AUDIT REPORT Department of Cooperative Governance and Traditional Affairs (COGTA) 2010/11 Portfolio Committee 18 October 2011 Parliament

Reputation promise/mission The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

Agenda Executive summary Legislative requirements Focus areas Opinions Audit report structure Audit outcomes achieved 2010/11 Basis for qualification Emphasis of matters Predetermined objectives Compliance Internal controls Other matters Entities

1. Executive summary COGTA Audit Report Objective Discussion of the audit report of the Department of Cooperative Governance and Traditional Affairs for the 2010/11 audit cycle for the financial year ended 31 March 2011. Objective What opinion means? Significant findings? Public interpretation? Conclusion?

2. Legislative requirements 1. Public Finance Management Act (Act No.1 of 1999) Accounting Officer: Section 40(1)(a) & (b) – Record keeping responsibilities by accounting officer and preparing financial statements for audit Section 40(1)(c) – Submission of financial statements to Auditor-General for audit Auditor-General: Section 40(2) – Audit financial statements and submit report to accounting officer 2. Constitution of the Republic of South Africa (1996) Section 188 – must audit and report on accounts, financial statements and financial management of government institutions 3. Public Audit Act (Act No.25 of 2004) Sections 20 – Auditor-General must prepare audit report containing opinion/conclusion on: Financial statements and financial position Compliance and financial management Predetermined objectives

3. Content of audit report Focus areas and content of audit report: Opinion Matters highlighted : Matters important to users of financial statements: Disclosed by department Detected by audit Predetermined objectives Compliance matters Internal Controls Other i.e investigations

4. Opinions Different audit opinions: Unqualified (unmodified) Disclaimer Adverse

4. Opinions Overall summary description per opinion: Audit Opinion Unmodified An unqualified opinion is expressed when the auditor concludes that the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable financial reporting framework. Unmodified (with emphasis of matter) The addition of such an emphasis of matter paragraph(s) does not affect the auditor’s opinion on whether the financial statements are fairly presented. Modified (Qualified) A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management regarding departures from financial reporting framework, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.

4. Opinions Overall summary description per opinion: Audit Opinion Disclaimer A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence to form an opinion and accordingly is unable to express an opinion on the financial statements. Adverse An adverse opinion is expressed when the effect of a disagreement with management regarding departures from the financial reporting framework is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

History of audit opinions: 2010-11 2009-10 2008-9 2007-8 Disclaimer   Adverse Qualified X  X Unqualified with other matters Unqualified with no other matters Goal: Unqualified opinion with no findings on predetermined objectives or compliance with laws and regulations!!!!

5. Audit report structure Index: Report on the financial statements Introduction Accounting officer/authority’s responsibility Auditor-General’s responsibility Opinion Emphasis of matters Additional matters Report on other legal and regulatory requirements Predetermined objectives Compliance with laws and regulations Internal control Leadership Financial and performance management Governance Other reports Investigations Performance audits Agreed up procedures Now please refer to handout for annual report for audit report of COGTA

5. Audit report structure Emphasis of matter/Additional matter Why? To draw the users of financial statements’ attention to a matter HIGHLIGHT! Difference? Opinion? “My opinion is not modified in respect of these matter(s)” Emphasis of matter Additional matter to draw users’ attention to a matter presented or disclosed in the financial statements which is of such importance that it is fundamental to their understanding of the financial statements to draw users’ attention to any matter other than those presented or disclosed in the financial statements which is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report

5. Audit report structure Matters highlighted Emphasis of matter: Financial reporting framework Significant uncertainties Revision of previously issued AFS Restatements of corresponding figures Material underspending Accruals Going concern/funding/financial sustainability Additional matter: Prior year audited by predecessor auditor Material inconsistencies included in annual report Unaudited supplementary schedules

6. Audit outcomes achieved 2010/11 Actual annual report of COGTA: refer to annexure Opinion: Qualified audit opinion Area of Qualification: Completeness of Irregular expenditure disclosed Other matters highlighted: Emphasis of matters Irregular expenditure Significant uncertainties Restatement Fruitless and Wasteful expenditure

6. Audit outcomes achieved 2010/11 Actual annual report of COGTA: refer to annexure 3. Predetermined objectives Reliability of information 4. Compliance PFMA National Treasury Regulations Other legislation Internal control Summary of control deficiencies in 3 Fundamentals: Leadership Financial and performance management Governance

7. Basis for Qualification Actual annual report of COGTA: refer to annexure Irregular Expenditure No proper system in place to ensure that where irregular expenditure could not be prevented, that it was detected/identified by the departments to ensure adequate and complete recording and disclosure thereof in the annual financial statements.

