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Report of the auditor-general to the Northern Cape provincial legislature and the council on Phokwane Local Municipality Report on the financial statements Introducti. 41. was engaged to ausit the financial statements of the Phokwane Local Municioality set out on pages .. to... which comprise the slalomen o” nancial zosilion asa 30 June 2075, he statement of financial performsnce, statement of changes in net seals, and cash Vow sislemanit ane the stslamen: of zomparison of budget intormation with actual information for the year then endec, as well as the notes, comprising a summary of significant aocourting policies and other explanatory information Accounting officer's responsibility for the financial statements 2. The accaurling officer is resqonsisle for the preparsticn ane fair presentstion of these finance statements in accordance with South African Standa‘cs of Ganarally Recognised Accounting Practice (SA standards of GRAP} and the requirements of the Muneipal Finance Management Acl ef Seulh Alica, 2003 (Act Na. 86 of 2003}(MFMIA), nd the Division of Reverue Act of South Attica, 2014 (Act No, 10 of 2014) (DORA), and for ‘such internal conisol as the accounting officer determines is necs Breparalian of frans.al slalomerts thal ara free trem mteral fo fraud or ertor. Auditor-general’s responsibility 3. My respons bly is to express an opinion on the financial statements bases on ‘conducting the audit in avcordrice with inleriationa’ Standards on Audling. Because of the matters described in the basis for disclaimer of opinion paragraphs, however, | was Lnaole © obtain sufficient sppropriste audit evidence to pravige a basis for an audit pinion, Basis for disclaimer of opinion Property, Plant and Equipment 4. The municipalty did nat value property. plant and equipment in accordanca wth GRAP AT. Properly, plant and equipment and Directive 7, The application of decmed cost. Iwas rol ale la delermine the impart on the net carrying amount of properly, alent and ‘equipment, as il was impractical ta do so. In addin. | was unable Lo obtain sulliciant ‘sppropriate aucit evidence for property, plant and equipment recorded, as the muriciaality dé nothave edecuate systeme in placs and | could not sonfrm this by atemative means. Consequently Iwas unable fo detsmnine whether any further adjustments to propery, plant and equipment stated at R633 208 380 (2014; REB6 226 615} innate 10 in the financial statements where necessary. Investment properties 5. Tho municpaliy cid nel value invasiment properties in secordance with GRAP 16, Investment Property anc Directive 7, Tha application of deemed cost. | was nel able to determine the impact on the net carrying amount of investment properties, as It was impractical to do so. In areitor | was unable te obiain suficient eppropriate sucit evidence for investmert properties recorded, 2s tno municipaity did not have adequate ‘syslars in place and | could nat cant this by alteraative means. Consequerily | was Unable to determine whether any ‘urher agjusimants to irvesiment properties steted at 2-266 012 (2014: RZ 266 013) in note 9 to the financial statements where necessary. 6. The municivay dé nol recognise investment properties in accordance with GRAP 16, Invesiment Property, 2s properties leased 'o municipal alicia and public are not classified as part of nvestment propery. | was no: able to determine the impact on the not carrying amount ef investment propertias for the current and prior year, as itwas imoracticable to do sa. Consumer receivables 7. Iwas unable lo obtain suficient appropriate audit evdence for consumer raceivabies, a¢ tbe inunicpaliy did nal have azequale systems in clace ane I could not confirm this by alternative means. Consequently. | was unable lo dstermine wbsther any further ‘adjustments la consumer receivables stated as R252 251 191 and the aliowance for Impairment statod at R231 459 786 In note 6 in the financial statements were necessary. 8, The municipalty did not account for revenue from exchange transacllans in accordance: with GRAP 4, Revenue from exchange transactions end GRAP 23, Revenue trom non exchange transactions. Consaquertly. coneurner recelvabies and revenus for exchange snd nor-exchange transactions was understated by RS 605 122, due ta incorrect meter reagings ard lars used, consumers nat biled for services ane rates and emplayoes not arges rent, Addiforaly, there was a resultant impact on the: surplus forthe period snd fon the accumulsted surplus in the financia! statements, Long-term receivables 9. Laas unable to obtain sufficient agpropriate audit evidence for long-term receivables, as ‘the municipalty did nat nave adequate systems in placa ane | could not contin this by alternative means, Consequently. | was unable to determino whether any further adjuslmants [olong-lem receivables staled as R2 220 712 and the impairment stated at 2.219 337 in nate 13 in the fancial slalemanks were necessary Inventories 10.1 was unaie to obtain sufficient appropriate evidence that the mun cipalily has aragerly fccountas for all reconstruction and developrient pragrarmme (RDP) land, as the municipality did net prevido information ta canfirm th RDP land. Iwas unable to confirm the inventories by allerative means. Consequently, Iwas unaale to determine whether any lurbier