INSTITUTE OF MUNICIPAL FINANCE OFFICERS

1. INSTITUTE OF MUNICIPAL FINANCE OFFICERS LOCAL GOVERNMENT TURN AROUND STRATEGY HEARINGS PRESENTED BY : G.D. van Schalkwyk & J. B. Dorfling Date : 3 February 2010

2. INTRODUCTION At the outset, IMFO wishes to acknowledge and express its appreciation for the opportunity to present today The views expressed in this presentation have been canvassed with Institute Council members, and is accordingly representative IMFO is well positioned to comment on this Strategy and present thereon It must be also stated up front that IMFO welcomes all the new legislation as it has led to better standards and accountability

3. PRESENTATION OUTLINE • Background • Vision • Mission • Objectives of the Institute • Recognition • Code of Conduct • The Institute’s Structure • Critical Problem Areas • Lack of Status of the CFO • Current Status of CFO’s • Lack of Professional Recognition of CFO’s • Current Status of Appointments

4. PRESENTATION OUTLINE • Onerous Statutory Reporting • Challenges in the Current Reporting System • Supply Chain Management • Current Situation in Municipalities • Annual Financial Statements • Current Position in the Drafting of AFS • Unsustainable Financial Pressures on Municipalities • Current System of Service Delivery • Frequent Official Absences by CFO’s

5. PRESENTATION OUTLINE • Ineffective Internal audit Divisions • Current Status of Internal Audit • Inexperienced and Ineffective Audit Committees • Other Concerns and Challenges

6. BACKGROUND • The Institute of Municipal Finance Officers (IMFO) is a professional body that was established in 1929 • The Institute is registered in terms of Section 21 of the Companies Act and is an Association not for gain. • The Directors of the Institute are all fully employed in local government finance or related bodies – i.e. Salga, National Departments, Audit Companies, LGSETA, Educational Institutions, etc. • No Director receives any remuneration from IMFO and cost for travelling and accommodation is for the account of their employers.

7. VISION STATEMENT OF IMFO To be the recognised professional body for the development and promotion of Municipal Finance Officers

8. MISSION STATEMENT OF IMFO Providing within the statutory framework, effective accounting advice, as well as setting and maintaining high financial standards and controls in the area of Local Government Finance, to all levels of government and stakeholders, to benefit the community.

9. THE OBJECTIVES OF THE INSTITUTE • The Institute aims to protect and promote the interests of the profession of municipal finance officials and the finances of local government in general. • The Institute: • Renders expert advice to statutory and non-statutory bodies; • Promotes standards of academic education and practical training of persons in the profession; • Preserves and maintains the ethics and status of the profession and combats unethical behaviour and actions;

10. THE OBJECTIVES OF THE INSTITUTE • The Institute: • Extends accountability and transparency of local government finance to the public; • Compiles, publishes and distributes guidelines regarding local government finance and accounting; and • Presents workshops, seminars and conferences on matters relating to local government finance and accounting where members can exchange views and experiences.

11. RECOGNITION The Institute’s professionalism enjoys the recognition of various government departments, including the Office of the Auditor General, the Department of Cooperative Governance and Traditional Affairs, National Treasury. Provincial Governments, Municipal Associations and other Municipal Institutes. It also has a status at educational institutions and many private firms, including professional auditors, banks and computer companies

12. CODE OF CONDUCT  The Institute established a Code of Conduct that all members of the Institute has to comply with. It is required from any prospective member of the Institute to declare that he/she agrees to and accepts the Institute’s Code of Conduct. The Code of Conduct is part of the Institute’s Constitution and comprises the following: Professional Standards Personal Interest Hospitality and Gifts

13. THE INSTITUTE ‘S STRUCTURE • Institute Council • 8 special Standing Committees chaired by members of the Institute Council • The Eight Standing Committees are responsible for:   • Accounting Practices and Research • Administration and Finance • Branches • Communication • Education and Training • Internal Audit • CFO Forum for Metros • CFO Forum for District Municipalities

14. SPECIFIC AREAS OF INPUT BY IMFO IN RESPONSE TO COGTA’S TURNAROUND STRATEGY

15. CRITICAL PROBLEM AREAS • It is critical that all municipalities implement proper Financial Management within their Councils. • This entails the appointment of qualified and skilled personnel as well as the development and implementation of various policies, procedures and processes. • The Chief Financial Officer within a Finance division of a local authority must ensure that overall all other divisions institute proper financial control and governance.

16. THE LACK OF STATUS OF THE CFO • The MFMA makes the Municipal Manager the Accounting Officer and not the Accountable Officer • This scenario assigns direct responsibility for every financial function to the MM, who in turn , delegates functions to the CFO. • This situation in some instances is leading to conflict between the MM and CFO and hence some financial decisions are being jeopardised.

