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Other Articles from The Villager

Is the Municipality of Tsumeb busy with creative accounting?

Mon, 25 November 2013 02:28
by Walter Barth

The Municipality of Tsumeb received a qualified audit opinion from the Auditor-General for the Financial Year ended 30 June 2012, which means all is not well.
The operating profit for the year under review amounted to N$4 208 392. Debit adjustments were N$1 652 553 and were meant to correct mostly previous year’s entries and transfers to funds amounting to N$947 517. The net accumulated surplus is thus reflected as N$1 608 322 as of 30 June 2012. This represents a decrease of N$639 582. Taking into consideration what the auditors say below, in relation to the provision of bad and doubtful debts, these figures are far from realistic.
The special fund accounts amount to N$53.3m, excluding the accumulated surplus mentioned above. Of this amount, N$4 836 001 has been invested at commercial banks. Funds utilised from the special fund accounts for internal loans amount to N$7 443 049, yet house owners and others owe the municipality N$11 164 684 and one investment is reflected as N$35 236 648 in CENORED. It is, however, unclear whether or not this amount represents the capital value of the electricity infrastructure taken over by CENORED or if it represents cash.
The total amount invested/utilised is N$58.7m, which exceeds the amounts held in special fund accounts.
In the year under review, the Auditor-General qualified his opinion based on the following shortfalls, which are unfortunately exactly the same as in the previous financial year:

Provision for bad and doubtful debts
The auditors are of the opinion the provision for bad and doubtful debts has been understated by N$37 081 961.

Should this understatement be corrected, it would mean the accumulated surplus currently shown as N$1 608 322 would decrease to an accumulated deficit of N$35 473 639.

It is important to reflect the realistic situation in the financial statements. If one overstates an asset such as debtors by N$35.5m, it gives a wrong impression to the user of the financial statements. The provision is a simple book entry and should be easily adjusted. It is, however, quite worrying to see the total provision currently amounts to N$43 979 130 whereas the debt arising from services rendered and assessment rates amounts to N$88 160 694. A realistic figure would thus be N$7 099 603. A resolution to write off unrecoverable debts should be taken to reflect more realistic figures.

Cash-flow position
The report states the municipality is facing an adverse cash-flow problem as indicated by the temporary advances to revenue from other funds and accounts amounting to N$42 138 562 at year-end. Furthermore, external loan redemptions and interests amounting to N$17 385 421 are unpaid while some have been outstanding for the past ten years.
Temporary advances are not reflected in the published balance sheet, only in the detailed balance sheet submitted to the Auditor-General by the municipality.
No comment can thus be given on this figure, although a thorough investigation would be interesting.
Many local authorities do not repay their loans from Government, mainly due to cash-flow problems. This is an issue, which needs to be resolved between these authorities and the line ministry.

VAT differences
The report states the recoverability of the VAT assets, as per the balance sheet of N$6 039 880, is doubtful because the statement from the Directorate: Inland Revenue indicates a payable balance of N$2 386 212 on 30 June 2012.
 The report further states not all returns for import VAT were submitted timely. No provision for any penalties and interests were made in the financial statements.
The municipality’s accounting staff and the staff of the Receiver of Revenue need to get together and sort these differences out.

Un-cleared suspense account balances
The report states the municipality’s records are characterised by long outstanding suspense account balances and for the majority, no explanation could be given. These balances are significant to the extent that they distort the fair presentation of the financial statements.

Suspense account balances should be supported with auxiliary records, which reflect every single individual transaction. Without them, no one would know from where an amount has come, which is reflected in a suspense account.
Council should consider writing off these balances if no evidence relating to the origin of the transaction can be found.

General comment
It gives reason for concern that all of the above-mentioned issues gave rise to the qualified audit opinion in the previous year. Isn’t anybody interested to correct these issues and obtain a clean audit opinion?
The municipality spent N$5.4m on its infrastructure of which N$3.6m, alone, was spent on streets and N$1.2m on water reticulation. In the previous year, N$1.2m was spent on capital development. Development and maintenance of infrastructure cannot be over-emphasised, as it contributes to good service delivery and making the environment more attractive for investment, which is vital for every local authority.