The Municipality of Grootfontein received a qualified audit opinion from the Auditor-General, which means that all is not well. The Municipality reduced the accumulated surplus from N$12.6m on 30 June, 2009 to N$1.3m in the year under review.
The operating deficit amounted to N$211 000 for the year.
The main reason for the decrease of the accumulated surplus was an adjustment of N$34m of the estimated bad and doubtful debts. A positive correction of the investment in Cenored amounting to N$23m softened the blow somewhat.
The Auditor-General qualified his opinion based on the following shortfalls:
Bad and doubtful debts
The auditor’s calculation of bad and doubtful debts revealed that the provision of N$39m is over-stated by N$2m.
The current figure in the balance sheet reflects the assets relating to debtors as N$6.3m whereas this figure should be around N$8.3m. The total debt of consumers reflected in the books of the Municipality amounted to N$41.9m of which N$39m is regarded as bad or doubtful. This non-collection has a serious impact on the cash-flow of the Municipality.
The auditors found the current debt collection strategies and policies as ineffective. Although Council did hand over some of the debts to private debt collection firms, the effectiveness of this measure should be continuously monitored.
Council should ensure that procedures are carried out strictly according to the debt collection policy, which is in place. To render services, such as electricity supply to inhabitants who cannot afford such services is a sure way to bankruptcy.
VAT Control Account: Receivable
The reconciliation of VAT returns against the ledger amount reflected a material difference of N$2.8m.
Unfortunately, the report of the Auditor-General does not indicate whether the amount relates to more income due or whether the expected income has been over-stated. Nevertheless, it is a substantial amount, which can mislead the reader of the financial statements. Regular reconciliations are recommended and if necessary, staff of the Receiver of Revenue should be requested to assist in the initial reconciliation.
The Auditor-General also raised concerns in the following areas:
Fixed assets depreciation
The computerised accounting system used by the Council was not able to calculate depreciation on a pro rata basis. This inability creates an incorrect valuation of fixed assets as stated in the annual financial statements.
The above-mentioned statement means that if you buy a vehicle on 30 September in a respective financial year, which means half of the financial year has gone by, 50% of the annual depreciation should be written off in the respective financial year. This does not happen and assets are as such over-stated. Manual calculations are recommended and the amounts should be brought to account by way of journals.
Build-Together Advances/Advances to buyers
The auditors found that a substantial number of beneficiary debts exceeded their original approved loan amount. This was mainly due to arrears and interest charges. Some loan agreements are not signed properly.
This again boils down to debt collection procedures, which are not carried out properly. Where agreements are not honoured, the necessary steps as indicated in the agreements should be implemented without delay. It is vital that agreements are properly signed to ensure that legal action can be implemented where necessary.
The auditors’ reconciliation of the financial statements payroll amounts with the earnings report revealed an immaterial difference of N$22 000, which was explained as journals written to special funds.
Council should ensure that the payroll balances with the amount reflected in the general ledger at all times.
The auditors’ comparison of the current bank account amount reflected in the financial statements with the Municipality’s year-end bank reconciliation, differed with an amount of N$22 000. The difference was referred to as a reconciling figure. Such lack of reconciliations of ledger accounts could raise doubt on the credibility of the correctness of the Municipality’s financial statements.
A bank reconciliation is performed to ensure that all transactions appearing in the cash-book are reflected in the bank account and those reflected in the bank account, which do not appear in the cash-book are brought to account in the cash-book. Outstanding cheques and deposits, direct deposits as well bank charges, etc. have an effect on the reconciliations. There is, as such, no reason that the balances could not be reconciled. Any unresolved difference spells out serious trouble.
It is good to see that the Municipality spent N$3.9m on capital projects. These projects are normally income generating and ensure growth within the Municipality. In this case, most of the expenditure was invested in the Single Quarters.