The Auditor-General has unveiled the latest Consolidated General Report on Local Government Audit Outcomes for 2022-2023, raising several concerns regarding the Newcastle Municipality.
According to the report released on Tuesday, 27 August 2024, by Auditor-General Tsakani Maluleke, the Newcastle Municipality achieved an unqualified audit for the financial year under review.
An unqualified audit opinion with findings, as explained by the Auditor General, indicates that while the municipality managed to produce quality financial statements, it faced challenges in delivering quality performance reports and complying with key legislation. The Auditor-General attributed the 2022-2023 audit outcome to the lack of appropriate competencies among key officials.
Let’s delve into the additional findings highlighted in the latest report.
Despite receiving an Unqualified Audit, the Auditor-General observed that numerous local municipalities across the country are experiencing financial difficulties. Maluleke’s report outlined that weaknesses in financial management affect three critical areas:
- Local governments face financial distress.
- Borrowing costs may increase.
- Governance and accountability processes may be weakened, all of which adversely affect service delivery.
Regarding financial distress, the Auditor-General noted that municipalities must assess their financial position at year-end using criteria included in the accounting standards.
“They do this by analysing their financial information and performing calculations to determine whether their revenue exceeds their spending (in other words, if they made a profit), whether they have more assets than liabilities, if there is enough money in the bank to pay their debts, and if they expect to have sufficient funds in the future to cover the costs of delivering services,” she explained.
If this assessment raises significant concerns about their ability to fulfil their obligations with the available funds, municipalities are required to disclose this in their financial statements. “The financial position of 74 of the 247 municipalities (30%) where we completed our audits was so dire that they had to disclose significant doubt about their ability to fully continue operating,” Maluleke stated, pointing out that these municipalities were found in every province except the Western Cape.
Many of these 74 municipalities have repeatedly made this disclosure over the previous administrative term. This situation indicates that these municipalities have not been fully operational for many years. Typically, these are the municipalities that fail to pay Eskom and water boards on time and do not deliver services at the required level.
In examining the municipalities in a concerning financial position over consecutive years, it was revealed that the Newcastle Municipality had been grappling with financial challenges for the past five years. In contrast, the eMadlangeni (Utrecht) Municipality, also listed, has only faced such difficulties for one year.
The annual financial statement, as highlighted by the Auditor-General’s findings, reflects data from audits of the financial year ending 30 June 2023. The report includes only those audits finalised by 31 March 2024, unless otherwise indicated.
Although the Newcastle Municipality submitted its financial statements for auditing by the legislated deadline, the Auditor-General noted that the quality of the financial statements was rated as poor. However, the Municipality received no findings on its financial statements only because it corrected identified misstatements during the audit.
Additionally, the Auditor-General acknowledged that the performance report submitted for auditing was of good quality, a significant improvement from the previous years when the performance reports received poor ratings.
Findings related to compliance with legislation included the following areas:
- Expenditure management.
- Material misstatement or limitations in submitted annual financial statements.
- Unauthorised, irregular, and/or fruitless and wasteful expenditure.
Findings on supply chain management (including non-material findings) included:
- Uncompetitive and unfair procurement.
- Awards to employees or councillors.
- Awards to close family members.
- Awards to other state officials.
The closing balance of unauthorised, irregular, fruitless and wasteful expenditure accumulated as follows, including amounts disclosed in financial statements for audits that were still outstanding as of 31 March 2024:
Unauthorised:
- 2022-2023: R372,8 million
- 2021-2022: R220,2 million
- 2020-2021: R967,8 million
- 2019-2020: R967,8 million
- 2018-2019: R918,1 million
Fruitless and wasteful:
- 2022-2023: R17,1 million
- 2021-2022: R20,7 million
- 2020-2021: R59,4 million
- 2019-2020: R55 million
- 2018-2019: R38,6 million
Irregular:
- 2022-2023: R534,7 million
- 2021-2022: R528,1 million
- 2020-2021: R498,4 million
- 2019-2020: R466,7 million
- 2018-2019: R370,2 million
In assessing the overall financial health of the Newcastle Municipality, the Auditor-General’s findings highlighted several concerning points:
- There is doubt about the Municipality’s ability to continue operating (going concern uncertainty)\.
- The Municipality’s ongoing operation has been in doubt for five years.
- The Municipality takes an average of 154 days to pay creditors, despite the Auditor-General emphasising that it should be less than 30 days.
- 59% of municipal debt cannot be recovered.
- The Municipality takes an average of 121 days to collect debt owed to it.
- The Newcastle Municipality owned more than it owed at year-end (no total liability position).
- The Municipality had money in the bank at year-end (no overdraft).
- The Municipality spent R358,0 million more than it made for the year (deficit).
- More than 50% of next year’s budget has already been spent in previous years.
Regarding infrastructure, the Auditor-General pointed out that the Newcastle Municipality received infrastructure grants and did not underspend these grants by more than 10%.
In terms of repairs and maintenance, the Auditor-General highlighted that the Newcastle Municipality disclosed spending of R64,5 million on repairing and maintaining infrastructure assets in its annual financial statements. According to the Auditor-General, this amount is equivalent to 1.2% of the value of infrastructure assets. The National Treasury norm recommends a minimum of 8% of the value of infrastructure assets.
Additionally, the Auditor-General noted that the Newcastle Municipality disclosed R58,9 million in water losses in its annual financial statements. This figure reportedly represents 37% of all water flowing through municipal pipelines, whereas the National Treasury norm suggests a range of 15-30%.
Regarding municipal revenue sources, the Auditor-General highlighted that Newcastle Municipality’s total revenue stood at R2,28 billion. Of this, Newcastle Municipality’s own revenue accounted for R1,60 billion, while R588,90 million came from grants. It is worth noting that “Own Revenue” refers to revenue generated by municipal governments through taxes (property, income, sales, excise taxes), user fees, and intergovernmental transfers.
For the 2022-2023 period, the Newcastle Municipality’s total grant revenue amounted to R588,90 million, with the Municipality’s equitable share constituting 79% of this figure, totalling R466,90 million. Other grants made up 21% of the total grant revenue, amounting to R122 million.
Furthermore, the Auditor-General reported that the Municipality spent R4,1 million on consultants for financial reporting. The use of consultants was attributed to vacancies within the Municipality, with services provided by consultants in areas such as:
- Asset management.
- Tax services.
- Other financial reporting services.
In examining internal controls, the Auditor-General noted that the Newcastle Municipality’s internal control assessment was ranked as concerning.
Specific controls such as daily and monthly controls, in-year and end-year reporting, as well as proper record-keeping, were also identified as needing intervention. The Auditor-General further noted that the Municipality’s review and monitoring of compliance required significant improvement.
As the Auditor-General’s Consolidated General Report on Local Government Audit Outcomes for 2022-2023 suggests that the Newcastle Municipality requires substantial improvement, what are your thoughts on the findings?
Share your views in the comment section below.
