Water Board audit outcomes for...

Water Board audit outcomes for 2016-17

28 February 2018

Our reputation promise/mission

The Auditor-General of South Africa has a constitutional mandate and, as

the Supreme Audit Institution (SAI) of South Africa, exists to strengthen our

country’s democracy by enabling oversight, accountability and

governance in the public sector through auditing, thereby building public

confidence.

2

ANNUAL PERFORMANCE PLAN (APP)

TARGETS PER APP

3

“Plan-Do-Check-Act Cycle”, also the Deming cycle , courtesy of the International Organization for Standardization

AGSA theme for the current year to improve outcomes

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DO

PLAN

CHECK ACT

AGSA theme for the current year to improve outcomes

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The role and importance of leadership in the public sector

Leadership is a key driver of good Internal Controls, which are key to ensuring that auditees deliver on their priorities

in an effective, efficient and economical manner. (pg 122)

Good internal controls, which is the responsibility of leadership, will also ensure that quality financial statements and

performance reports are produced, and applicable legislation is complied with – especially around procurement and

contract management. (pg 122)

CONSOLIDATED General Report on National and Provincial Audit Outcomes

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7

Water value chain

Water Boards

DWS, WRC

TCTA

WSA WTE

7

CMAs

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€€

1 The Water Board audit outcomes

for 2016-17

8

Our annual audits examine three areas

9

The AGSA expresses the following different audit opinions:

Unqualified

opinion with no

findings

(clean audit)

Financially

unqualified

opinion with

findings

Auditee:

• Credible and reliable

financial statements

that are free of

material

misstatements

• Useful and reliable

performance as

measured against

predetermined

objectives

• complied with key

legislation

Auditee produced financial

statements without material

misstatements or could correct the

material misstatements, but

struggled in one or more area to:

• align their performance reports to

the predetermined objectives they

committed to in their APPs

• set clear performance indicators

and targets to measure their

performance against their

predetermined objectives

• report reliably on whether they

achieved their performance target

• determine the legislation that they

should comply with and implement

the required policies, procedures

and controls to ensure compliance

Qualified

opinion

Auditee:

• had material

misstatements on

specific areas in their

financial statements,

which could not be

corrected before the


were published.

Adverse

opinion

Auditee:

• had the same

challenges as those with

qualified opinions but, in

addition, they had so

many material

misstatements in their

financial statements that

we disagreed with

almost all the amounts

and disclosures in the


Auditee:

• had the same

challenges as those

with qualified opinions

but, in addition, they

could not provide us

with evidence for most

of the amounts and

disclosures reported

in the financial

statements, and we

were unable to

conclude or express

an opinion on the

credibility of their


Disclaimed

opinion

10

Regression in audit outcomes over three years – Water Boards

33% (Sediben

g, Lepelle,

Mhlathuze)

56% (Magalies

, Sedibeng, Lepelle, Amatola,

Rand)

11% (Overber

g)

45% (Umgeni,

Rand, Magalies, Amatola)

11% (Overber

g)

44% (Magalies

, Overberg, Lepelle, Amatola)

11% (Bloem)

33% (Umgeni, Mhlathuze, Bloem)

56% (Sediben

g, Mhlatuze, Umgeni, Bloem, Rand)

2016-17 2015-16 2014-15

11

11% Overberg

67% Magalies Lepelle

Sedibeng Rand

Amatola Mhlathuze


Sedibeng Rand

Amatola Overberg


Overberg Amatola

22% Bloem

Umgeni 33%

Bloem Umgeni

Mhlathuze

56% Bloem

Umgeni Mhlathuze Sedibeng

Rand

2016-17 2015-16 2014-15

11% Overber

g

56% Sediben

g, Mhlathu

ze Lepelle Amatola

Rand 33%

Magalies

Amatola,

Overberg

33% Overber

g Mhlathu

ze Amatola

33% Magalie

s, Umgeni, Bloem 67%

Sedibeng

Mhlathuze

Umgeni Lepelle, Bloem, Rand

67% Bloem Lepelle Sediben

g Umgeni

Rand Magalie

s

2016-17 2015-16 2014-15

11% Overber

g

22% Amatola Overber

g

44% Magalie

s Overber

g Mhlathu

ze Amatola

44% Sediben

g, Lepelle Rand

Mhlathuze

78% Magalie

s; Sediben

g Mhlathu

ze Umgeni, Lepelle, Bloem, Rand

56% Bloem Lepelle Sediben

g Umgeni

Rand

44% Magalie

s, Umgeni, Bloem,

Amatola,

2016-17 2015-16 2014-15

Unqualified

with

no findings

Unqualified

with findings

Qualified

with findings

Adverse

with findings

Disclaimed

with finding

Audits

outstanding

Three year trend – Overall audit outcomes

Three year trend –

Compliance with key legislation

Three-year trend –

Quality of annual

performance plans

Three year trend –

Quality of submitted

annual performance reports

Material findings on performance reports reported at seven of the eight

completed water boards were mainly due to:

