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DRAFT ANNUAL REPORT 2015/16 


NGWATHE LOCAL MUNICIPALITY 


2. Report of the Auditor-General 

Report of the auditor-general to the Free State Legislature and the council on the Ngwathe Local 
Municipality 

Report on the financial statements 

Introduction 

1. I have audited the financial statements of the Ngwathe Local Municipality set out on pages ... to which 
comprise the statement of financial position as at 30 June 2016, the statement of financial performance, 
statement of changes in net assets, cash flow statement and the statement of comparison of budget and actu¬ 
al amounts for the year then ended, as well as the notes, comprising a summary of significant accounting poli¬ 
cies and other explanatory information. 

Accounting officer’s responsibility for the financial statements 

2. The accounting officer is responsible for the preparation and fair presentation of these financial statements in 
accordance with the South Africa Standards of Generally Recognised Accounting Practise (SA Standards of 
GRAP) and the requirements of the Municipal Finance Management Act, 2003 (Act no. 56 of 2003) (MFMA) 
and the Division of Revenue Act, 2015 (Act No. 1 of 2015) (DoRA) and for such internal control as the account¬ 
ing officer determines is necessary to enable the preparation of financial statements that are free from material 
misstatement, whether due to fraud or error. 

Auditor-general’s responsibility 

3. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my 
audit in accordance with the International Standards on Auditing. Those standards require that I comply with 
ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the finan¬ 
cial statements are free from material misstatement. 

4. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the 
financial statements. The procedures selected depend on the auditor’s judgement, including the assessment 
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those 
risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presenta¬ 
tion of the financial statements in order to design audit procedures that are appropriate in the circumstances, 
but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit 
also includes evaluating the appropriateness of accounting policies used and the reasonableness of account¬ 
ing estimates made by management, as well as evaluating the overall presentation of the financial statements. 

5. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit 
opinion. 

Opinion 

6. In my opinion, the financial statements present fairly, in all material respects, the financial position of the 
Ngwathe Local Municipality as at 30 June 2016 and its financial performance and cash flows for the year then 
ended, in accordance with SA Standards of GRAP and the requirements of the MFMA and Dora. 


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DRAFT ANNUAL REPORT 2015/16 


NGWATHE LOCAL MUNICIPALITY 


Emphasis of matters 

7. I draw attention to the matters below. My opinion is not modified in respect of these matters. 

Restatement of corresponding figures 

8. As disclosed in note 43 to the financial statements, the corresponding figures for 30 June 2015 have been re¬ 
stated as a result of errors discovered during 2015-16 in the financial statements of the municipality at, and for 
the year ended, 30 June 2015. 

Material losses 

9. As disclosed in note 50 to the financial statements, material electricity losses of R126 752 795 (2015: 

R64 106 909) were incurred by the municipality mainly due to electricity theft. 

Material impairments 

10. As disclosed in notes 10 and 11 to the financial statements, management provided for the impairment of con¬ 
sumer and other receivables of R566 444 475 (2015: R473 132 002). 


Irregular expenditure 

11. As disclosed in note 49 to the financial statements, the municipality incurred irregular expenditure of R60 200 
348 (2015: R9 346 751) in 2015-16 due to non-compliance with supply chain management (SCM) require¬ 
ments. 

Fruitless and wasteful expenditure 

12. As disclosed in note 48 to the financial statements, the municipality incurred fruitless and wasteful expenditure 
of R74 252 491 (2015: R51 248 897) in 2015-16 due to interest and penalty charges on the late payment of 
suppliers. 

Unauthorised expenditure 

13. As disclosed in note 47 to the financial statements, the municipality incurred unauthorised expenditure of 
R177 095 143 (2015: R266 727 757) during 2015-16 due to expenditure that exceeded the limits provided for 
in the main divisions of the approved budget. 