8. Emphasis of matters NB! Audit only highlight if matter is disclosed in the financial statements of the entity Significant uncertainties Litigation against department of R4 397 000: highlighted as outcome is unknown Restatement of corresponding figures Prior year figures (R264 119 000) corrected in current year financial statements: highlighted if material or significant Irregular expenditure Expenditure of R419 586 000 incurred in contravention of act, law or regulation. Majority related to expenditure incurred in contravention of the DoRA and PFMA/Treasury Regulations: highlighted as it is material and significant to users. expenditure = spending of public funds Indication of financial management Fruitless and Wasteful expenditure Interest in legal fees R336 000: highlighted as expenditure = spending of public funds “avoided”

9. Predetermined Objectives Reliability of information Validity: The following matters were noted: Source information or evidence was not provided was thus validity could not be determined. Compliance Non-compliance with Treasury Regulations, refer to compliance table. Recommendation Maintain sufficient and appropriate supporting evidence for reported targets. System to collect and collate evidence to ensure correct and adequate reporting. A system to ensure review and monitoring of compliance with laws and regulations when strategic plans are compiled, approved and submitted

10. Compliance Summary of compliance findings Category of finding Act Description Strategic planning and performance management TR 5.2.1 Strategic plan was not submitted 10 days prior to discussion of department’s budget vote. PFMA(38(1) (a)(i) &(b) The accounting officer did not ensure that the department maintains effective and efficient systems systems of internal controls regarding performance planning TR 5.2.3(d) The strategic plan did not include measurable objectives Annual financial statements, performance and annual reports PFMA 40(1)(a)&(b) Financial statements submitted were subject to material and/or significant adjustments and certain supporting evidence for AoPO was not provided to audit

10. Compliance Summary of compliance findings Category of finding Act Description Internal audit PFMA 38(1)(a)(i) TR 3.2 Internal audit function did not assist accounting officer in evaluating internal controls Procurement and contract management PFMA 76(4)(c) PN 8 0f 2007/8 Three quotations not obtained for goods procured Expenditure management PFMA(38(1)(c) (ii) TR 9.1.1 Irregular expenditure was not prevented by the department PFMA(38(1)(f) TR 8.2.3 Payments due to creditors were not always settled within 30 days from receipt of an invoice Transfer of funds and/ or conditional grants DoRA 10(1)(c) Payments made not in accordance with approved payments schedule DoRA 10(1)(d) Transfer payments not paid into primary bank account of municipality

10. Compliance Recommendation Implementation of an adequate review process of financial statements prior to submission for audit to ensure compliance. A system to ensure that the department procures goods and services in a transparent, cost effective and efficient manner. Compliance to laws and regulations should be adhered to during procurement in order to prevent irregular expenditure i.e (signed off checklist indicating steps followed prior to approval for payment). The department should also implement a system to ensure that irregular expenditure not prevented is: Detected; and Adequately disclosed as irregular expenditure System/process to ensure payments to suppliers are affected within 30 days. Action needs to be taken against non-complying individuals as the processes are in place and just require adherence thereto. Risk management processes need to ensure compliance with required laws and regulations such as DoRA, PFMA, TR etc. Internal audit to be fully capacitated

Internal control deficiency Financial and performance management 11. Internal controls Internal control deficiency Leadership Financial and performance management Governance The accounting officer did not exercise oversight responsibility regarding financial and performance reporting and compliance with laws and regulations and related internal controls X Management did not prepare regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information. Management did not review and monitor compliance laws and regulations. The accounting officer did ensure that there is an adequately resourced and functioning internal audit unit that identifies internal control deficiencies and recommends corrective action effectively

12. Other matters Investigations Agreed upon procedures Ongoing investigations into alleged SCM irregularities by employees. Agreed upon procedures Donor funding from EU – Project Masibambane Performance Audit: Readiness of government to report on its performance Going forward CoGTA has developed action plans to address all audit findings. These action plans should be monitored and regular feedback given to the executive authority. Regular audit steering committee should be held and feedback be provided at audit committee meetings. Vacancies in key management positions were filled during the period under review (CFO) also post year end (CAEs) Discretion applied regarding appointment/usage of consultants, knowledge and skills transfer must be a prerequisite Audit opinion of predetermined objectives in audit report in future. Focus on key controls review process and feedback by AGSA

13. Entities Entity Audit Outcomes Audit Opinion Findings on Predetermined objectives Findings on Compliance Significant deficiencies in internal control Leadership Financial and performance management Governance South African Local Government Association (SALGA) Financially unqualified Emphasis on: Irregular expenditure Fruitless and wasteful expenditure Going concern Validity of reported information Strategic planning and performance management Annual financial statements Expenditure management Procurement and contract management X Municipal Demarcation Board (MDB) Financially unqualified No findings Annual financial statements Procurement and contract management

13. Entities Entity Audit Outcomes Audit Opinion Findings on Predetermined objectives Findings on Compliance Significant deficiencies in internal control Leadership Financial and performance management Governance CRL Rights Commission Financially unqualified Emphasis on: Irregular expenditure Fruitless and wasteful expenditure Going concern Usefulness of information Strategic planning and performance management Annual financial statements Expenditure management Procurement and contract management Internal audit Audit committee X

QUESTIONS???