• Indicators not being clearly defined in identifying the source

information and method of calculation;

• Targets not being specific in clearly identifying the nature and required

level of performance; and

• Sufficient appropriate audit evidence not being available to confirm

reliability of the reported performance; or

• Reported performance not being reliable when compared to source

information

3 …. performance planning and reporting must be improved by….

Material non-compliance was identified at 7 of the 8

completed water board audits and related mainly to :

• Not preventing irregular and fruitless and/or

wasteful expenditure;

• Not procuring through a competitive bidding

process although required;

• Submitting AFS for audit late and with

misstatements;

• Not safeguarding assets; and

• Not collecting all revenue due to the boards

…. compliance with key legislation and….

2

• Sedibeng was qualified on completeness of irregular

expenditure, trade and other receivables, trade payables and

property, plant and equipment.

• Lepelle was qualified on property, plant and equipment. The

entity did not componentise, review useful lives, depreciate some

assets and assess assets for impairment.

• Mhalthuze was qualified on property, plant and equipment and

completeness of irregular expenditure.

• Over berg has not submitted the 16/17 financial statements for

audit purposes.

To improve/maintain the overall audit outcomes, financial statements processes,

1

12

Improved Unchanged Regressed Outstanding

Unqualified with no findings

Bloem Water

Unqualified with findings

Magalies Water

Amatola Water

Rand Water

Umgeni Water

Qualified with findings

Sedibeng Water

Lepelle Water

Mhlathuze Water

Adverse or disclaimed with

findings

Outstanding Overberg Water

Movement

Outcome

4

Movement in audit outcomes

4 1

2016-17

Water Boards

Unqualified with no findings

Unqualified with findings

Qualified with findings

Adverse with findings

Disclaimed with findings

Audits outstanding

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9 auditees

Regression in qualification areas Qualification areas over two years at the Water Boards

Cost of portable

water

Irregular

expenditure

Trade and other

receivables

Trade and other

payables

Property, Plant and

Equipment

Inventory, Employee

cost & Revenue

Audit year

Auditee 2016

-

17

2015

-

16

2016

-

17

2015

-

16

2016

-

17

2015

-

16

2016

-

17

2015

-

16

2016

-

17

2015

-

16

2016

-

17

2015

-

16

Sedibeng x x x x

Lepelle x

Mhlathuze x x

Overberg o/s x o/s o/s o/s x o/s x o/s x

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Sedibeng Lepelle Mhlathuze

Qualification

details

The system to identify IE is inadequate and

the entity could not provide evidence for

trade and other receivables and trade

payables on restatement of corresponding

figures. Entity did not adequately review

the useful lives

The entity did not componentise, review

useful lives, depreciate some assets and

assess assets for impairment.

The entity capitalised costs which did not

qualify for capitalisation and they did not

adequately review the useful lives of PPE

as required by accounting standards.

Root Cause • Inadequate review by line managers

on daily and monthly controls and

inadequate quality assurance reviews

by management on the financial

statements

• Inadequate system implemented to

identify and account for Irregular

Expenditure

• Inadequate review by line managers




statements

• Inadequate internal controls over the

asset register in accordance with

applicable accounting frameworks

• Inadequate review by line managers




statements

• Inadequate comprehension of specific

accounting standards governing

assets.

