City of Tshwane no longer a going concern – AG

The City of Tshwane’s financial statements for the year ended June 30 2022 are such a mess that the Office of the Auditor General (AG) has issued its first-ever adverse audit opinion for the country’s capital.

This news leaked on December 4, before AG Tsakani Maluleke was able to present it to the full council at a meeting scheduled for January 26. It has been confirmed by Mayor Randall Williams in a statement issued by late yesterday afternoon.

“The adverse opinion is a disappointment, it is not an outcome that is remotely acceptable within the context of good governance. We have already begun the work to set the city right,” Williams said.

Maluleke found in a 28-page report that details the extent of the city’s misrepresentation of its finances: “In my opinion, …the financial statements do not present fairly, in all material respects, the financial position of the City of Tshwane Metropolitan Municipality as at 30 June 2022, and its financial performance and cash flows for the year…“

The news comes shortly after the city on December 1 first suspended its CFO Umar Banda for among other things misleading “the political leadership and administration executive of the City of Tshwane into believing that the City’s 2021/2022 financial statements were compliant for the purposes of submission to the offices of the auditor general (OAGSA) on 30 August 2022.”

A day later the suspension was withdrawn, and he was purportedly summarily dismissed even though his contract was earlier extended to the end of December and the council barely a week earlier authorised a further extension of three months.

Banda challenged his dismissal in the High Court, but the case was dismissed due to a lack of jurisdiction. He indicated that he would refile the matter in the labour court, but eventually settled with the city out of court.

Read: Tshwane CFO challenges dismissal

Without directly blaming Banda, Williams in his statement said: “The contract of the Chief Financial Officer, Umar Banda, was terminated on 31 December 2022 and we are in the process to appoint a new Chief Financial Officer. A report on the conduct of the ex-CFO in relation to the compilation of the financial statements and the auditing process will also be brought to Council.”

Republican Conference councillor Lex Middelberg, who was cited as a party in Banda’s court application, said in response to the audit outcomes: “No explanation will be adequate. The attempt to pin the failure on the CFO failed when the city had to settle with him on the last day of December. The agreement with the former CFO is confidential, but I understand that they have agreed not to badmouth each other, that the city will give a good reference and that it will be treated as a normal termination of the employment agreement at the end-of-term thereof.”

Several of the misstatements Maluleke lists in her report run into the billions each. These include:

• Assets under construction were classified as completed assets, which resulted in an overstatement of depreciation of more than R2 billion;
• The city reported R6.4 billion of trade payables, in other words, payments to suppliers that were outstanding at year-end. According to the AG report, this was understated by almost R5 billion, which means Tshwane was owing businesses more than R11 billion on June 30 2022;
• In the summary of consumer receivables by customer classification, the understatement was R2.3 billion and the amounts did not correspond with the amounts under gross balances;
• The municipality left out loans to the value of almost R900 million in the reporting about loans payable in the year following the reporting date;
• The city stated salaries and wages at R7.4 billion. Middelberg points out that the amount on the draft budget was almost R12 billion. Maluleke said: “I was unable to obtain sufficient appropriate audit evidence for salaries and wages because the municipality was unable to provide information and supporting documentation to support the amount recorded for salaries and wages due to an inadequate system of internal control.”;
• The city duplicated the contingent liabilities disclosure, which led to an overstatement of almost R4 billion; and
• Fruitless and wasteful expenditure was understated by R1 billion.

Over and above these mistakes, Maluleke says the municipality “incorrectly recorded budget and actual amounts in the statement of comparison of budget and actual amounts. The statement contained material differences and could not reconcile to the budgeted amounts and actual amounts recorded in the statement of financial position, statement of financial performance and cash flow statement.

“Due to the extent of differences identified in the statement of comparison of budget and actual amounts; and the number of material misstatements identified across the financial statements line items, I could not determine the correct amounts that should be processed, as it was impracticable to do so.”

They did not correctly prepare and disclose the net cash flows from operating, financing and investment activities and due to multiple errors, the AG was unable to determine the full extent of the errors as it was impracticable to do so.

She doubts the City of Tshwane’s ability to continue as a going concern.

Despite Williams’ assurance that his coalition government has “already begun the work to set the city right” and that it is working closely with National Treasury and the AG to address the issues, Maluleke’s report cites many instances where her earlier recommendations were ignored, and her questions went unanswered.

According to Williams, National Treasury has sent former CFOs to assist the city. “We will also be bringing in an external auditing firm to begin provisionally auditing the first half of this financial year ending 31 December 2022,” he said.

The process has also begun to appoint a new CFO.