Going concern 

14. Note 45 to the financial statements indicates that the municipality incurred a net loss of R141 836 468 during 
the year ended 30 June 2016 and, as of that date, the municipality’s current liabilities exceeded its current as¬ 
sets by R714 672 259. In addition, the municipality owed Eskom R544 008 986 (2015: R386 211 700) and the 
Department of Water Affairs R63 899 036 (2015: R50 086 403) as at 30 June 2016, which was long overdue. 
These conditions, along with other matters set forth in note 45, indicate the existence of a material uncertainty 
that may cast significant doubt on the municipality’s ability to operate as a going concern and to meet its ser¬ 
vice delivery objectives. 

Additional matter 

15. I draw attention to the matter below. My opinion is not modified in respect of this matter. 


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Unaudited disclosure notes 

16. In terms of section 125(2)(e) of the MFMA, the municipality is required to disclose particulars of non- 
compliance with the MFMA. This disclosure requirement did not form part of the audit of the financial state¬ 
ments and, accordingly, I do not express an opinion on it. 

Report on other legal and regulatory requirements 

17. In accordance with the Public Audit Act, 2004 (Act No. 25 of 2004) (PAA) and the general notice issued in 
terms thereof, I have a responsibility to report findings on the reported performance information against prede¬ 
termined objectives for selected key performance areas presented in the annual performance report, compli¬ 
ance with legislation and internal control. The objective of my tests was to identify reportable findings as de¬ 
scribed under each subheading, but not to gather evidence to express assurance on these matters. Accord¬ 
ingly, I do not express an opinion or conclusion on them. 

Predetermined objectives 

18. I performed procedures to obtain evidence about the usefulness and reliability of the reported performance 
information for the following selected key performance areas presented in the annual performance report of 
the municipality for the year ended 30 June 2016: 

• Key performance area (KPA): Basic service delivery and infrastructure development on pages xx to xx 

19. I evaluated the usefulness of the reported performance information to determine whether it was consistent with 
the planned key performance areas. I further performed tests to determine whether indicators and targets 
were well defined, verifiable, specific, measurable, time bound and relevant, as required by the National 
Treasury’s Framework for Managing Programme Performance Information (FMPPI). 

20. I assessed the reliability of the reported performance information to determine whether it was valid, accurate 
and complete. 

21. The material findings in respect of the selected key performance area are as follows: 

KPA: Basic service delivery and infrastructure development 

Usefulness of reported performance information 

22. The FMPPI requires performance targets to be specific in clearly identifying the nature and required level of 
performance, and measurable. A total of 66% of the targets were not specific and 83% of the targets were not 
measurable. 

23. The FMPPI requires performance indicators to be well defined by having clear definitions so that data can be 
collected consistently and is easy to understand and use. A total of 76% of the indicators were not well de¬ 
fined. 

24. The processes and systems that produced the indicator should be verifiable, as required by the FMPPI. A total 
of 83% of the indicators were not verifiable. 


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Reliability of reported performance information 

25. The FMPPI requires auditees to have appropriate systems to collect, collate, verify and store performance in¬ 
formation to ensure reliable reporting of actual achievements against planned objectives, indicators and tar¬ 
gets. I was unable to obtain the information and explanations I considered necessary to satisfy myself as to 
the reliability of the reported performance information. This was because of limitations placed on the scope of 
my work due to the absence of proper systems and processes and the auditee not providing sufficient appro¬ 
priate evidence in support of the reported performance information. The auditee’s records also did not permit 
the application of alternative audit procedures. 

Additional matters 

26. I draw attention to the following matters: 

Achievement of planned targets 

27. Refer to the annual performance report on pages xx to xx for information on the achievement of the planned 
targets for the year. This information should be considered in the context of the material findings on the use¬ 
fulness and reliability of the reported performance information for the selected key performance area reported 
in paragraphs 22 to 25 of this report. 


Compliance with legislation 

28. I performed procedures to obtain evidence that the municipality had complied with applicable legislation re¬ 
garding financial matters, financial management and other related matters. My material findings on compliance 
with specific matters in key legislation, as set out in the general notice issued in terms of the PAA, are as fol¬ 
lows: 

Strategic planning and performance management 

29. The integrated development plan was not drafted by taking into account the integrated development process 
and proposals submitted by the district municipality as required by section 29(3)(b) of the Municipal Systems 
Act, 2000 (Act No. 32 of 2000) (Municipal Systems Act). 

