EHLANZENI DISTRICT MUNICIPALITY – BEST PRACTICE CLEAN AUDIT AND ASSET MANAGEMENT

1. EHLANZENI DISTRICT MUNICIPALITY – BEST PRACTICE CLEAN AUDIT AND ASSET MANAGEMENT PRESENTED BY: MR. WISEMAN KHUMALO –CFO 07 FEB 2013

2. CONTENTS INTRODUCTION SUMMARY OF AUDIT OUTCOMES 2014 AUDIT GOAL KEY TO SUCCESS APPROACH – CLEAN AUDIT (STRATEGIC AND OPERATIONAL) BEST PRACTICES – ASSETS (PPE) CHALLENGES CURRENT AND FUTURE LESSONS LEARNT AND WAY FORWARD

3. INTRODUCTION EDM COVERS FIVE LM’s (NKOMAZI, BBR, UMJINDI,THABACHWEU AND MBOMBELA) PAST FIVE YEARS – TWO UNQUALIFIED (2007/8, 2008/9), THREE CLEAN AUDITS (2009/10,2010/11,2011/12) GRADE 5 DETERMINATION OF UPPER LIMITS 1 550 000m POPULATION OF THE DISTRICT

4. INTRODUCTION

5. INTRODUCTIONOPPORTUNITIES & AREAS OF INVESTMENTS Agricultural farming, Live stock farming, Rural CBD (Precinct development), ICT, Timber growing, Tourism, Arts and craft, CRDP Mining, timber cluster, agro processing, agriculture, scenic attractions, revitalization of railway transport, ICT Fresh produce market, agriculture and agrarian reform, live stock farming, Industrial parks, Tourism routes, Cultural and heritage, ICT and Informal Trading, manufacturing –sugar cane & CRDP Agriculture, Forestry, fishing, manufacturing, tourism, construction and utilities, Social and community services, & CRDP Mining, manufacturing, agriculture and agro tourism, farming and nature conservation & Mining,

6. AUDIT OUTCOMES: EDM 2007/8 – Unqualified with matters 2008/9 – Unqualified with only one matter 2009/10 – Unqualified with no matters (Clean Audit) 2010/11 – Unqualified with no matters (Clean Audit) 2011/12 – Unqualified with no matters (Clean Audit) EDM have been able to maintain the clean audit (3 YRS)

7. 2014 CLEAN AUDIT GOAL • WHERE IT BEGAN????? • LAUCHED BY MPUMALANGA PROVINCE IN DECEMBER 2009 • IMMEDIATELY STARTED PLANNING FOR 2009/10 FINANCIAL YEAR • IDENTIFIED OUR STRENGHTS AND WEAKENESSES • STRENGTHEN MANAGEMENT TEAM – COMMON GOAL OF CLEAN AUDIT • STANDING ITEM ON SENIOR MANAGEMENT MEETING • ZERO TOLERANCE TO NON-PERFORMANCE

8. KEY TO SUCCESS LEADERSHIP – CENTRE MUST HOLD FINANCIAL AND PERFORMANCE MANAGEMENT – SOUND INTERNAL CONTROLS, COMPLIANCE FUNCTIONAL GOVERNANCE STRUCTURES Auditor – General also looks at these issues during the audit

9. KEY TO SUCCESS (CONT….) NO CONSULTANTS USED IN AFS PREP FINANCE STAFF AVERAGE 10 YEARS EXPERIENCE – GRAP TRAINING QUARTERLY ACCOUNTING SYSTEM – HAVE BEEN USED OVER 15 YEARS STILL TRAINING BEING PROVIDED CLEAN ADMINISTRATION – PRIORITY (ALL RESPONSIBLE FOR FRAUD PREVENTION, RISK MANAGEMENT,ETC U, I, F – SERIOUS CONSEQUENCES ZERO TOLERANCE TO POOR PERFORMANCE

10. KEY TO SUCCESS (CONT…) • Informed and effective Finance PORTFOLIO Committee • Independent and qualified FUNCTIONAL AND EFFECTIVE Audit Committee • Risk Management Committee IN PLACE AND FULLY FUNCTIONAL • Open and transparent reporting mechanisms (SCM AND OTHER REGULATORY REPORTING) • Appropriate financial systems • Dynamic and competent management

