual performance report and la presented ag addtional Information, | have not audited these schedules and, aocordingly, | do not repor thereon, Compli¢nce with legislation 30. performed procedures to obtain evidence thel the municipality had complied with applicable tegleiation regarding nancial matters, financial management and other related matters. My material findings on compliance with specific matters in key legislation, as set out in ihe general notice isaued in tarma ofthe PAA, are as follows: Annval consolidated finemelal statements 31, The consolidated financlal statements submitted for auditing were nt prepared in all ‘material respecis in accordance wlth the requirements of section 122 ofthe MFM, Materia! misstatements in the consalidatad statement of financial postion, franc Performance and cisclesurs items identified by the auditors In the submited onactldated financial statements were not adequately corrected and the supporting records could net be subsequently provided, which reeulked in the consolidated financial statements receiving a qualified audit opinion Procurement and contract management 232. Goods and services with 9 transaction valua of below R200 000 were procured without ‘Obtaining the required price quotations, in contravention af by supply chain management (SCM) reguiation 17(@) and (¢) 98, Goods and services ofa transaction value abovs R200 000 were procured without inviting competitive bide. 26 required by SCM regulation 1642). Deviations were ‘approved by the accounting offiosr even though it was not impractical to invite ‘competitive bide, in contravention of SCM regulation 36(1). 234, Gontracts were avvarded to biddere based on praferenca points that were nat allocated ‘end celeulated in accardance wit the requirements of the Preferential Procurement Policy Framework Act 8 of 2000 and ite regulation, 36. Awands wera made to providers wha were in the service of cther state institutions or ‘whose directors were in the eervioe of other atate institution In contravention of FMA 1142() and SCM regulation 44. Similar awards were identified in the previous year and ng effective stops were taken to pravert or combat the abuse of the SCM process, as required fy SCM regulation 38(1). 28, Parson in gavicn of ha municipal whose close family members had a private or business inlerestin contracts awarded by the municipalty Tailed to dieciose such Inleret In eantravention of SCM raguallon 48(2V@) analtha code of eanduct for councilor sued in lars of fhe Municipal Systems Act 22 of 2000 and the cada of ‘ponduc for staf membera eeued in terms of the Muniipal Syston Act, Expenditure management 7, Reasonable steps ware not taken to prevent unauthorised and iraguiar expenditure, 26 rexwired by section 82(1}(0) of the MEN. Revenue Management 438. ntersct wae not charged on ell accounts in airears, as required by secon 84(2}(g) of the MFMA, Asset management ‘90. An effective system of intemal control for assets (including a complete and accurate: asset register) wae not In ploce, as required by eecton 832} ofthe MFMA, Consequence management 40. fregular and rflees and wasteful expenditure ineured by the municpally wae net investigated lo determine whether any person was lable forthe expenciture, as required by section 32(2\(b) of the MFMA, Internal control 41.1 considered internal control relovant to my auclt of the financial statements, annual Petiarmance report and compance with leglalation. The malters reported below are limited to the significant internal contol defciencies that resulles In the basis forthe {uaifiad opinion, the findings on the annual performance report and the findings an ‘vompliance with lagistation inckided In ths report. Leadership 42, Instability and change in leadership during the year under review have perpetuated a lack of leadership disciplines to enable oversight and monitoring that eromote eficiency ‘and effectiveness in financial management, performance reporting and compllance with laws and reguiations. This has not set tha cotrect tone for building a high performance ‘environment thet promotes accountability. 49, Commitments mada by leadership ta fil rfcal senior and mide managernent positions were not met. Inadequala pianning within the various directoratas’ caupled ‘with the continued absence of permanent officials to lead and guide the municipality ‘compromised the effectiveness and stabilty af the conirol environment. As a result performance management fe not adequaiely implemented and monitored and, where acaseary, consequence management is nat always applied. Financial and perfermance management 44. Tha municipality did not fully Implement and monitor all required daly and monthly financial, performance andi complianea dleclpines to verily the credibility of i-year ‘reporting. This zesullad in kay reconciliations and precessing only being performed after tha financial year-end, 45. The municipal did net implement an effective perfarnance manegemert ayatem that ‘enabled the leadership to hold all officals eecountable for financial and performances reporting es well 2s compliance with laws and regulallone 45, Furthermore. there wae a lack of processes to ensure compliance with lawe and regulations. As a rasul, management ald net effectively monitor and address al araas, ‘of non-compliance during the yaar. Governance “47. A fiak aoeessment was conducted by the municipality, however risks identfied within ‘hia ssaesament were not appropriately mitigated by the control envfrenment. 48, The intemal controt deficiencies identified by intemal auclt and recommendations made by both internal audit and the audit committee were nol adequately aidreated by management. This had an impact on the affectivenses af thege parties in executing theie responetbities Qther reports Investigations progress or had bean finalized atthe date of my ‘+ The Stete Precient signed a proclamation subsequent to fnenclal year to insthute an investigation into tha supply chain managaraant unit ofthe municipality by the Special Investigations Unit (SIU). The investigation is. ‘eureniy in progress. ‘©The mamber of tha exacutiva counci for Local Govarnment and Traditional Affaire and the Directorate for Priority Crime Investigation are investigating allegations of inregularies wih reepact o the etate funeral procurement. Aodiken -Genceal pst London 48 December 2018