17. IMFO’S RECOMMENDATIONS • IMFO proposes that regulations be compiled formalising the delegations to the CFO, which will standardise the status, functions, roles and responsibilities of this vital position. • The regulations will have to become an addendum to the MFMA. • IMFO will be happy to assist in the drafting of such regulations

18. LACK OF PROFESSIONAL RECOGNITION FOR MUNICIPAL FINANCE OFFICERS • The Municipal Finance profession was previously regulated in terms of the law by way of the Municipal Accountants Act, Act 21 of 1988. • This Act prescribed the competencies for the Municipal Finance Officers as well as compulsory registration at the Boards for Municipal Accountants before a person could be appointed as a Chief Financial Officer and other Municipal Finance officers in a municipality. • When the MFMA was enforced in 2003 this Act was abolished and no provision was made to regulate the municipal finance profession.

19. LACK OF PROFESSIONAL RECOGNITION FOR MUNICIPAL FINANCE OFFICERS • Nothing was put in place to replace the compulsory registration of the municipal finance officers. In effect the municipal finance officers no longer fell under the auspices of a professional body that had the power and competency to regulate the profession and the competency of municipal finance officers. • The Institute maintained self regulation and currently aligns its membership to the minimum levels of qualification regulated by National Treasury with the addition of Accounting III.

20. IMFO’S RECOMMENDATIONS That legislation be re-instated similar to the repealed Act on municipal accountants (Act 21 of 1988) - to enforce the registration, skills development and professional status of a person, as a skilled municipal finance officer, before he can be appointed as a CFO in a municipality

21. CURRENT STATUS OF THE APPOINTMENT AND REGULATION OF THE MUNICIPAL FINANCE OFFICER. Whilst the MFMA calls for suitably qualified persons, without suitable regulation of appointments by a professional body, municipalities tend not to comply.

22. IMFO’S RECOMMENDATIONS • That the introduction of legislation along the lines of the repealed Act 21 of 1988 to be considered • That IMFO will ensure that disciplinary action will be taken against any member transgressing its Code of Conduct

23. ONEROUS STATUTORY REPORTING • Onerous statutory reporting requirements by National Treasury, Provinces and various sector departments overwhelm municipalities with their respective reporting requirements. • The above approach, is not practical and engages scarce financial skills in municipalities in reporting administration, instead of service delivery matters.

24. ONEROUS STATUTORY REPORTING • Currently the data submitted by many municipalities is in some instances incorrect because of the volume of reporting required as municipalities do not have skills and resources to complete all of these reports. • Many reports require similar information and frustrate municipal employees. • The number of reports required is applied to all municipalities which is not practical and feasible.

25. IMFO’s RECOMMENDATIONS • That the standardised report currently used by National Treasury be further enhanced to produce standardised reports stored in a centralised portal that allows for the draw down of information required by other departments • Those municipalities that do not implement the above and comply with NT budget reforms, must at a minimum comply with the category summary budgetary reporting

26. IMFO’S RECOMMENDATIONS • That consideration be given for a standardised IT system for low-capacity municipalities with assistance from COGTA • That minimum software system requirement for local government finance be developed to ensure compliance by Service Providers • All General Ledgers must have the capability of interfacing with the national portal

27. SUPPLY CHAIN MANAGEMENT • The regulations are administratively over-elaborate, particularly for small municipalities. • Many municipalities blatantly disregard them • Interference by politicians in the process • SCM is non-existent in some municipalities. • Many municipalities are struggling to comply with the 3 SCM committees, because of the shortage of suitable committee members. • Must ensure we benchmark costs and ensure value for money

28. IMFO’S RECOMMENDATIONS • Though IMFO prefers to have the three regulated committees it would seem that such committees in any event have the same members, due to the lack of availability. • At low level municipalities establish only a specification and an adjudicating committee with the CFO chairing the latter and the head of SCM the former - the need for an evaluation committee seems to be administratively burdensome and essentially superfluous

29. IMFO’S RECOMMENDATIONS • The involvement of any unauthorised officials and politicians in an SCM issue should be strictly regulated • Guideline prices / benchmarks should be issued by National Treasury’s SCM Unit • High-capacity municipalities should have e-procurement capability to avoid corruption

30. ANNUAL FINANCIAL STATEMENTS • The advent of the GRAP standards have placed the preparation of acceptable AFS beyond the capability of even a well qualified municipal CFO. • The cost of the implementation of GRAP has been extremely high and the benefits derived cannot justify the cost, especially for impoverished municipalities. • Most municipalities are incapable of compiling acceptable AFS without the aid of very expensive consultants.