agjusimenis [a inventories of ROP land, stated st R59 483 000 (2014: RSQ 4483 000) in note 7 to the financial statements wares necessary. Irregular expenditure 11. The MFMA requires the municipality to include particulars ofieegular cxperdituro tn the roles fe the annus fnencal statements, The municipality incurred expend ture ia ‘contravention ofthe supply chain managemenl eaquirements thal wera not included in inregu'ar exzenciture, wh ch resulted in irtegular exzendiure being understated ay RS 243408. In euelion, the manicipslly did nol have adequate systems to maintain ‘complete records of regular expenditure. Due fo this lack of sysiams, | was nol able la confirm the amount of irregu sr expersiture to be dsclosed by alternative means. Consequently, was unahie to determine whether ery furher adjusimert to rrequiar expenciture was necessary. Commitments 12, During 2014, I wae unable fo obtain sufficient approprate audit evidence for ‘commimants and to confi the eammrilmans by alernalive means, Consenuerty. | ‘nas unable te determing whether any adjustment to comm tment stated at R49 430 476 ‘ws necessery. My aucit opinion on the financial statements for tne oeriod endec 30 June 2014 was madified accordingly. Contingent llabiliies and assets 13.1 os unable o obtain suffeiet anoropriale aus evidence thal management has properly acsountec forall contingent laoifies as the municipal ais not sunt al legal fepresontaionletors wae uneble te cofim eeringen fables snd contigen: asses by aternative means. Consequery, | was Unable ta determine whether an futher ajustmerts lo rontingent lebiltes and contingent asselsclsr’osed in note 41 were necessary Disclaimer of opinion 14, Because ofthe significance of the matters deserted in te basis for disclaimer of opinion paragraphs, | have not been able to obtain surficent sppropriaie audit evidence to provide a basis for an auc opinion. Accordingly, Ide rol exress an opition an the financial statements Emphasis of matters 15. craw attention tothe matters below. My opinion is not modified in respect of these mallers. Restatement of corresponding figures 18. As cisclosed in note 43 tothe nancial statements, the corresponding figures for 30 June 2014 have heen restated ae a reoult of an error diccavered during 2015 Inthe financial Statements of the municpslty al. andlor the year erdec, 90 June 2014 ‘Materlal losses. 17. As disclosed in note 50.2 ofthe financial statements, material losses amaunling ta R7 ‘061 723 (26%) for Kin slealrity, R18 600 085 (84% tor kVA electricity and 7 293, 644 (53%) for maga tas watar ware incurred Additional matters 18, | drew attention to the matters below. My opinion is not modified in poet of these Unaudited supplementary schedules 10. Tho supplomentary information set out on pages XX to XX does nat form part of the financial statemonts and is praconted as additonal information. I nave not audited these schedules and, sccordingly, I do not express an opinion thereon, Unaudited disclosure notes 20. in terms of section 126(2}(6) of the MEMA the municipality is required to disciose pargeuiars of nor-complanca with vie MFA. This diseloeure requirement did net fern pat o the sucit of the financial staterments and accorsingly Ido net express an opinion haven, Report on other legal anc regulatory requirements 21.In accordance with the Public Ausit Act of South Africa, 2004 {et No. 26 of 2004) (PAA) ‘and the general notice sues in termes thereof. I nave a responsiblity to roport find ngs fon the roporied gcrfarmance: informalion against prederermined objectives for selected development proves presented in the annual aerarmance report, complanca wilh legislation and intema! control. The objective of my tests was to identify reperlable findings as descrized urder each subheading, bul nol lo gether evicerice fo express assurance on these matters. Accordingly. !do nol exaress an apinien cr corclusien on these matters Predetermined objectives 22. | parfarmad procedures to oblain evidences aboal the usefulness and rekabilty of the reported performance information for the following selected development prisrly presented in the annual perormmance report of the municipality forthe year ended 30 June 2048: *» Develosment priariy: Service delivery and infrastructure developments o ges x10 23. evaluated the reported performance information againet the ovarall ertaria of usefuiness and reliatiliy 24. | ovalvatod the usofulress of the reported parformenes information o delermine whether {twas presented in accordarce with the National Treasury's annual reporting principles and whether the reported performance was consistent with the planned development prorives. | {urher performed tests to determine whether indicators and targata wera wall fined, veifiable, speatic, measurable, line bsune wn ralevant, as required by the National Treasury s Framework for mariaging programme performance inlormalion (FMPPI) 25. assessed tho reliability ofthe weporiad perforinsnoe informslian In determine whether i ‘was valid, accurate end complete, 26. Tho material findings in respect of tre seieeled development profiles are as follows: Services delivery and Infrastructure development Usefulness of reported performance information 27. Section 41(c) of the Munizipal Systems Acland Section 121(4)(2) of the MEMA requires the integrates development plan (IOP) te form the basis forthe anrwal report, therefore Faquiting consisleney of objectives, ingicators and targets between planning and reporting documents. & toiai of 30% of the reported largels were nicl consistent with those in the anproved SDBIP. This was cue to alanned targets per the service deivery udget implamantation sian (SOBIP} itfering from thase in tne annual performance report 28 Performance targets should be spectic in clea/y identtying the nature and required level of performance as required by the FMPP|. A total of 33% of the targets were nat spectc. 