11. APPROACT TO CLEAN AUDIT – EDM (STRATEGIC) INPUT: Politicians sec 56 managers (all filled) Competent and qualified staff (critical posts filled) Functional Governance structures (IA, AC, RMC etc) PROCESSES: policies and procedures Record keeping Compliance and Reconciliations Reporting Sound Internal controls monitoring OUTPUT: clean administration (Accountability) Enhanced and transparent oversight Effective and efficient reporting Enhanced service delivery Informed decisions by leadership

12. APPROACH TO CLEAN AUDIT (OPERATIONAL) • Coordination of audit process by CFO AND MM • FUNCTIONAL AUDIT STERING COMMITTEE (2X / M) • Constructive interaction with the auditors and appropriate committee structures to deal with audit issues • Keeping Executive Management informed of audit progress • Detailed file of audit working papers in support of the compilation of the annual financial statements • SCM (BELOW R200K AND ABOVE) – MORE THAN 10 STAFF MEMBERS CHECKING PAYMENTS IF THEY COMPLY

13. APPROACH TO CLEAN AUDIT (OPERATIONAL) • COMPLIANCE WORKING PAPERS – IN LINE WITH REGULATIONS AND COMPLIANCE REGISTER AND CALENDER (BUDGET, REPORTING TO NT,PT, AG) • Availability of key personnel during the audit process (NO LEAVE DURING AUDIT) • Early resolution of issues and audit queries – EXCEPTION REPORTS • Challenge to unreasonable demands and findings – LAST WEEK OF NOVEMBER)

14. BEST PRACTICE – ASSETS • LOCAL GOVERNMENT CAPITAL ASSETS MANAGEMENT GUIDE – A MUST READ • ASSET MANAGEMENT POLICY – BENCHMARK WITH OTHER MUNICIPALITIES AND COMPLY • BENCHMARK WITH MUNICIPALITIES THAT HAVE MADE IT, INFORMATION SHARING SESSIONS • KNOW WHERE YOUR ASSETS ARE - GIS TOOL, ASSET NUMBERS, • TRAINING, TRAINING, TRAINING OF STAFF MEMBERS

15. BEST PRACTICES - ASSETS • PRESCRIBED GRAP STANDARS – KNOW BY HEART - GRAP 16 (INVESTMENT PROPERTIES) - GRAP 17 ( PPE) - GRAP 13 ( LEASES) - GRAP 31 ( INTANGIBLE ASSETS) - GRAP 103 (HERITAGE ASSETS) - GRAP 21 & 26 (IMPAIREMENT IF CASH GENERATING ASSETS AND NON CASH) • GRAP 3 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS • DIRECTIVE 5: APPENDIX G – 1 APRIL 2012

16. BEST PRACTICES: ASSETS • EACH GRAP STANDARD: KNOW BY HEART - SET UP OF A GRAP STANDARD IDENTIFICATION RECOGNITION MEASUREMENT PRESENTATION DISCLOSURE

17. ASSET REGISTER • COMPLY WITH GRAP • SEVEN SUBHEADINGS NEEDED TO FULLY COMPLY 1. ACQUISITION 2. IDENTIFICATION AND LOCATION 3. ACCOUNTABILITY 4. PERFORMANCE 5. DISPOSAL 6. ACCOUNTING 7. MANAGEMENT AND RISK

18. BEST PRACTICE: ASSETS • DEFINATION: - PROBABLE FUTURE ECONOMIC BENEFITS OR SERVICE POTENTIAL - WILL FLOW TO THE MUNICIPALITY - COST OR FAIR VALUE CAN BE MEASURED RELIABLY ( - MUNIC SHOULD ALSO HAVE CONTROL OVER THE ASSETS - BE CAREFUL OF THE CAPITALISATION THRESHOLD IF AG WILL ACCEPT IT ( NO MINOR ASSETS IN GRAP)