2

Performance management linked to programmes/ objectives tested

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Objectives

Key outcome (what is it intended to

achieve?) Findings raised on quality of APR

Number of water boards reporting

performance

Achieved

Partially

achieved

Not

achieved

Not

reported

on

Bulk portable

water quality

compliance

To measure whether water quality

standards were met

None 5 3

0 0

Manage

avoidable water

losses

To reduce avoidable water losses in

treatment and distribution systems

Sufficient appropriate audit evidence could not be obtained

due to water meters not functioning

Limitations imposed on the auditor’s work

6 0 2 0

Reliability of

supply

To ensure that there are no unplanned

interruptions to bulk supply

exceeding 24 hrs

The method of calculation for the achievement of the planned

indicator was not clearly defined

Lack of proper performance management systems to support

the reliability of reporting on this objective

Audit evidence obtained did not agree to the reported

performance

7 0 1 0

Increased access

to services

Contribution to national objectives of

extending services

Underlying targets for this objective not specific in clearly

identifying the nature and required level of performance

Source information and method of calculation not clearly

defined

Sufficient appropriate audit evidence not available

Evidence not agreeing to reported achievements

Performance management systems not in place to facilitate

reliable reporting

3 0

4 1

Key predetermined objectives findings linked to key service delivery

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Objectives

Key outcome (what is it intended to

achieve?) Findings raised on quality of APR

Number of water boards reporting

performance

Achieved

Partially

achieved

Not

achieved

Not

reported

on

Bulk supply

agreements

concluded with

municipalities /

other customers

To ensure that statutory agreements

and service level agreements are in

place


defined

Limitations imposed on the auditor’s work

5 1 1 1

Implementation

of Ministerial

directives

New ministerial directives issued are

implemented on time


defined

Indicator not well defined

Targets were not clear in identifying the nature and required

level of performance

Reporting against the objective was not reliable when

compared to evidence

0 0 5 3

Support Rural

development

Total number of identified

municipalities supported


defined

Reporting against the objective was not reliable when

compared to evidence

4 0 3 1

The objectives highlighted in red above i.e. “Increased access to services” and “Implementation of Ministerial directives” were the

areas in which the water boards performed the worst.

This impacted negatively on the objective to build new infrastructure to enable the delivery and provision of water in areas where access

to water is limited.

Key predetermined objectives findings linked to key service delivery

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3 Compliance

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38% (3)

62% (5)

11% (1)

62% (5)

11% (1)

11% (1)

89% (8)

22% (3)

78% (6)

Findings on compliance with key legislation

2016-17 2015-16

Regression in compliance with legislation and quality of financial statements

22% (2)

44% (4)

44% (4)

25% Sedibeng, Amatola

50% Lepelle,

Sedibeng, Magalies, Mhlathuze

62% Lepelle,

Sedibeng, Magalies, Mhlathuze Amatola

Management of procurement and/

or contracts

Revenue management

Material misstatements in submitted

annual financial statements

Quality of submitted financial statements

Outcome if

NOT corrected

Outcome

after corrections

Two auditees - Magalies & Amatola Water Board avoided qualifications

due to the correction of material misstatements during the audit process.

(Overberg Water Board outstanding)

Outcome if

NOT corrected Outcome

after corrections

2016-17

With no material misstatements

With material misstatements Outstanding audit

38% (3)

2015-16

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Fruitless and wasteful expenditure and Irregular expenditure

R 104m

R 0.2m

R 298m

R 8.4m

Irregularexpenditure

Fruitlessand wastefulexpenditure

Expenditure

incurred in

contraventio

n of key

legislation;

goods

delivered

but

prescribed

processes

not followed

Expenditure

incurred in

vain and

could have

been

avoided if

reasonable

steps had

been taken.

No value for

money!

Definition UIF amounts incurred by entities in

portfolio

2016-17 2015-16

----------------------------------------------------------------------------------------------------------------------

Nature of UIFW expenditure R’million Audit report impact

No qualification

paragraphs were

issued at any of the

water board related

to fruitless and

wasteful.

Irregular

expenditure was

qualified for both

Sedibeng and

Mhlathuze due to

significant doubt on

the completeness

of the expenditure

which was

disclosed by

management for

both water boards

in the annual

report.

• Interest and penalties paid to SARS due to late

payment (Lepelle R347k, Rand Water R1.9m)

• No show to conference hence accommodation

and conferences expenditure incurred declared as

FWE (Mhlathuze R232k)

• Settlement of Umgeni CE’s salary for 2018 & 2019

year (R5.2m)

• Non-compliance with various procurement legislation:

- Sedibeng R143m,

Contracts not advertised on CIDB R46m and obtained quotations

instead of following open tender processed for R66m . Paid R20m to

supplier before conducting the competitive bidding processes

- Amatola R79m,

Competitive bidding not followed and bids not advertised for minimum

required time and in the correct media (total accumulated = R189m)

- Lepelle R9m,

Extension of expired contracts, non-compliance with panel selection

and deviations not in line with NT regulations.

• Awarding construction contracts to suppliers where CIBD grading less

than the value of contract awarded (Mhlathuze R12m & Magalies R24m),

• Non-compliance with PPPF as bid not evaluated for functionality

(Magalies R17m).

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UIFW expenditure – AGSA key messages

“As long as the political leadership, senior management and officials do not make accountability for

transgressions a priority, irregular, unauthorised and fruitless and wasteful expenditure as well as

fraud and misconduct will continue. An environment that is weak on consequence management

is prone to corruption and fraud, and the country cannot allow money intended to serve the people

to be lost!

