CASE STUDY 'Nobody really knows' what happened to R5.5bn at SA's worst-run municipalities - AG Auditor-General Tsakani Maluleke has presented the key outcomes of her office's annual probe into the financial status of SA's 257 municipalities. Maluleke says that "nobody really knows for sure" what happened to around R5.5 billion in funds sent by national government to 22 of the country's most opaque municipalities. Many municipalities in the Free State simply didn't submit any financials at all, she says. Nobody really knows what happened to about R5.5 billion in funds that flowed through 22 of South Africa's worst-run municipalities in a year, according to Auditor-General (AG) Tsakani Maluleke. Maluleke was on Tuesday morning briefing Parliament on the outcomes of her office's annual probe into SA's 257 municipalities, for the year to end-June 2020. She said that 22 municipalities - just under one in ten - received a "disclaimer of audit opinion" from her office for that period. A disclaimer is the worst result that a municipality can receive from the AG. It means the municipality has not provided enough evidence on which to base an audit opinion. The AG said that, in aggregate, the 22 municipalities received R6.49 billion in funds from national government at the start of the 2019/20 year. At the end of the period, they had just under R1 billion left in their bank accounts. But what happened to the funds in the intervening period? "Nobody's reporting, nobody's accounting, and nobody really knows for sure what has happened to this money," she said. The 22 municipalities were characterised by "relative chaos" with no commitment to any financial transparency. Of the 22 municipalities, seven were in the North West, four in Mpumalanga, four in KwaZulu-Natal, four in the Eastern Cape, two in the Northern Cape, and one in the Western Cape. What about the Free State? The true state of affairs may be worse, said Maluleke, as the AG's office was unable to complete many audits for the Free State. Many of the province's municipalities either submitted information too late, or simply didn't send anything at all to the AG. "We are unable to say much about the state of disclaimer opinions in that province," she said. The AG also told Parliament that ten of the municipalities that received a disclaimer of audit opinion spent a total of R105 million on outside consultants to try to help them fix their books. She did not name the ten municipalities at Tuesday's briefing. She will be publicly releasing her full report later in the month. "That's really, on average, R10 million apiece for consultants to compile financials, and yet, at the end of the audit period, we were unable to offer any audit opinion on those financials," she said. Consultants for 'basic' financials Maluleke said that in the year under review across all municipalities, just over R1 billion was spent on consultants to help them compile their own financial statements. This is roughly R150 million more than in the 2018/19 financial year. She said her office had again noted the use of expensive private sector consultants to put "basic" financial statements together. "There is nothing wrong with looking for external experts to help one deal with the more complex aspects of compiling financials," she said. "However, if year-on-year the municipality relies on consultants to help them put basic financial statements together, then we are concerned," she said. (Cronje, 2021 - https://www.news24.com/fin24/companies/industrial/nobody-really-knows-what-happened-to-r55bn-in-sasworst- run-municipalities-ag-20210622) Answer ALL the questions in this section. Question 1 (25 Marks) The FIRM risk scorecard builds on the different aspects of risk, including timescale of impact, nature of impact, whether the risk is a hazard, control or opportunity, and the overall risk exposure and risk capacity of the organisation. Compile a FIRM risk scorecard for the above-mentioned municipalities who could not produce their financial statements. Make relevant assumptions where necessary. Question 2 (25 Marks) "Risk treatment is sometimes referred to as risk control and it includes the selection and implementation of actions to reduce risk likelihood and risk impact. With the use of a diagram, discuss the concept of 'Cost-effective controls' and relate the discussion to the use of consultants for producing a financial statement in terms of the case study. Question 3 (25 Marks) The Auditor General stated that "Nobody's reporting, nobody's accounting, and nobody really knows for sure what has happened to this money." Critically discuss the most obvious key financial risk faced by these municipalities. Elaborate on the four (4) risk response strategies available to entities and evaluate which one is the most appropriate. Suggest mechanisms through which your response may be implemented. Question 4 (25 Marks) Performing secondary research, discuss the various outcomes / opinions that the Auditor General of South Africa may express for municipalities that emanate from an audit of their financial statements. Discuss your findings in relation to operational risk as it relates to the case study. State any assumptions you might be required to make.

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Rubric: Question 1 Learners should provide a scorecard in terms of a table with the correct labels for the columns and rows. Learners need to apply the concepts of FIRM and fill the cells within the scorecard / table based on the case study

Question 2 Learners should provide a relevant diagram clearly labelling both axis

Learner should explain the variables Learner should discuss the diagram in terms of the various states Learner should apply the theory to the case study citing relevant materials from such

Question 3 Learners should identify, discuss the key financial risk (based on the extract) and relate it to the case study Learners should identify, discuss the four risk response strategies and provide an evaluation on which one is the most appropriate Learners should discuss mechanisms to implement the appropriate strategy chosen. Question 4 Learners should perform secondary research to identify and explain the various outcomes / opinions that Auditor General of South Africa may express for municipalities that emanate from an audit of their financial statements. Learners must discuss their findings in relations to operational risk as it relates to the case study