30. The key performance indicators set by the municipality did not include indicators on the percentage of house¬ 
holds with access to a basic level of water, sanitation, electricity and solid waste removal as required by sec¬ 
tion 43(2) of the Municipal Systems Act and the municipal planning and performance management regulation 
10(a). 

Financial statements, performance and annual reports 

31. The annual performance report for 2015-16 did not include the performance of the external services providers, 
a comparison of the performance with the previous financial year and measures taken to improve performance 
as required by section 46(1 )(a), (b) and (c) of the Municipal Systems Act. 

32. The financial statements submitted for auditing were not prepared in all material respects in accordance with 
the requirements of section 122 of the MFMA. Material misstatements of non-current assets, current assets, 
non-current liabilities and disclosure items identified by the auditors in the submitted financial statements were 
subsequently corrected, resulting in the financial statements receiving an unqualified audit opinion. 


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33. The 2014-15 annual report was not tabled in the municipal council within seven months after the end of the 
financial year, as required by section 127(2) of the MFMA. 

34. The council failed to adopt an oversight report containing the council’s comments on the annual report within 
the prescribed timelines, as required by section 129(1) of the MFMA. 

Procurement and contract management 

35. Goods and services with a transaction value above R200 000 were procured without inviting competitive bids, 
as required by SCM regulation 19(a). Deviations were approved by the accounting officer even though it was 
not impractical to invite competitive bids, in contravention of SCM regulation 36(1). 

Expenditure management 

36. Reasonable steps were not taken to prevent unauthorised expenditure, as required by section 62(1 )(d) of the 
MFMA. 

37. Reasonable steps were not taken to prevent irregular expenditure, as required by section 62(1 )(d) of the 
MFMA. 

38. Reasonable steps were not taken to prevent fruitless and wasteful expenditure, as required by section 62(1 )(d) 
of the MFMA. 

39. Money owed by the municipality was not always paid within 30 days, as required by section 65(2)(e) of the 
MFMA. 

Consequence management 

40. Unauthorised expenditure by the municipality was not investigated to determine whether any person was liable 
for the expenditure, as required by section 32(2)(a) of the MFMA. 

41. Irregular expenditure by the municipality was not investigated to determine whether any person was liable for 
the expenditure, as required by section 32(2)(b) of the MFMA and municipal budget and reporting regulation 
75(1). 

42. Fruitless and wasteful expenditure by the municipality was not investigated to determine whether any person 
was liable for the expenditure, as required by section 32(2)(b) of the MFMA and municipal budget and report¬ 
ing regulation 75(1). 

Internal control 


43. I considered internal control relevant to my audit of the financial statements, annual performance report and 
compliance with legislation. The matters reported below are limited to the significant internal control deficien¬ 
cies that resulted in the findings on the annual performance report and the findings on compliance with legisla¬ 
tion included in this report. 

Leadership 

44. Leadership did not always take prompt and adequate action to address weaknesses in performance manage¬ 
ment, which resulted in non-compliance with applicable legislation. Management failed to properly analyse the 
control weaknesses and implement appropriate follow-up actions that adequately addressed the root cause. 


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Financial and performance management 

45. Management did not implement proper record keeping and prepare regular, accurate and complete perfor¬ 
mance reports that were supported and evidenced by reliable information. This was due to the lack of compe¬ 
tent staff in the performance information division. The municipality also did not prioritise the review and moni¬ 
toring of compliance with legislation, which resulted in repeat findings being reported. 

46. The financial statements were not properly reviewed for completeness and accuracy prior to submission for 
auditing. Audit findings communicated to the municipality during the audit were corrected by management, 
which resulted in material adjustments to the financial statements. 

47. Due to the lack of capacity, the finance division relied heavily on the use of consultants, which is not sustaina¬ 
ble in the long term. 


Governance 


48. The municipality did not promptly initiate steps based on the risk assessment performed to address risks relat¬ 
ing to the performance management system. 


Bloemfontein 
30 November 2016 



AUDITOR-GENERAL 


SOUTH AFRICA 


Auditing to build public confidence 


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