Briefing to Portfolio Committee on

Water and Sanitation

Water boards audit outcomes

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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

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With no material findings

With material findings

Outstanding audits

No APR/ late submission

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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.

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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

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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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