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sprain doe lid 0 rious Alfred Nzo District Municipality Audit Report For tho year ended 30 June 2016 Report of the auditor-general to the Eastern Cape Provincial Legislature and the council of Alfred Nzo District Municipality on the Alfred Nzo Municipality Report on the consolidated and separate financial statements Introduction 1. [have audited the consolidated and separate financial sialements af the Alfred Nro Disiic Municipality and its entity set out on pages ... 1 .., which comprise tie consolidated and soparate statement of financial position as at 30 June 2016, the consolidated and separate statement of financial performance, statement of changes in net sssets, and casi law sialement and statement cf camparison af budget information saith actusl information for the year then ended, as well as the noles, comprising a summary of significant accounting policies and other explanatory information. Accounting officer's responsibility for the consolidated and separate financial statements 2. The accaurting officer is responsible forthe preparation snd fair presentation of these ‘consolidated and separate financial statements in accardanee with South Alcan Slandards af Generally Recognised Accounting Practice (SA standards of GRAP} and the requiromen's of the Municipal Finanos Management Ael of South Arica, 2003 (Act No, 86 of 2003) (MFMA) and the Division of Revenue Act af South Afica, 20%4 (Act No. 10 of 2014) (DoRA}, and for such intemal control ae the accounting officer determines is necessary to enable the preparation of the consalidaled and separate financial slalemenls thal are free from material misstatement, whethor due to fraud or errr. Auditor-general’s responsibility 3. My rosansibilly is to express an opinion on these consolidated and separate financial statements based on my audit. I conduclad my audi in accoréance mith International Standards en Audtirg. Those stancarss require that | comply wit ethical requirements, {an¢ plan and perform the audit to obiain reasonable assurance about whether the consolidated and separate financial slatemenis are Frac fram material misstatement. 4. An audit involves performing procedures to obtain audi evidence about the amounts ane disclosures in the consolidated and senarale financial statemonts. The procedures selected depend on the auditor's judgement, including the assessment ofthe risks of material misstaleinent of the consolidated ard separate financial statements. whether {ue fo fraud or error. In making those risk assessments, the auditor considers Internal control rolovantto the entity's preparation and fsir presentation ot the consolidated and separate financial statements in order to dasign audi! procedures that ere appropriate in the circumstances, but nat forthe purpese af expressing an apinion on the effectivanasa ofthe entity’ internal control. An audit also includes evaluating the appropriateness of accounting policies uses and the reasonableness of accaunling astimalis made by management. 25 well as ovalualing the overall prozentaton of the consolidated and separate financial statements. 5. [believe thal the auti! avidencs | have oblained is sufficient and aparopriate to provide a bess for my qualited auc opinion. Basis for qualified opi Ieguler expenditure 6. The municipality did not have adequate systems to identify and disclose all regular expenditure incurred during the year, a required by section 125(2}(4) of the MFMA, ‘The integular expenditure for the curtent and prior year, disclosed in note 47 t0 the consolidated and saparate financial statements, is understated. Due fa the lack of systems, itwas impracteaole o determine the ful exlent ofthe understatement of the regular excenciture. Consequenlly, I was unable to determine whether any further adjustments were necessary lo the currant and prior year iregular expenditure of R6G1,2 milion (2075; R99B,6 milion), as disclosed in note 47 fo he consolcated and separate nancial stalemonts Property, plant and equipment 7. The municjpaliy vid rot account for property, plant and ecuipment in accordance with GRAP 17, Property, plant and equipment. as disclossd in nole 3, an the follawing elicisncias were identifies Operating expenses were incorrectly capitalised to ascels under constuelion The fixed asset regieter did nat agies lo the financial! statements © Tha useful ives of assets with zero values were rot reassessed ‘= Assets were duplicated in the ford aeset rogistor + Assets under construction were nol seauralaly reported, 8. Asa result, property, plant and equipment is overstated by REZ2.6 milion (2018: Ré28,1 millon), operating expenses are understated by R37 milion and accumulated Surplus, a8 disclosed inthe statomont of financial positon and financial performance, i ‘overstated by RAB5,6 milion (2018: RAZ6.t rion) 8. In adaition, na municipality did not comply with the requirements of GRAP 17. Property plané and equiorent relating to the categorisation of assels. Completed assets were not lransferred lo infrastructure assets from assets under construction. AS a resuk, infrastructure assets disclosad in nota 2 are undarsialed ty R108,2 milion (2018: RE9,2 milion} and sesets under construction, as disclosed in note 3, arc overstated by R105,2 rilion (2048: R69, 2 milion). Payables from exchange transactions 410. The municipality did nal have adequate systems to maintain records of accounts payable for goods and services recoived but not yet paid ‘or, which resulted in trade Payables and general expenses being understated by at least R&1.5 million (2016: R68.2 milion, twas impracticable for me to determine the ful extert af the Lnde-slaloment in payables fram exchange transactions and general expanses, as clsclosed in note 18 ta the cansolidaled ane separate financial stalemerts, Commitments 11. GRAP 17: Property, plant and equipment requires the sisclosire af contractual ‘commitments forthe acquisition on property. plant and equigment, An adequate record of commitments was nol maintained and reviewed for accuracy and completeness by the municipality for the year under review. Invoices inspected did not agree to the Cisciosed amounis in the commitments register and net all commitments have bean recorded in the register. This resulted in ar understatement al R1,27 billion 2015: 196.4 millon) of commitments disclosed in note 39 ta the consolidated and separate financial statements, 12. In addlion, | wes unable fe ebtain sufficient appropriate auclt euidenes fer the emount <isclosed as connitments in note 38 to the separate financial statements as requested information was not submitted and | could nol confirm ine diselasure by skernatve means. Cansaquenlly, was unable to determine whether any further acjuetments were rrecessary to commitments of RE“2,6 milon (2018: RB48,7 milion), 8s dizclosed in nate 3910 the consolidates and segarate financial statements, Employee benefits 13, GRAP 25, Employee benefits alows a municipality la disclose mult-employer defined benefit plans as defined contribution plans if certain <iscloauros are mada, Tha municipal belongs to = number of muli-emplayer plans which meet the definition of <efingd benefil glans, The muricipalily has not made all the disclosures as required by GRAP 25, Employee bensfis. Qualified opinion 14, In my opinion, except forthe effects of the matters described in the basis fr qualified ‘pinion paragraphs, the financial staternents present fairy in all material respects, the financial position ct the Alfred Nzo District Municpalily as ai 30 June 2018 and ite financial performance ard cash flows forthe year then endad, in accordance with the SSA standards of GRAP and the requirements of the MEWA and DORA. Emphasis of matters 16, | draw attention fo the matters below. Wy apinien fs nel modified in respect of these matters. Restatement of corresponding figures 16. As disclosed in note 42 to the consolidatec and separate Fnancisl statemonts, the corresponding figures for 30 June 2016 have been reslaled as a resull of an etror discovered during 30 June 2016 in the consclidated and senarste financial statements of the municipality a, and forthe year ended, 80 June 2018. Material losses 17. As disclosed in nole 8.1 fo the consolitated ane separate nancial salements, material losses tothe amount of REO milion (2018: R37,2 millon) were incurred as a result of water losses, Financial eustainabilty 418. As cisclosed in note 44.1 tothe consolidated and seperate financial stetements, the ‘municipality ¢ facing a number of financial sks thal cast doubt on Its ability te sustain its current level of operations in the near future, The key financial sks idertitied include «an nabiliy to pay craditore within due dates + negative key financial ratio, including & net current tsb pos ton, In addition, the actions taken by management to mitigate the impact ofthese risks are disclosed inthis note Additional matter 19. | draw attention fo the matter below My opinion is rot modified in resnert af this mater. Unaudited disclosure nates 20. In terms of section 125(2}e} of the MFRIA, the muinicipally fs required io disclose zarticulrs of non-somplisnce with this legislation. This disclosure requirement did not farm part ofthe audit of the separate financial statements and, accordingly, | do not ‘express an opinion thereon, Report on other legal and regulatory requirements 21, In accarcance with the Public Autit Act of South Africa, 200d (Act No. 26 af 2004) (PAA) and the general nota issusd in terms thereof. [have @ respons bly to report findings on the reported performance information against predetermined objectives of selected