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Briefing to Portfolio Committee on
Water and Sanitation
Water boards audit outcomes
2
Reputation promise
The Auditor-General of South Africa (AGSA) 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.
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Role of the AGSA in the reporting process
Our role as the AGSA is to reflect on the audit work performed to assist the portfolio committee in its oversight role of assessing the performance of the water boards.
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Our focus 1
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Our annual audit examines three areas
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The AGSA expresses the following different audit opinions Unqualified opinion
with no findings
(clean audit)
Financially unqualified
opinion with findings Qualified opinion Adverse opinion Disclaimed opinion
Auditee:
• produced credible and
reliable financial
statements that are free
of material
misstatements
• reported in a useful and
reliable manner on
performance as measured against
predetermined
objectives in the annual
performance plan (APP)
• complied with key
legislation in conducting
their day-to-day
operations to achieve
their mandate
Auditee produced
financial statements
without material
misstatements or could
correct the material
misstatements, but
struggled in one or more
area to:
• align performance reports to the predetermined objectives they committed to in APPs
• set clear performance indicators and targets to measure their performance against their predetermined objectives
• report reliably on whether they achieved their performance targets
• determine the legislation that they should comply
with and implement the required policies, procedures and controls to ensure compliance
Auditee:
• had the same
challenges as those with
unqualified opinions
with findings but, in
addition, they could not
produce credible and
reliable financial
statements
• had material misstatements on
specific areas in their
financial statements,
which could not be
corrected before the
financial statements
were published.
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
financial statements
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
financial statements
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Water Value chain
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The 2017-18 audit outcomes 2
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Water Boards snapshot (2017-18)
Quality financial
statements: 56%
(2016-17: 56%)
Clean audits: 0%
(2016-17: 11%)
Quality performance
reports: 44%
(2016-17: 33%)
No findings on compliance
with legislation: 0%
(2016-17: 11%)
Irregular expenditure (IE):
R341 m
(2016-17: R294 m) *Completeness of IE qualified at Sedibeng
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Overall audit outcomes of the portfolio over four (4) years
(11%) Overberg
(11%) Overberg
(44%) Umgeni
Rand Magalies Amatola
(33%) Sedibeng Lepelle
Mhlathuze
(45%)
Sedibeng Lepelle
Mhlathuze Overberg*
(56%) Rand
Magalies Sedibeng Lepelle Amatola
(44%) Magalies Amatola Lepelle
Overberg
(56%) Bloem
Umgeni Rand
Magalies Amatola
(11%) Bloem
(33%) Bloem
Umgeni Mhlathuze
(56%) Bloem
Umgeni Sedibeng Mhlathuze
Rand
2017-18 2016-17 2015-16 2014-15
• A regression occurred as Bloem Water moved from a clean audit to unqualified with findings on compliance.
• Financial statement preparation remains a concerns as material adjustments are effected to AFS submitted for audit at six (6) Water Boards
• Lepelle was qualified on property plant and equipment (PPE), payables from exchange transactions, cash-flow statement, statement of changes in net
assets and commitments. The audit period was also extended to provide management to address some of the qualification areas. They managed to
resolve 5 qualification paragraphs pertaining to, related parties, additional PPE paragraphs, irregular expenditure, cost of sales and other income
• Sedibeng water was qualified on operating profit, irregular expenditure (IE), prior period error and trade and other receivables.
• Mhlathuze was qualified on receivables
• * Overberg’s audit report for 2016-17 was signed on the 25 January 2019. Was qualified on inventories, PPE, Intangible assets and IE
Unqualified
with
no findings
Unqualified
with findings
Qualified
with findings
Disclaimed
with finding
Audits
outstanding
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Status of the audit outstanding as at 28 February 2019
• The financial statements for Overberg Water Board for 2016-17 were submitted on 3 August 2018 and the audit report thereon was signed on the 25 January 2019
• The 2017-18 financial statements were submitted on 31 August 2018 and anticipated sign off date on audit report is 31 March 2019
• The main root causes for non/late submission of financial statements is:
There is currently no board in place at Overberg;
The CFO Position is also vacant as the CFO was suspended with pay from 29 January 2017 and was formally terminated on
07 February 2018; and
CEO is also acting as the accounting authority until such time that a new board is appointed by the Minister of Water and Sanitation
Audit outcomes in the current year on compliance and pre-determined objectives
• AFS preparation remains a concerns as material adjustments
are effected to AFS submitted for audit at six (6) Water Boards
including Bloem that was clean in the 2016/17
• Various SCM non-compliance findings were raised, at Lepelle,
Rand, Mhlathuzi, Amatola and Sedibeng
• Effective steps were not taken to prevent irregular expenditure
and/or fruitless & wasteful expenditure at Lepelle, Umgeni,
Magalies, Mhlathuzi and Amatola.
