Strides towards positive audit outcomes

Financial reporting in the Public Sector in South Africa

Financial reporting within South Africa's local government sphere has long been marred by a series of persistent issues. From transaction processing difficulties to recording keeping challenges and ethical concerns, the path to achieving transparent and accurate financial records has been fraught with obstacles. In this article, we delve into the complexities surrounding these three key areas and explore the efforts being made to overcome them. By addressing these fundamental issues head-on, South Africa is taking significant steps towards fostering accountability and integrity within its local government sector.

Let’s take a look at the key issues, as well as the way forward to achieve positive audit outcomes.

Background

Consolidated General Report on Local Government Audit Outcomes MFMA 2021 -22 indicated that there is little improvement on overall audit outcomes. The summarised outcomes were as follows:

Note. Table Adopted from the AG(SA) report

The above table clearly shows that less than 50% of the municipalities achieved an unqualified opinion. Furthermore, 15% are sitting in the extreme end of adverse, disclaimer and outstanding audits. Though the 7% sitting in outstanding audits may move to the category of unqualified, the fact that a timely audit couldn’t be done is a negative pointer.

Auditor General South Africa Diagnosis

The AG(SA) further carried out a detailed analysis of the root cause of the position that local government finds itself in. In summary, they identified the following key issues:

• Inadequate skills and capacity;
• Governance failures; and
• Lack of accountability and consequences.

A look at the challenges

Having worked in various municipalities across the various provinces of the country, the below insights are based on firsthand observations in the frontline and consider three (3) areas of focus:

1. Transaction processing

One of the main bottlenecks that we noted in municipalities that end up with undesirable audit opinions is centered on transaction processing. We identified the following around this area:

• Lack of timely transaction processing: this resulted in incomplete transactions at year end. This challenge meant that when consultants are brought in, most of their time will be invested in resolving the basics rather than complex value adding issues that they should be focusing on.
• Incomplete and inaccurate monthly reconciliations: reconciliations are meant to identify and help address errors on a timely basis. One of the key issues that we noted is that, throughout the year, some identified reconciling items are not investigated and rectified on a timely basis. This then results in work overload at the end of the reporting period.
• Normal day to day transactions processed as general journals: the lack of timely transaction processing normally results in the processing of bulky general journals at period end to catch up with the unprocessed transactions. This results in challenges around failure to support these journals when it’s time for the audit.

2. Record keeping challenges

Record keeping is another key challenge encountered by local governments. This challenge can be split into two:

• Lack of discipline by the personnel responsible for filing the accounting records: Supporting documentation is at times kept in drawers and not properly filed which then results in them going missing at the critical time of the audit. This results in frustration for the consultant as there is little that can be done to improve the situation without supporting documents.
• Failure to invest in modern day systems (accounting packages): The majority of the municipalities are still investing in basic accounting packages that are for transaction processing purposes only. In the corporate sector, you find that most organisations have invested in the necessary ERPs with the ability to store supporting records in addition to the basic general ledger functionality. Enterprise resource planning (ERP) refers to a type of software that organisations use to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations.A complete ERP suite also includes enterprise performance management, software that helps plan, budget, predict, and report on an organisation’s financial results. ERP systems support all aspects of financial management, human resources, supply chain management and logistics with your core accounting function.

3. Ethical challenges

When looking at the Code or Professional Conduct of the South African Institute of Chartered Accountants, I believe a focus should be on Professional Competence & Due Care. This principle is based on the understanding that the administration arm of local government is occupied by the professionals who are expected to conduct themselves in a certain way. One of the observations on the ground is that strides have been made in the local government space and most of the officials occupying the positions in the finance division hold at least a bachelor’s degree and some are post articles accountants.

The code’s requirements in terms of professional competence and due care:

• Section R113.1 - A professional accountant shall comply with the principle of professional competence and due care, which requires a professional accountant to: 
  • Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service, based on current technical and professional standards and relevant legislation; and
  • Act diligently and in accordance with applicable technical and professional standards.
• Section R113.2 - In complying with the principle of professional competence and due care, a professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the professional accountant’s authority have appropriate training and supervision.

Based on issues highlighted in 1 and 2 above, it is clear that this fundamental principle is not being religiously adhered to by those who are executing the duties on a daily basis. Are those executing the finance function adequately trained and supervised? Are they maintaining the professional knowledge and skill at the required level? The answer to these questions is likely to reflect in our audit report at the end of the period.

Turning things around

The turnaround for every organisation lies in their ability to identify and analyse the underlying root cause and respond effectively to the core issue. The turnaround may need a number of processes, from governance, skill capacitation and consequence management, to feed into the solution.

However, when considering the above:

1. Transaction processing

The following will assist in addressing problems highlighted around this area:

• Evaluate the skill set required to perform the tasks.
• Address the gaps identified in skill set evaluation through:
  • Appointment of the fit for purpose consultants to assist throughout the process rather than year-end appointments when it’s already late. Distinguish scenarios that require bookkeepers and data capturers from those requiring experts.
  • Capacitate the responsible staff through training and mentorship.
  • Hire skilled and experienced staff.
• Implement timely reviews of the work being done in order to pick up and address problems in a timely manner.
• Timely reconciliations coupled with follow up and resolution of differences is key.
• General journals should be the last resort when it comes to routine transaction processing. The first option should always be processing a transaction in its usual form.

2. Record keeping

• The challenges associated with record keeping are often a discipline issue.
• Filing should be done on a timely basis to ensure the transactions being processed don’t fall short at year end.

Invest in fit for purpose accounting packages which integrate transaction processing with electronic record keeping. For municipalities that have not yet implemented the MSCOA compliant systems, this may be the right opportunity to address this challenge as well while planning for system migration.

3. Ethical behaviour

As highlighted in the above paragraphs there is a certain responsibility bestowed on the professional accountant in business.

• The question then arises, does the performance contract of the professional accountant contain a clause on compliance with professional ethics?
• Have you discharged your ethical responsibility with respect to the team that reports to you?
• Though certain staff members may escape by not being part of professional bodies, it might be time to establish the fundamental principles aimed at all local government employees or simply localise this to your own municipal sphere.

4. Consultants in local government

It is imperative that there is proper assessment to identify areas where consultants are required, including:

• Assess the skill level required before going out to the market.
• Assess the proper time of the project to be carried out by the consultant, as late implementation doesn’t help the municipality.
• Have performance management frameworks for the consultants.
• Routine transaction processing should remain the duty of the municipality.
• Consider if you are ready to implement the proposed solution crafted by the consultant.

*Article originally published in Accountancy SA