programmes presented inthe annual performanee report, compliance with legislation and internal control, The objective of my tests was to identity reportable findings as described under each subhessing, but net to gather evidence lc exaress assurance on these matlers. Accordingly, Ido net express an opinion or conclusion on nese maitre, Predetermined objectives 22. | performed procesures ta obtain evidence about the usefulness and rolablty ofthe raported performance information ot the folowing selected programme presented in the annal performsnee repert of the municipally for the yoar ended 80 June 2046: + Programme 2: Basic sevice delivery (Infrestructure and munie'pal services) on ages x to x 23. | evalualed the usefillness of the reparted performance information to determine ‘whether itwas presented in gecardance wih tie National Treasury's annual reporting principles and whether the renorted performance was consistent with the planned programmes. [further performed tests lo datermina whether indicators and lergets were \well éafned, veritable, spectic, measurable, time bound and relevant, as required by the National Treasury's Framework for managing programme performance information (FMP) 24, | assessed the reliability ofthe reported performance infarmatior to determine whether it ‘was valis. accurata and complete 25, The maletial findings in respect o! the selected programme are as follows: Basic service delivery {Infrastructure and municipal services) Usetuiness of reported performance information 26. The FMPPI requires that porformance indicators should be well defined by having clesr definitions so that cata can be collectes consistently and is easy fo understand and use A ola cf 26% ind alors were not well defired due [a a lack of technics indicator descriptions. 27, ‘The progesses enc systems that produced the indicator should be verifable, as required by the FMIPPI A tolal af 45% ind alors wre not veriiable. This was because the ‘municipality does not have etander< apereting procedures and maintain erope” recacd heaping. Reliabilly of reported performance information 28. Tho FMPPL requires auilees to have appropriate systems tc collect, collate, verily end store performance information fo ensure valid, accurate and complete reporting af aclual achiavernen's against planned objectives, indicstors and targets. The reported perfermance information was nat valid, accurate and complete when compared to the source information or evidence provided. This was due to a lack of standard operating procedures and froquant review of tho validly of pared achisvernants against scurce documentation, as well as lack of integration of departments within the municipal, Additional matters 29. I draw attention fo the following matters: Achievement of planned largets 30. Refer to the annual gerfomance report on pages x tox for information on the achievement of planned targets for the year. This information should ba considered in the context of the material findings on the usefuiness and relabilty of the reported Performsnos information in paragraphs 27, 28 and 26 of this spor Adjustment of material misstatements 31. identied material misststemerts in the annual performance reaor gubmitted for uciting. These matorial misstatements elated lo the reported performance information of inftastructure and municial services. As managemenl subsequenlly corrected only some of the misslalerants, | raised meters findings on the usetulness and reliabilly of the reportec performance infomration Unaudited supplementary informetion 22. The supplementary infomation set cut on pages x to x does not arin pal ofthe an performance report and is presented as additions informaten, | have not audited these schedules and, accordingly, | donot report on them. Compliance with leaislation 33. | performed procedures to obtain evidence that the municipaity had eampled with applicable legislation regarding fianciel matters, frenciel manegement and other releted matters. My material finciags on compliance with spacfic natlars in key logisiaton, as Sel out r the genersl notice issued in terms of the PAA, are as follows: ‘Annual report and annual financial statements 2A. The financial statements submittes for auciting were net prozarad in all material respocts in accoreance with the requirements of section 122 ofthe NFM. Material misstatements entfied by the audiors in the submitted financial statements were not _adequalely corrected and the supaotting records couic not be provided subsaquenlly, ‘which resulted in the financial statements receiving a cualified audit pinion. 