Objectives were qualified at Lepelle, Magalies, Sedibeng and Amatola on the following;. • Lepelle - Strategic objective 1: Provision of equitable and sustainable regional water and sanitation services and
Strategic objective 2: Develop and maintain regional water and sanitation infrastructure
• Magalies – Strategic objective: To provide sustainable water services to customers
• Sedibeng - Objective 4 – Increased access to services, Objective 11 – Bulk supply agreements concluded with
municipalities/other customers, objective 13 – Support rural developments, Objective 17 – Jobs created
• Amatola - Objective: Support rural development
Four year trend –
Compliance with key legislation
Overberg
Overberg
89%
67%
67%
44% Magalies Lepelle Amatola Overberg
Bloem
Bloem
Umgeni Mhlathuze
56%
2017-18 2016-17 2015-16 2014-15
Four year trend –
Quality of annual
performance plans
Four year trend –
Quality of submitted
annual performance reports
Overberg
Overberg
Amatola Lepelle
Magalies Sedibeng
56%
33% Magalies Amatola Overberg
33%
44%
33% Bloem
Umgeni Magalies
67%
67% Bloem
Umgeni Magalies Sedibeng Lepelle Rand
2017-18 2016-17 2015-16 2014-15
11%
Overberg
Overberg
22%
Amatola Overberg
44%
44% Amatola Lepelle
Magalies Sedibeng
44%
Bloem Umgeni Magalies Amatola
78%
56% Bloem Lepelle Rand
Sedibeng Umgeni
44%
44%
2017-18 2016-17 2015-16 2014-15
--------------------------------------------------
With no material findings
With material findings
Outstanding audits
No APR/ late submission
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13
Status of internal control
Good Of concern Intervention required
Overberg
Sedibeng Overberg Lepelle
Sedibeng Overberg
Governance
Financial andPerformanceManagement
Leadership
Magalies
Bloem
• Sedibeng – Not an effective leadership culture due to no oversight, inadequate filing systems and inadequate policies in place
• Overberg - Not having a board in place, CFO position vacant and CEO newly appointed
• Lepelle - Lack of proper record keeping, daily and monthly processing and, inadequate IT systems controls.
13
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First
le
ve
l
Overberg
Amatola, Lepelle, Sedibeng, Overberg
Mainly due to Board appointments
Overberg Amatola, Bloem, Lepelle, Mlathuze, Sedibeng
Senior management (SM)
Accounting authority (AA)
Executive authority (EA)
Internal audit unit
Audit committee Se
co
nd
le
ve
l
--------------------------------------------------------------------------------------------------------------------
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Assurance provided
Provides assurance
Provides some assurance
Provides limited/ no assurance
Not established
Sedibeng, Overberg
• Overberg - Not having a board in place, CFO position vacant and having an acting CEO, limited assurance are provided
• Sedibeng – SM did not monitor the effectiveness of internal controls and also placed reliance on consultants for the preparation of AFS. The AA did not hold SM accountable for the implementation of action plans developed to address prior year findings.
• Lepelle - Lack of adequate internal controls result in limited assurance on SM level
• Amatola - The review of controls and processes implemented by the entity was not always adhered to by management as evidenced by internal control deficiencies identified and non-compliance with SCM policy and several requirements of the PFMA.
• Mhlathuze – Risk management function was not adequately functional for the first nine months of the year.
Lepelle, Mlathuze, Ugeni
14
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Financial health and financial management 4
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(33%) Umgeni / Magalies / Rand, Mhlathuze,
(44%) Umgeni / Rand / Magalies / Mhlathuze
(11%)Overberg
(11%)Overberg
2016-17
2017-18
(56%) Bloem, Lepelle, Amatola, Sedibeng
(44%) Bloem, Lepelle, , Amatola, Sedibeng
Material uncertainty exists whether of auditees can continue to operate in future 22%
Two or less unfavourable indicators
More than two unfavourable
indicators
Significant doubt that operations can
continue in future and/or auditee
received a disclaimed or adverse
opinion, which meant that the
financial statements were not
reliable enough for analyses
• Material uncertainty exists whether Amatola and Bloem can continue to operate in
future
• Four (4) Water Boards ( Bloem; Amatola; Lepelle ; Sedibeng) experienced financial
health concerns. The water boards experience considerable difficulties in collecting
debt as their debt collections were not adequate and their average collection
period were long.
• Amatola, Lepelle and Sedibeng have an abnormally long creditor payment period.