Most auditees have the required policies and processes to ensure that transgressions and fraud

are identified and acted upon, but chose not to use it – a clear indicator of a lack of commitment to

accountability”. AGSA GR press briefing


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Recommendations We propose the following recommendations to improve SCM, which will also reduce the irregular expenditure incurred:

Strengthen the SCM control environment by appointing suitably skilled and qualified heads of SCM/Budget units where vacancies

exist and conduct regular training to improve skills (DO).

Focus on preventing irregular expenditure and non-compliance – this should be a key performance measure in senior officials’

contracts (DO).

Implement SCM compliance checklists to supplement policies and procedures (DO).

Unauthorised, irregular and fruitless and wasteful expenditure incurred should be dealt with by the accounting officer or authority. We

therefore recommend that the accounting officer or authority act as required by the legislation. (PFMA)

Submit regular reports to management, governance and oversight structures on compliance with key legislation (CHECK).

A less tolerant approach by all parties, including those charged with governance and oversight, will result in accountability and

consequences being enforced against those who intentionally fail to comply with legislation (CHECK).

Institute corrective or disciplinary action for misconduct (ACT).

Swiftly deal with investigations – the best practice in this regard is three months (ACT).

Ensure that management refers IFW expenditure where criminality is suspected/ indicative of fraud and corruption to SAPS and or

other investigate bodies (ACT).

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4 Financial Health and Governance

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23

Am

atol

a

Blo

em

Lepe

lle

Um

geni

Ran

d W

ater

Mag

alie

s

Mhl

athu

ze

Sed

iben

g

Financial Health indicators

Achievement of performance objectives

The financial health assessment of the water boards compared to their percentage achievement of consistently audited

objectives is analysed below.

Favourable indicators

Concerning indicators

76%-100% achieved

50%-75% achieved

0-49% achieved

Financial health status

Key Observations:

The general correlation between the financial health status and performance of the water boards is supplemented by additional reasons for non-achievement of

targets as described below:

Water boards generate own revenue by delivering services to municipalities and other water users and fund their activities from this own generated revenue.

In addition when Ministerial directives are issued, the Department of Water and Sanitation (DWS) is supposed to advance funds for the implementation of

these directives.

Funds for implementation of Ministerial directives were not received timeously from DWS for implementation and performance on this objective at Mhlathuze

and Lepelle. For Mhlathuze this in itself did not translate to a concerning financial health situation.

Mopani Municipality entered into a debt payment arrangement with Lepelle due to financial health concerns which impacted on the water board’s ability to

maintain infrastructure as required. Furthermore performance indicators and targets of Lepelle were not adequately developed in terms of the requirements

of the FMPPI and did not consider the processes and resources to ensure indicators and targets are measurable and achievable.

Community protests delayed the achievement of the objective of increasing access to services at Magalies, therefore although funding was not cited as a

major constraint, targets in terms of this objective could not be achieved.

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Governance Boards were appointed and are functional at all of the water boards except for Mhlathuze and Overberg. The term of the board at Mhlathuze expired and a new

board has not been appointed as yet. An interim chief executive was appointed who is fulfilling the role of accounting authority whilst there is still no board.

The contracts of the board members of Overberg have been terminated by the minister and the board had not yet been replaced as at

31 December 2017.

Water board Vacant key positions

Amatola CEO; Director for planning and development; Director of corporate services (interim appointment made); CFO (suspended and acting CFO in place)

Lepelle CFO (retired 30 June 2017 and acting CFO in place)

Magalies CEO; General Manager: Finance; General Manager: Corporate Services; Finance Manager

Mhlathuze CEO (suspended and interim CEO appointed); COO (interim COO appointed)

Overberg CFO (suspended); Financial manager

Water Board Senior management Accounting authority Executive authority Audit committee Internal audit

Amatola

Bloem

Lepelle

Magalies

Mhlatuze

Rand Water

Sedibeng

Umgeni

Provides assurance

Provides some assurance

Provides limited

assurance

The annual report is used to report on the financial position of auditees, their performance against predetermined objectives and overall governance. One of the important oversight functions

of Parliament is to consider auditees’ annual reports. To perform this oversight function, they need assurance that the information in the annual report is credible. To this end, the annual

report includes our auditor’s report, which provides assurance on the credibility of the financial statements and the annual performance report, as well as on the auditee’s compliance with

legislation.

Our reporting and the oversight processes reflect on past events, as it takes place after the end of the financial year. However, management, the leadership and those charged with

governance contribute throughout the year to the credibility of financial and performance information and compliance with legislation by ensuring that adequate internal controls are

implemented.