5. The annual performance report for the year under reviaw did not include the Performanca ofthe municipality erlily, as required hy section 46 (1) fa) of tte Municipal Systems Act (MSA), Revenue management Imerest was not charged an all scuounts in arrears, as required by section B4(2149) of Ihe NFM, Expenditure management 37. Reasonable steps were not taken to arevanl unauthorised expenditure, iragular expenditure and frutless and wasteful expendilure, as raquired by section 62(7314) of he MEM, 38, An adequate management, accounting and inforrzalon system ws notin place which accounted for creditors, as rocuired Sy section 65(2Kb) of the MFM 39. An effectiva system of expenditure contol including procedures for the payment af funds, was rot in place, as recuired ay section 65(2Ka) of the MFM 40. Money oued by the municipality was nal always paid within 30 deys, 26 required by section B5(2Ke} of the MMA, Asset and lability management 41. An effective system of intemal contral for assets and labilies was notin place, 28 required hy section 63(2}(} of the MFMA, Consequence management 42. Unauthorised, regular and fruitless and wasteful expenditure incurred by the ‘municipality wes net investigatod to determine whether any person was liable forthe expenditure, ae required by section 32/2}a) and 32(2}(b} of the NFM Procurement and contract management 43, | could not obain sufficient appropriate audi evidenee Inst all contracts wera awarded in secorcance with the lagis lative requirements and a procursment process whicr i fl equitable, transparent snd compel, as Ihe municipelity does act hava a proper record-keeping system in place, 44, Invitatons for competitive kidding were not shvays advertised fora required minimum umber of days, in contravention of supaly chain maragement (SCM) regulation 22(1) and 2212}, 45. | could nol obtain sufficient appropriate auuil evitence that contacts were awarded to ‘suppliers based on preference points that were allocated and eeleuatec in accordance wilh Ine requirements ofthe Preferential Procurement Policy Framework Act and its regulations. 48. | ould not obtain sufficient appropriate sucit evidence thal tho proference point system \vas apaliad in ail rocurement of goods ans services above 30 DOO, as required by section 2(a) of ne Preferential Procurement Polley Framework Act and SCM regulation 28(1 Ka) 47. | could not obiain sufficient appropriate auall evidence thal contracts were only ‘extended oF mocitied after labling the reasons for the proposed amendment in he ‘counail of the municipality, as requited by section 1 16(3} of the MFMIA, 48. | could not obtain sutlicient appropriate auclt evidence thet all extensions or modifications of contracts were approved by & properly delegated official, as required by SCM regulation 5. 49. | could not obtain sufficient approprate auult evidence that contacts were awarded! to bidders that scored the highest points in the evalualion process, as required by ot section 2(1}{f of Preferential Procurement Policy Framework Act 50. Parsons in service of the municipalily whose close family members had a arivate or business interest in contracts awerded by the municipality falled to disclose such interest. in contravention of SCM ragulation 45(2).8) 51, The performance of contractors or providers was not mentored on a monthly basis, as required by section 116(2}() af te MEM. 52. The contact performance snd monitoring measures and mathads ware insufficient to ensure effecive contract management, in contravention of section 118(2}() af the MPA, 58. Measures to combal the abuse of the SCM system were nct implamanted ae per the requirements of SCM regulation 381), because sufficient appropriate aucit evidence ‘could nol bw obtained that awards were made to providers who: + had not curing the last five years failed lo enform satisfactorily on & previous contract with the municipality + had not committed 3 corupt or ‘raudulert actin competing for the contract had not abused the SCM syslem of the municipality ‘© had nol been convicted of fraud oF corruption during the past five years, Internal control 4. | considered internal control velevant lo ry audil of the finaneal statements, snnual performance roporl and compliance with legislation. The matters reported Belew are limted te the significant inizmal control deficiencies that resuited in the basis for Aualfiad cf opinion, the tingings on the annual performance raper: and the fingings on ‘compliance with legislation included in tis report Leadership 55. Leadership cid nol take full ewnership ofthe general control envionment ane ld nat insist on daily disciplines to ensure efficiency and offectiveness in facial ‘management, sonvice delivery execution snd compliance with lave and regulations ‘Consequently, the correct tone was not sel to ensure thal officals ara held accountable fr their actions through & consequence management programme. 5. Furthermore, leadership did nol investigate transgressions idertiieg in order to take action where necessary against officials and promote a high standard af ethics,