Some of the contributing factors were due to delay in paying suppliers is where the
entity is acting as an implementing agent on behalf of department of water and
sanitation, the department does not reimburse the entity timeously for claims on
projects resulting in the delay in settling of invoices of suppliers
• Lepelle’s cash and cash equivalent decreased significantly as at 30 June 2018
Key concerns identified
Financial health
Audit outstanding
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Municipal debt consist of of total receivables at year end: 85%
Financial health
Waterboard Total receivables at year
end Municipal debt Percentage
Amatola 152 158 311 150 898 440 99%
Bloem 936 650 000 925 889 801 99%
Lepelle 845 033 000 617 834 891 73%
Umgeni 495 695 000 435 963 753 88%
Rand Water 2 481 293 000 2 169 449 295 87%
Mhlathuze 114 174 000 25 475 912 22%
Magalies 412 842 000 137 850 203 33%
Sedibeng 4 364 983 000 3 699 949 449 85%
Overberg Not yet audited Not yet audited
Grand Totals 9 562 931 525 8 163 311 744 83%
• Some water boards’s debtor’s collection is not as adequate, as there is a significant increase in the provision for
impairment of receivables – Amatola, Bloem and Lepelle
• Debtor collection period at all water boards is greater than 30 days
• This might have a negative impact on service delivery for future capital projects
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Irregular and fruitless and wasteful expenditure increased over years
Expenditure
incurred in
contravention
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
R 128 million
R 24 million
R 294 million
R12 million
R 341 million
R16 million
Irregularexpenditure
(IE)
Fruitless andwasteful
expenditure(FW)
2017-18 2016-17 2015-16 2014-15
IFW amounts incurred by entities in portfolio Nature of IFW expenditure R’million
• Five (5) WBs disclosed fruitless and
wasteful expenditure for the current
year relating to late payment of
invoices, resulting in interest and
penalties amounting to R4,3 million
• The bulk of the disclosed fruitless and
wasteful expenditure relate to
litigations and claims at Rand Water
(R11,9 million)
Majority of the disclosed irregular
expenditure related to:
• Non-compliance with the
procurement processes.
• Payments made to expired contracts
and/or payment made not in
accordance with contract term
• Non-Compliance to SCM
Regulations
• Non –Compliance with NT
regulations and instructions
• Overpayment of contracts without
proper variation orders approval
Audit report
impact
Non compliance
findings were raised
in three (3) Water
Board (Sedibeng,
Lelpelle & Amatola)
due to effective
steps not taken to
prevent fruitless and
wasteful
expenditure
IE was qualified for
Sedibeng due to
significant doubt on
the completeness of
the expenditure
which was disclosed
in its annual report.
Non compliance
findings were raised
in six (6) Water
Board due to
effective steps not
taken to prevent
irregular
expenditure
---------------------------------------------------------------------------------------------------------------------------------
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Most common findings on supply chain management
1 of 8
2 of 8
Inadequate contract performancemeasures and monitoring
Preference point system notapplied or incorrectly applied
Competitive bidding not invited
5 of 8
Concerns were identified in the procurement processes followed by Water boards, bearing in mind that as Schedule 3B
entities are guided mainly by implementation of their own policies on supply chain management (SCM) which are only required to
be designed to ensure that procurement happens in a manner that is fair, equitable, competitive and cost effective.
Some procurement did not comply with such requirements due to no proper process being followed whilst in other cases a process
was followed which was flawed e.g. preference point scoring was not applied or was applied but the bid awarded to a tenderer that
did not score the highest points in the process.
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Concluding remarks and recommendations 5
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DO
PLAN
CHECK ACT
ACCOUNTABILITY = PLAN + DO + CHECK + ACT
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• Management to implement remedial action to improve (Plan)
• Implement proper procurement internal controls (DO)
• Appointments should be made at board and key management levels to ensure stability in the control environment.
• Boards and CEOs should be held accountable for the delivery and financial results of these entities, and there
must be immediate and effective consequences for poor performance and transgressions, especially those who
permit or incur IFW expenditure. (ACT)
• Recovery of debt owed to them by municipalities, inhibits certain water boards to fully service their operational
expenditure needs, which have to be funded from this revenue. Specific and focussed debt recovery strategies are
required to be implemented by management to ensure sufficient levels of cash flow is maintained to ensure
uninterrupted continuation of operations which does not compromise service delivery. (CHECK)
• Oversight by the department, minister and parliamentary committees responsible for these water boards should
include strong in-year monitoring and ensuring that governance policies and practices in place, are properly
monitored. (CHECK)
• The inability of the DWS to also provide funding for certain projects to be implemented on its behalf combined with
the concerning recoveries, has also further exasperated the ability of certain water boards to deliver timeously on
projects committed to and to ensure the construction of infrastructure and thus access to water in remote areas.
This will require improved and focussed intensive stakeholder engagement; and better coordination and
collaboration from all the relevant role players within the sector who are responsible for the business of
providing this basic need to the citizens.
Concluding remarks and recommendations
Water boards play an integral role in the delivery of water services in the water value chain of South Africa. Accountability is of paramount importance:
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Corruption
Service Delivery
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