We assess the level of assurance provided by these assurance providers based on the status of internal controls and the impact of the different role players on these controls.

5 Actions required / Recommendations

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• Key positions should be filled within reasonable time to ensure stability in leadership.

• Quality review should be implemented to ensure that information reported in the AFS and APR is accurate, valid

and complete and where needed training should be provided.

• Management should provide monitoring and corrective actions to address audit findings.

• Management should design adequate procedures governing circumstances in which deviations from SCM

process are allowed to ensure a procurement process which is fair, transparent and cost effective. This should

also include procedures to prevent and detect Irregular Expenditure.

• Management should ensure that appropriate systems and processes are designed to support the reliable

recording and reporting of all indicators included in the annual performance plan.

• Leadership should hold staff accountable for poor performance and transgressions (Consequence

Management).

• The risk management function should be capacitated and adequate IT governance framework should be

designed and implemented.

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Key actions required to improve/ maintain outcomes: Leadership and

Management

Concluding comments and Recommendations for effective oversight We recommend that the committees:

Continue to reinforce their focussed and robust engagements with departments and entities on the root causes for UIFW

expenditure.

Invite the office of the AGSA and governance structures (IAF and Audit committee) for briefings to gain insights,

especially in the status of records review for early engagement (linked to slide 30);

Conduct hearing with the presence of investigative and prosecutorial agencies and authorities;

Request feedback from investigative agencies on cases specific to their portfolios, related to UIFW, Fraud and Corruption;

Build collaborative relationships with other regulatory bodies such as NT, office of the Chief Procurement Officer on the status of

irregular expenditure; and

Demonstrate a willingness to avail yourselves to engage with stakeholders on key accountability issues.

Request auditees to regularly report fully on the implementation of key programmes/ projects in terms of planning, budgeting,

implementation and spending which correlates to actual progress in terms of delivery.

Continue to do regular and deliberate site visits on key projects to determine if what is on the ground correlates to reported

expenditure and service delivery.

Consider effectively utilising the media to create the necessary attention and focus on work done as well as creating public interest

on key matters/programmes.

Other entities/portfolios, which are achieving success can share their successes /challenges overcome, experienced during their

journey. Similarly the clean audit environments should share best practices and pitfalls to avoid.

Do not tolerate hearings/ briefings from departments/ auditees who come to parliament unprepared!

Consequence management must strongly be enforced for poor performance and transgressions, especially on UIFW

expenditure, as required by the PFMA!

Accountability must be promoted by oversight by requesting executives and accounting officers/authorities to ensure that

measures to deal with UIFW, are included as part of the performance management processes! (PFMA sections 38 and 51).

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Concluding comments and Recommendations

“Accountability and good governance are central to building an efficient, effective and developmental-oriented public

service. Accountability means that the leadership is answerable to the public and takes responsibility for their actions,

decisions and policies. These concepts of public interest and accountability are entrenched in the country’s constitution and

the legislation that governs national and provincial government”. AGSA GR press briefing


“Improvements can be attributed to the political leadership taking accountability and discharging oversight

responsibility through robust discussions and interrogating reports submitted by the administrative leadership” (pg 14)

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Status of key focus areas

Oversight and monitoring

(Unchanged)

Financial management

(Unchanged)

Performance management

(Unchanged)

Procurement and contract management

(Unchanged) Compliance management

(Regressed)

HR management

(Unchanged)

IT management

(Unchanged)

Financial health

(Regressed)

Status of

records review

Pro-active

follow up

procedures

Financial and non – financial information

(internal and external reports/documents

& discussions with senior managers)

Feedback linked to Focus Areas

AGSA audit methodology improvements

Engaging accounting officers in conversations that are insightful, relevant and have an

impact

Identify matters that add value in putting measures

and action plans in place well in advance to mitigate

risks

Assess progress made in implementing action plans/

follow through with commitments made in previous

engagements

Provide our assessment of the status of key focus

areas that we reviewed

Identify key areas of concern that may derail progress

in the preparation of financial and performance

reports and compliance with relevant legislation and

consequential regression in audit outcome

Key control engagements / status of records review – objectives

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AGSA audit methodology improvements (cont.)

31

Sou

rce:

Rob

ert K

litga

ard

(aca

dem

ic a

nti-c

orru

ptio

n re

sear

ch)

Correlation between low accountability, corruption and impact on service delivery

Corruption

Service Delivery

Corruption arises when officials are given sole power (monopoly) to make

consequential decisions (discretion) without adequate oversight or control

(accountability).

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How to get in touch with the AGSA

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