31. ANNUAL FINANCIAL STATEMENTS • A fair number of municipal audit opinions are disclaimers or adverse which creates a distorted perception of a lack of service delivery • Most municipal IT system require major expensive upgrades to bring them in line to comply with the reporting standards of GRAP.

32. IMFO’S RECOMMENDATIONS • That the implementation of GRAP standards be deferred to allow municipalities to create internal capacity to manage their own financial affairs and that GRAP be phased in over a longer period. • That simplified more affordable accounting standards for smaller municipalities be implemented.

33. UNSUSTAINABLE FINANCIAL PRESSURES ON LOCAL COMMUNITIES • The problem of arrear accounts has become insurmountable. Regularly increasing rates and charges for services is pushing more and more residents into the defaulters category. • People leaving the rural areas have to be housed in informal settlements. • RDP houses are being constructed and municipalities cannot service these communities. • Unemployment is rife in many communities.

34. UNSUSTAINABLE FINANCIAL PRESSURES ON LOCAL COMMUNITIES • Traditional revenue sources of municipalities are being threatened • Municipalities are burdened with unfunded mandates( eg. Libraries, clinics museums etc.) • Many capital assets are being created with MIG Funds that municipalities cannot afford to maintain effectively due to lack of own funds. • Labour costs are increasing way out of proportion to productivity. • In terms of Systems Act, all municipal debt owed by municipal staff and councillors must be closely monitored

35. UNSUSTAINABLE FINANCIAL PRESSURES ON LOCAL COMMUNITIES • Arrears on consumers accounts are skyrocketing because communities cannot afford to pay. Services delivery protests are occurring because municipalities cannot provide an acceptable level of basic services to all its citizens. • The economic recession has led to job losses causing poverty and hopelessness. • Municipalities cannot do future planning because they are not sure of future revenue sources.

36. IMFO’S RECOMMENDATIONS • That urgent attention be given to municipal databases to ensure that proper credit control systems are in place • Need to ensure that consumer accounts are timeous, accurate and valid. • That consumer accounts be sent out timeously to ensure that it reaches consumers and pensioners before pay or pension day

37. FREQUENT OFFICIAL ABSENCES CFO’s have to frequently attend training courses, imbizos, report back sessions and related gatherings keeping them away from their departments regularly, while the financial management of their departments is below par - the value of these sessions must be questioned.

38. INEFFECTIVE INTERNAL AUDIT DEPARTMENTS • Very few municipalities have internal audit sections that function effectively. • The AG places little reliance on the tests carried out by internal audit • Are internal audit sections viable in municipalities? • In many municipalities internal audit is ineffective and the audit plans and approaches are mainly based on risk-based plans and systems auditing.

39. INEFFECTIVE INTERNAL AUDIT DEPARTMENTS • In some cases, due to lack of skills, the system is simply not functioning even though there are officials in these posts. In some municipalities the function is contracted out to chartered accountants. • Internal audit reports tend to be of limited value due to the following reasons • Inappropriately qualified staff • Lack of timeliness of reports • Poor quality of reports • Poor corrective action / recommendations • Little overall value add

40. IMFO’s RECOMMENDATIONS • That the internal audit function be reviewed and re-focused on risk-based auditing, internal control and value-for-money • That the Treasury division of a municipality should retain the financial control inspectorate function to ensure compliance with legislation and internal controls

41. INEXPERIENCED AND INEFFECTIVE AUDIT COMMITTEES Inappropriately qualified individuals are being appointed to audit committees. This is in addition to inappropriately qualified staff being employed in some senior management positions in the internal audit division

42. IMFO’s RECOMMENDATIONS • That appropriately qualified individuals be appointed to audit committees, as well as the internal audit division • IMFO can assist to source such individuals

43. OTHER CONCERNS AND CHALLENGES In addition to the aforementioned issues, the following are other issues impacting on local government finances :- • Asset management • Maintenance and sustainability • Changes in legislation – needed to be bedded down • Credit control in general • Developing and implementation of policies and procedures • The impact of the economic slowdown

44. OTHER CONCERNS AND CHALLENGES In addition to the aforementioned issues, the following are other issues impacting on local government finances :- • Capital borrowings • Grant dependency • Funding deficits • 2010 challenges • Backlog strategy • Basic accounting principles • Municipal Finance Division Structures

45. THE WAY FORWARD IMFO pledges it’s full and unqualified support, assistance and knowledge transfer to the COGTA We want to state our appreciation to present our views and recommendations to this distinguished house

46. THANK YOU