29, Performance targets should be measurable as required by cna FMPPI, [could nol maasura Ike resuired performance for 28% of the tergets, 30. Porformanos indicators should be wall-da/ined ¥y having olesr definitions so that dat ‘can be collected consistently and is easy to understand and use, as required by the FAIPPL A [otal of 33% of the indicators were net well defined. 31, The processes and gystoms that producad the incicator should be verifiable, #8 renuired by the FMPPI, 4 total of 100% of the incieatere were nat verfiable, Tris was because rmanagomen! did nol adhere ta the requirements of the FMPPI due to a lack of proger systems and processes. 52. The FMPPI requires indicators to reste logically and directly to an aspect of the auditee's mandate and the realisation of strategie goals and objectives. total of 8% of the targets were rot relevant tothe indicators and thore‘ere the indicators dt rot relate logically and direcly tothe realisation of strategic goals and objectives as er the service ery anc budget implementation plan. This was because proper periomance Planning and management practices had nat been developed and impiemanted le provide for the development of performance incicstors and targets included inthe service delivery and budgot implamentatien glen Reliability of reported performance information 38. The FRIPEI requires ausitocs ta have appropriate systems fo collect, colale, verily and store performance information to ensure valid, accurate anc complete reperting of actual achievements agains! planned atjecives, indicators and targets. | was unable ta obtain ne information and explanations | considered necestary to salisty mysall ax tothe rolablity of tha reported perforinence iniormalion, This was due to lmitations placed an the seoge of my werk cue to tha absence of information systems and the fect that the sudilee could nol provide sufficient appreciate evidence in support af the reported Invermaten. The euditae’s records not permiting the application of it procedures. Additional matter 5d. | draw attention tothe folowing matter: Achievement of planned targets Roles to the annual performance repor:on page xx 9 2% for information on the achievement ofthe planne¢ targets forthe year. This information should te considered in the context of the material findings on the usefUiness and rclabilly of the reporter: performance in'o:mation forthe velecied development priority reported in of this repon. Compliance with leaislation 36. | performed pracodures to abiain evidanee that the municgality hae complies with applicable legislation regarding ‘nancial matters, financial management and other ‘aialed mallers. My snaleral findings on complianos wth saecfic matters in key legislation, as set out in the general notice issued in lerms of the PAA, are as follows Procurement and contract management 37, Goods and services with a transaction value of below R200 000 were procuved willoul pbiaining he required price cuotations as recuired by supply chain management {SCM regulation 17(a) & (c) priate audit evidence could not be obtainad that goods and servicas of a Transaction valus above R220 000 wera prooured by mesns of inviting competitive bids ‘and that deviations approved 2y the accounting afficar were only fl wae impracticl to inuite competitive bids, 95 required by SCM regulation 19(a) and 36,1) 20. Canlract was awarded Io bidders based cn prefersncs points thst were nat calculated in ‘accordance with the requirements of the Preferential Procuramiont Polity Framewark Act (PPPFA} and ils regulations 49, Contract wore awardad to bidders that did aol score the hignest points inthe evaluation process, 2s required by section 2{1)f] of PPPFA. 41, Contracts were ruerdes to bidders who cid not submita declaration on whether they are cempioyed by the state or connected ta any parson empicyed by tne state, as required by SCM regulation 13(c} 42, Awards ware made lo providers who are in he service of cther state insitutions or whose direcers or principal sharoholders are in tha service of atner state institutions in contravention of MFMA 112i) and SCM regulations £4, 48, Sufcion! appropriate audit evidence could nol be cbiined that contract ané cuotaons were only awarded to providers whose tax mallers have tc doclarad by the South Alrieart Reveriue Service lo be in order as required by SCM regulation 23, Financial statements, performance and annual reports 44, The tinancial statements subnited for audlting were not prepared in all material aspects n accordance with the requirements of section 122 ef the MEMA. Materil misstatements of non-currert assets, current assets, lablties, expenditure, disclosure items identified by the auditor in the submited financial statements wore subsequently corecies and the supporting records