March 30, 2006
By Anish Abraham
FINANCIAL management in the City of Johannesburg has improved to such an extent since its inception in 2000, that the outgoing city manager, Pascal Moloi, feels disclaimers from the Auditor-General are unwarranted.
Speaking at the five-day mayoral lekgotla held at Riviera on the Vaal in Vereeniging on 28 March, Moloi explained that the City had received several disclaimers since its transformation into a new metropolitan structure.
In compliance with the Municipal Financial Management Act, the auditor-general audits against financial management standards to which municipalities have to adhere. If they do so successfully, they receive an "unqualified" audit opinion, the highest accounting recognition a municipality can achieve.
Disclaimers
"Disclaimers occur in two fashions," Moloi said. "They can be due to 'housekeeping' reasons, where you have problems with documentation and reconciling accounts. In short, there were insufficient controls."
Such "housekeeping" problems had previously plagued City finances for the first two years after the formation of the new metropolitan municipality, and most have since been resolved.
"There were no manuals for directors on sound financial management, the City was not able to account for all its assets and did not know how many people to bill," Moloi explained.
The second type of disclaimer was more a result of the technical application of accounting standards rather than poor financial management. This, said Moloi, was the type of disclaimer given by the auditor-general for the City's financial statements for the 2004/05 financial year.
Highest accounting standards
Because of the complexity and scale of its structure and operations, the City of Johannesburg has to adhere to three accounting standards, more than any other municipality in the country. They are Generally Accepted Municipal Accounting Practice, Generally Recognised Accounting Principles and International Accounting Standards.
"During my tenure as city manager of Johannesburg, the auditor-general has raised the bar for us every year, on the theory that South Africa's premier municipality should be held to a higher standard of accounting than anyone else, on its way to becoming a world-class African city, and we welcome it," Moloi said.
This is because its utilities, agencies and corporatised entities are owned by the municipality yet are treated as companies. This means the municipality has to meet higher accounting standards and, for example, treat impairment of assets in the same way as private companies.
"Around 2002, Johannesburg was identified as a pilot municipality by the national Treasury and the auditor-general," he said. The City was chosen to pilot budgetary and accounting reforms, which have since become law and must be adhered to by other municipalities.
Moloi added that one change that could work in the City's favour was the increased frequency of visits from the auditor-general's office, up from the present nine-month cycle.
Complexities
Johannesburg is the only municipality in the country to have consolidated the accounts of its core administration with the 16 municipal-owned entities under its control.
"This annual consolidation, however, brings with it accounting and auditing complexities that contribute to the auditor-general's disclaimer opinion on the City's financial statements," Moloi said.
Whereas other municipalities had chosen not to consolidate their financial statements and thereby received clean audits, Johannesburg felt it should rather present a "fuller picture" to its constituents.
Two of the City's subsidiaries, City Power and Johannesburg Water, had received disclaimers, although they had managed to persuade the private accounting firms hired by the auditor-general that they had resolved long-standing problems related to fixed assets and completeness of revenue.
However, the auditor-general, who issued a disclaimer of opinion, overruled the accounting firms' recommendation that the two receive a qualified opinion on their financial statements.
"I am confident that having already convinced the private accounting firms of its undeniable progress towards solving the inherited problems, the City will eventually convince the auditor-general too," Moloi said.
Private sector confidence
He continued that private sector confidence in the City's bond issue, the first by a city since 1994, was testament to the sound financial management and stability of Johannesburg.
Despite the current disclaimer by the auditor-general, since their issue the spread of the City's bonds above the national benchmark have compressed. "This is because a clean audit opinion is not necessarily an accurate measure of financial performance," he said.
Moloi explained that international credit ratings agencies examined a much wider range of indicators than the annual audit. Those include political context, socio-economic performance, budgetary framework, debt and liquidity and competence of politicians and officials.
"None of these appear in the annual audit but all are crucial to a city's ability to deliver services to its residents."
However, Moloi cautioned against disregarding the disclaimers from the auditor-general, stating that despite those achievements, his successor should strive for a clean audit report in the coming financial year.
"I am sure that if we maintain our present standards we should be able to get a clean audit over the coming one or two years. The words of the Auditor-General himself were very conciliatory - the level of financial management in the City of Johannesburg is of the highest in the country," Moloi concluded.
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