Municipal audit outcomes
The MFMA General Report for 2018/2019 was published by the Auditor-General of South Africa (AGSA) on 1 July 2020. With only 20 municipalities achieving a clean audit, it is hard not to wonder how things will look the next year given the ongoing COVID-19 crisis and the negative effects it has had on the economy.
More debt less cash
Of concern is that municipalities are already cash strapped and overburdened with debt. The AGSA’s report indicates that 60% of the money due for basic municipal services, such as water and electricity, will not be collected. A staggering R28.65 billion is owed to Eskom and various Water Boards. The implementation of the new impairment model outlined in the revised Standard of GRAP on Financial Instruments (2019) may go some way to help municipalities to better understand their exposure to credit risk, i.e. non-collection.
The new model proposes an estimation of exposure to credit risk rather than just focusing on past “default” events which is the current approach. Having better information about the future means that users of the financial statements may be able to better predict the financial position of an entity. However, if the Standard is to be implemented effectively – which is currently proposed as 1 April 2024 - there will be a clear need for municipalities to have reliable information on the debts it is owed. This may be an area where municipalities may want to focus their attention given the current economic crisis.
Preparing the financial statements
Despite being in a dire financial position, 183 municipalities employed consultants to help with the preparation of the financial statements. Only 7% of these indicated that they used consultants due to internal vacancies. This means that the remaining municipalities had internal teams available to prepare the financial statements, but still chose to use consultants.
The use of consultants is often raised with the ASB and broadly framed under the concern that the “Standards of GRAP are too costly to implement”. The Standards of GRAP are designed to be scalable, particularly because the Standards only apply to material items. What this means is that if an entity has complex, material transactions, then the Standards could arguably be complex to apply. These entities should however have appropriately skilled resources to deal with this level of complexity. If an entity does not have complex transactions, then the Standards and related accounting are simple.
The Standards of GRAP are also designed to deal with transactions undertaken by a range of entities in the public sector. As a result, some Standards may be more relevant to particular entities or groups of entities than others.
It is critical for entities to understand which Standards are relevant to them, and what transactions and events are material such that the Standards are only applied to material items.
A critical success factor in preparing financial statements, is a sound control environment. This includes the existence of credible, reliable and complete information for all the transactions and events that have occurred at an entity. It is important that, if consultants are used, they should ideally not be used to fulfil day-to-day or routine activities where existing internal capacity exists.
Access the full report
Access the full Consolidated General Report on the Local Government Audit Outcomes and the Citizens’ Report MFMA 2018-19 on the AGSA’s website.
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