were provided suasequently, bu ‘ne uneorrectes material misstatements and supaoring records thel could no be provised resalled in the "ancial statements receiving a disclaimer audi opitior 45, Financial slalements were abl submitter for aurlling thin two morths after the end of the financial year. 2s required by section 126(1){a) of the FMA. 48, The 2013:14 annul recart was no! tabled in the municipal council witnin seven months after the and of the financial year, as raquired by section 127(2) af the MMB, AT. The oversicht report, containing comments 07 the annual report was not adoptod by coun within two months ‘rom the dete on which the 7013!74 annual report was tabled, a required by section 1291) ofthe RIFMA, Strategic planning and performance management 48. The municipality dic not establish a perfomance management system, as rectired by secion 38(3) ofthe Municipal Systems Act 49. The municpalty dd not establish mechanisms to monitor and rewew is performance: management system, as required by section 40 of the MEA. 50. The annual performance resort ‘or the year under ‘extew did not incluce @ comparison ot the performance with set targots andior comparison with the previous financial year and measures teken to improve performance, as recuired by section 46 (7x) and {c) of ae MSA, 51. Te performance management system and related corrrole wore inadequate as Idd nat describe and represent ihe processes of performance monitoring, measurement, review and rezerling and hew itis conduced, arganised and menaged, as required by sections 38 of the RISA and regulation 7 of the Municipal planning and perfarmance management regulations, Expenditure management 52. Money owee by the municipality wae not shvays paid within 30 days, as required by section €512)(e) of the MENA. Reasonable steps were not taken to prevent unauthor'sed expenditure, regular exconditure and frutlees and wasteful expenditure, as required by eection 62(1}(¢) of the MERA, Revenue management 54, An effective sysiem of intemal control fer deblors and revewwe was not in place, as raquitad by section 64(2)(} of Ine MMA, Asset and llablilty management 155, An adequate management, accounting and information system which aczounis for assots was nct in place, as required by section 63{2ifa) of the MFMIA, 58. An effective system of intaral conto for assets {including an asset register) was net in place, a8 required oy section 63{2Xc} of the MIFEA, Consequence management 57. Unaulkorised, lregular, Fruitess end wasteful expenditure incurres by the municipaliy '896 nol investigated Lireously lo cetermine i any person is lable forthe expenditure, as required by section 32(2}ayfi of the Municipal Finarce Management Internal control 58. | cansidered intemal control relevant fo my audit of ie financial statements, annua performance report and compliance with lagisation. The matters reported below are limited tothe significant interval control deficiencies that resulted in the besis for disclaimar of ezinion the findings an the annual performanes report and ine fineings on ‘compliance with legislation included inthis report Leadership '58, During the previous financial year anc the current financial yaar the municipally hac vauancios in kay management pasitons, These vacancies, together with the instability within the mayoral postion, resulted ina leadership vacuum, Martoring cf the intemal porral anvconment was therefore not cone anc resulted in he municipality not prioritising compliance lo laws and regulations, financial reporting ane performance reporting 60. The munieizalty did not employ sufficient resources to ensure municipal funetione falated to financial and perlarmanca reporting and camplianes to [avs and regulations can be executed in good quality and achering to proper segregation al dates. ‘ “The leadership dis not regularly monitor management's compliance ‘ith awe, regulations and internally designed policies and procecures. As 2 result, signifcant nor: ‘compliance issues were noted Finncial and performance management 62. Management dis not review the financial statements to ensure the achievement of fair presentation, which resuiled in material smendmerts to the financial statements 183. Records management and maintenance disciplines should be refined, included in ne Sally key controls, and reviewed ang monitored at the appropriate level of management 64. As tho municipality die not nave incividuale who sutficiently understocd the financial reporting framework and the perfarmaneo and financial management raquirament, the rrurieipally engaged a cansultant ta assist in the comp laton of the ‘xed asset register ane financial statements. The underlying accaunling recards of te municipaity did not facilitate the 2reparation of fina framework, al slalements le coms'y with he secounting 5, Manual or automated contrals were nai designed to ensure that the transections had CcocurTed, were authorised, and were completely and accurately processe: Documentation supportng amounts disclosed in tre financial statements was nal always: avaiable. 65. Nanagemtent did not document and aoprave internal polices and rocedures ta address, the process of collecting, recording. processing, monitoring and reporting on predetermined objectives. Consequsnily, serformance syslems, processes and procedures had not been designed and implemented,