19. ASSETS: BEST PRACTICE • IMMOVABLE AND IMMOVABLE ASSETS - INFRASTRUTURE ASSETS: ROADS, NETWORKS ETC WHEN USING EXPERT: QUALIFICATIONS, EXPERIENCE, INDEPENDENCE DECLARATIONS - DOCUMENT METHODOLOGY FOR: DETERMINING THE BOUNDRIES OF THE VERIFICATION, DETERMINING THE CURRENT REPLACEMENT COSTS, DEPRECIATED REPLACEMENT COSTS,ESTIMATED USEFUL LIVES, REMAINING USEFUL LIVES, RESIDUAL VALUES, CONDITION ASSESSMENT (PAR.56 GRAP 17)

20. ASSETS: BEST PRACTICE • LAND AND BUILDINGS: - DEEDS SEARCH AND COMPARED WITH FAR - VALUATION ROLL COMPARED WITH FAR - SPLIT BETWEEN LAND AND BUILDINGS - LAND NOT TO BE DEPRECIATED EXCEPT LANDFILL SITE • UNBUDLING / COMPONENTISATION CHECK THE DPLG GUIDE PAGE 59 AND ENGINEERS TO ASSIST

21. ASSETS: BEST PRACTICE • ASSETS IN USE - BUT FULLY DEPRECIATED (CANT SHOW ZERO VALUES, ASSESS THE CONDITION OF THE ASSET, RE-LOOK AT THE USEFUL LIVES AND CORRECT ERROR OR CHANGE THE ESTIMATE – REMEMBER WHEN CORRECTING ERRORS GRAP 3 TO BE FULLY COMPLIED WITH) - ASSET MANAGEMENT POLICY (DISPOSAL / REPLACEMENT OR……

22. ASSETS: BEST PRACTICE • DEPRECIATION: SYSTEMATIC ALLOCATION DEPRECIATE SEPARATELY EACH SIGNIFICANT PART REVIEW AT LEAST AT REPORTING DATE - RESIDUAL VALUE - USEFUL FIVES - DEPRECIATION METHOD - CONDITION OF THE ASSETS

23. ASSETS: BEST PRACTICE • INVESTMENT PROPERTY: DEF – EARN RENTALS, CAPITAL APRRECIATION (CRITICAL) STAFF QUARTERS, HOSTELS, ETC ACCOUNTING POLICY TO BE IN PLACE ACCOUNTING TREATMENT : VERY CRITICAL (CHOICE IS YOURS – EITHER COST OR FAIR VALUE, IF COSTS GRAP 17 DEPRECIATE AND ACCOUNT FOR IMPAIRMENT LOSSES

24. CHALLENGES – CURRENT & FUTURE MAINTAINING CLEAN AUDIT – NEW GRAP STANDARDS TO BE IMPLEMENTED RETENTION / RECRUITMENT OF SKILLED STAFF ANNUAL ROTATION OF AUDITORS – NEW AUDITORS YEARLY SUPPLIERS WHOSE DIRECTORS ARE IN THE SERVICE OF THE STATE 30 DAYS (WHEN DO WE START COUNTING) WRONG INTERPRETATION BY BOTH OF STANDARDS AND REGS

25. LESSONS LEARNT AND WAY FORWARD IN-HOUSE COMPILATION OF AFS – IMPROVES CHANCES OF GETTING CLEAN AUDIT MANAGEMENT TO PERFORM ROUTINE MANAGEMENT WORK (ASSET MANAGEMENT UNIT IN PLACE) FUNCTIONAL GOVERNANCE STRUCTURES COMPLIANCE WITH LAWS AND REGS – REPORT NON COMPLIANCE TO COUNCIL, AG, PT AND NT (ASK FOR ADVICE WHERE NECESSARY) ON-GOING MANAGEMENT MEETINGS – CLEAN AUDIT TO BE A STANDING ITEM THROUGHOUT RETENTION / RECRUITMENT OF SKILLED STAFF – TO FILL CRITICAL POSITIONS ON-GOING TRAINING OF STAFF MEMBERS

26. THANK YOU Contacts: Mr. W Khumalo (CFO) 013 759 8513/48/ 082 460 5825 wkhumalo@ledc.co.za