The glaring absence of financial efficiency at the Makhado Municipality is set to send chills down the spine, with the auditor general (AG) expressing an adverse opinion on the financial statements of the municipality.

“The financial statements do not present fairly, in all material aspects the financial position of the Makhado Municipality as at 30 June 2008 and its financial performance and cash flows for the year then ended …” states the report. In layman’s terms, this would mean that the municipality cannot do proper accounting and could not provide sufficient supporting documentation for the accounting entries made with regard to tax money being spent.

Non-compliance with applicable legislation and inefficient and ineffective accounting were hallmarks of the report. A few aspects from the extended list are highlighted.

Internal controls

The municipality did not comply with legislation (MFMA section 62 (1)(i)) by maintaining “effective, efficient and transparent systems of financial and risk management and internal control.” In no reporting items whatsoever were control activities appropriately designed and implemented. Control activities are the policies, procedures and practises that ensure that management’s financial reporting objectives are achieved and financial risk mitigation strategies are carried out. There were no efficient control activities in the following reporting items: unauthorised ex-penditure; property, plant and equipment; revenue and receivables; purchases and payables; cash and bank; grants, reserves and surplus; inventory; capital commitments; cash flow statement; and MFMA disclosure. The monitoring and control environment in most of these items was also absent. When internal controls are deficient, an environment is created that is susceptible to the possibility of fraud and erroneous activities.

Matters of Governance

The auditor general has indicated that the previous year’s external audit recommendations have not been substantially implemented. The municipality did not have an audit committee in operation throughout the financial year, but they did have an internal audit function. The internal audit function did not substantially fulfil its responsibilities as set out in section 165 (2) of the MFMA.

Non-compliance with Municipal Structures Act

In the financial year 2007/8, the Makhado Municipality accounted for all water and sewerage transactions in its accounting records. This was done “despite the fact that the Vhembe District Municipality is the water service authority…” reads the AG report, stating that this is not in accordance with the Structures Act (Act No. 117 of 1998). This was also mentioned in the previous AG report.

Property, plant and equipment

Property, plant and equipment in excess of R743 million recorded in financial statements could not be verified. The asset register was not maintained in a logical format. Due to inconsistencies between the valuation roll and the asset register, land registered in the name of the municipality at R25 million could not be confirmed as being correctly valued.

Revenue and Receivables

Under this heading, numerous examples of improper accounting appear. It is apparent that the municipality cannot operate the system adequately and sufficiently.

The supporting documents for receipts and receivables were not submitted. The accuracy and completeness of the revenue of R148.9 million and the receivables of R68 million could not be confirmed.

Property rates totalled R9.2 million for the period under review, but there was not sufficient evidence to satisfy the AG regarding the completeness and occurrence of property rates.

Services income of R112.1 million was only based on metered con-sumption.

The municipality did not reconcile the accounting records with the electricity cash power system. The prepaid electricity was stated as R9.77 million, but its completeness could not be determined since no report could be generated from the cash power system.

The municipality did not provide adequately for the existence of bad debts and the accounts receivable were overstated by R21.47 million. Supporting documentation of other debtors, totalling nearly R4 million, could not be submitted.

Irregular expenditure

The municipality has omitted to disclose irregular expenditure of R378 516 000. Disclosure is required according to section 125 (2) (d) of the MFMA.

Cash and bank

The Makhado Municipality ended the financial year with a bank balance of R7.896 million. The AG said that the bank reconciliation statement did not reconcile with the bank balance. The bank reconciliation included unrecorded items of over R13 million. The AG was not able to satisfy himself as to the valuation and completeness of the bank balance.

Accumulated surplus

The Makhado Municipality stated the accumulated surplus balance as R549 million, but the AG was not satisfied as to the completeness, existence, valuation and rights to the accumulated surplus balance.

Performance information

The municipality did not include the annual performance report as required by the MFMA (Section 121 (3) (c)), neither did the municipality appoint or budget for a performance audit committee. The question may be asked how a municipality will improve if they do not even know how they performed against set criteria.