Auditor General report on the eThekwini Municipality and its entities

The 2014 report released by the Auditor General on 30 July 2014 refers to:

1. eThekwini Municipality: Unqualified with findings
2. Durban Marine Theme Park (Pty) Ltd: Unqualified with no findings
3. I.C.C. (Pty) Ltd: Unqualified with findings

Significant movement in audit outcome

The regression in the audit outcome of ICC, from clean to financially unqualified with other matters was a result of the municipal entity receiving non-compliance findings related to supply chain management and material adjustments to the financial statements. The lack of improvement in the audit outcome of the municipality was as a result of non-compliance findings related to supply chain management and material adjustments to financial statements. Durban Marine Theme Park (Pty) Ltd retained its clean audit status for two consecutive years.

eThekwini Municipality incurred R325,27 million in irregular expenditure, which is 18% of the total amount incurred in the province. The irregular expenditure was incurred mainly as a result of contracts awarded to suppliers, which were in contravention of supply chain management legislation. However, it must be noted that the amount of irregular expenditure incurred by the municipality has decreased by 67% over the past three years, from R1 billion in 2010-11. This was a result of effective monitoring by leadership and processes in place to identify irregular expenditure in good time.

Six key risk areas

Overall, there has been slow progress in addressing the six key risk areas.

The status of supply chain management remains unchanged as the municipality had not implemented an effective monitoring control in the form of the management and review of conflict of interest forms for all employees and councillors of the municipality. This resulted in awards being made to employees and close family members of employees and councillors of the municipality. In addition, supply chain management non-compliance was noted at ICC in that council was not informed before contracts were amended.

General report on the audit outcomes of KwaZulu-Natal local government for 2012-13 The quality of the annual performance report has remained unchanged with no material findings reported for two consecutive years. This needs to be sustained. The human resource management findings were mainly due to senior management positions that were vacant for long periods, resulting in little or no monitoring taking place, as well as a break down in controls.

The quality of the financial statements is unsatisfactory as a result of a lack of processes to ensure that the information is validated before it is disclosed in the financial statements for both the ICC and the municipality. Material corrections to the financial statements were required. With respect to financial health, there was material underspending of both the capital budget and conditional grants received by the municipality. Progress has been made in addressing the key risk area of IT. The services of consultants were again engaged at the municipality in connection with financial reporting information at a cost of R46,27 million (2012: R41,5 million).
Key controls and root causes

Although, there has been a regression in key controls, largely due to ICC, the municipality improved due to the appointment of the head of internal audit, and this unit has now become more effective. The regression in the monitoring of processes at ICC was due to instability of employees in key positions.

The following controls must be strengthened to create a control environment that supports reliable financial reporting and compliance with legislation:

• The mayor and municipal managers must ensure the review of policies, processes, controls and resources of the supply chain management, legal and housing unit to ensure complete, accurate and timely financial reporting in terms of legislative and financial reporting standards by 30 June 2014.
• The municipal manager must implement effective human resource management to ensure adequate and sufficiently skilled officials are in place, and whose performance is being monitored.
• The mayor and municipal manager must ensure that appropriate disciplinary action is taken by 30 June 2014, against employees that transacted with the municipality. In addition, the municipal manager will ensure that the City Integrity and Investigations unit will receive the resources they require to speed up the process.

The mayor and council should ensure that all key positions are filled in good time and address deficits in the competencies of staff in key positions through focused training. A human resources succession plan as well as training programmes to address skills deficits, should be implemented.

Additionally, council needs to take ownership of the financial, performance and compliance aspects within the administration and obtain monthly assurance from management that key matters reported by internal and external audit have been addressed. The reports presented to council should be concise and credible, and produced in a timely manner by management, to enable councillors to identify areas that require corrective actions.

Impact of key role players on the audit outcomes

For improved audit outcomes the assurance levels should be improved by ensuring stability at the level of municipal manager and senior management and by filling senior management vacancies with sufficiently skilled officials, in good time. We met with the mayor twice during the financial year and these interactions had an impact on the audit outcomes. The reason for our assessment is the reduction in irregular expenditure incurred and other non-compliance related matters at the municipality, and no matters being reported for Durban Marine Theme Park. However ICC did regress as a result of supply chain management non-compliance.

The assurance provided through the oversight of the municipal council and the MPAC should be improved.

The mayor committed to fully implementing the previous year’s commitments, which were:

• to provide oversight and monitor progress made on the implementation and restructuring of the supply chain management processes and polices
• that appropriate disciplinary action would be taken against employees that transacted with the municipality.

The mayor, together with council, MPAC and the audit committee’s oversight of the municipality and its entities should be more effective in ensuring that there is progress on the commitments and action plans tabled by management.