The Makhado Municipality has for a second consecutive year received a qualified opinion from the Auditor-General (AG) regarding their 2015/16 financial statements.

In layman’s terms it may sound impressive, but it is not. A qualified opinion is when the AG expresses reservations about the fair presentation of the financial statements. It is, however, also not that bad. All it means is that there were some departures from generally recognised accounting practices, but not sufficiently serious to warrant an adverse opinion (bad) or disclaimer of opinion (very bad).

Following the release of the AG’s report for the 2015/16 financial years last month, the Zoutpansberger decided to take a closer look at where local municipalities improved or fell short.

Auditor-General Kimi Makweta minced no words in his report summary, especially regarding the marginal improvement shown by municipalities in their audit outcomes in comparison to the previous year. “The key drivers of internal control, being leadership, financial and performance management as well as governance, had shown minimal improvement since the previous year,” said Makweta. No single municipality in Limpopo could achieve a clean audit. The only other province to find themselves in the same boat was North West. Having said this, Makweta, however, did point out in his summary that municipalities in Limpopo, along with those in the Eastern Cape and Mpumalanga, at least showed momentum in the right direction.

With regard to internal control, the Makhado Municipality’s leadership was judged harshly. “Leadership’s review did not detect or prevent the risk of material misstatements to the financial statements and performance information which were only identified during the audit process,” the AG stated, adding that the leadership at the municipality over-relied on key individuals and the external auditors to achieve improved outcomes. “The slow response by leadership to resolve recurring findings and its inability to follow a pro-active approach have resulted in material misstatement in financial reporting,” the AG said in its report.

With reference to some of the misstatement, the AG found that:

* He was unable to obtain appropriate audit evidence that the municipality affected the adjustments made to the valuation from the effective date of the general valuation roll, as required by the Municipal Property Rates Act; and

* He was unable to obtain sufficient audit evidence that management had properly charged and accounted for all service charges and property rates, due to the status of the accounting records; and

As for financial and performance management, senior management was also criticised. “Senior management 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 implementation of the supply chain management processes and procedures were inadequate resulting in irregular expenditure,” the AG stated.

Regarding the above, the AG found that the Makhado Municipality’s irregular expenditure amounted to R152 980 778 for 2016/15 due to contraventions of the supply chain management legislation. The report further stated that reasonable steps were not taken to prevent unauthorised expenditure (which, according to the AG report, totalled R22 992 036), irregular expenditure and fruitless and wasteful expenditure, as required by the Municipal Finance Management Act (MFMA). The AG was especially critical of the municipality’s procurement and contract management processes. In this regard, the AG found that:

* Bid adjudication committees were not always composed in accordance with supply chain management (SCM) regulations;

* 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, as required by SCM regulations; and

* Awards were made to providers who were in the service of other state institutions, in contravention of the MFMA and SCM regulation. The AG stated that similar awards were identified in the previous year and that no effective steps were taken by the municipality’s leadership to prevent or combat the continued abuse of the SCM process.

Having said all of this, the AG did, however, state in his report that the municipality’s statements present fairly, in all material respects, the financial position of the municipality as at 30 June 2016. Het concluded by saying that: “Although risk management activities took place within the municipality and the necessary policies and procedures have been formulated and documented, the municipality’s reactive approach in addressing inadequate systems and internal controls indicates that there are inadequate mitigating processes in place to address the municipality’s reliance on key individuals and to guide the municipality through periods of change and unpredictability.”