Transcript INCA CBF SUMMER SCHOOL 19 February 2008

INCA CBF SUMMER SCHOOL
19 February 2008
What everyone should know
about Municipal Finance and
Accounting
Mare-Lise Fourie
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INTRODUCTION
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Conceptual framework for municipal finance originally
formulated in the White Paper on Local Government in
1998
Framework translated into legislative requirements in
MFMA (Act 56 of 2003)
Underlying principles of the Act:
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Promoting sound financial governance by clarifying roles;
Strategic approach to budgeting;
Modernisation of financial management;
Cooperative government; and
Promoting sustainability
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INTRODUCTION (Cont)
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Act built around the responsibilities of
accountability and the oversight within a culture
of transparency and regular reporting
Separation of responsibilities between executive
and non-executive councillors and officials is
important for good governance
Financial governance can be illustrated as
follows:
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Financial Governance Framework
Responsible for
Oversight over
Accountably to
Council
Approving policies
and budgets
Mayor
Community
Mayor
Policy; budgets;
outcomes;
management
of/oversight over
MM
Municipal
Manager
Council, Public
Municipal
Manager
Outputs and
implementation
Administration
Mayor, Council,
Public
Chief Financial
Officer
Outputs
Financial
management
Municipal
Manager
Top Management
Outputs
Service delivery
Municipal
Manager
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WHAT ARE THE RESPONSIBILITIES OF THE
VARIOUS STAKEHOLDERS IN FINANCIAL
MANAGEMENT?
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The Council, other political structures, mayor, other
political office bearers and councillors
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In terms of MSA the executive and legislative authority
of a municipality is exercised by its council
Authority exercised, inter alia, by doing the following:
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Developing and adopting policies, plans, strategies and
programmes, including setting targets for delivery;
Implementing applicable national and provincial legislation and
the municipality’s own by-laws;
Preparing, approving and implementing budgets; and
Imposing and recovering rates, taxes, levies, duties, service fees
and surcharge on fees
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The Council, other political structures, mayor, other
political office bearers and councillors (Cont)
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Duties of the council governed by the MSA include the
following:
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Integrated development Planning
Performance management
Tariff, rates and credit control and debt collection policies
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The Council, other political structures, mayor, other
political office bearers and councillors (Cont)
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In terms of the MFMA councils, political structures,
political office bearers and councillors are variously
charged with, inter alia, the following duties and
responsibilities and invested with the following powers:
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Cash management and investment policy;
Budgets;
Unauthorised, irregular or fruitless and wasteful expenses;
Supply chain management policy;
Annual reports; and
Resolution of financial problems
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The Council, other political structures, mayor, other
political office bearers and councillors (Cont)
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The mayor assigned various specific duties in terms of
the MFMA
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In general, the mayor must provide political guidance over the
financial and fiscal affairs of the municipality. In providing such
guidance, the mayor may monitor and, to the extent provided in
the MFMA, oversee the MM and the CFO in the exercise of their
duties but may not interfere in the exercise of those
responsibilities
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The Council, other political structures, mayor, other
political office bearers and councillors (Cont)
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Specific duties include:
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Provide general political guidance over the budget process
and the priorities that must guide the preparation of the
budget
Coordinate the annual revision of the IDP
Approve the SDBIP; and
Receive, consider and take appropriate action with regard to
the monthly budget statements and the mid-year budget and
performance assessment
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Municipal Manager
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The MM is the accounting officer of the municipality
As such, the MM is invested with, inter alia, the following powers
and charged with the following duties and responsibilities with
regard to financial governance:
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Guidance to councillors and officials on financial matters;
Assistance to the mayor in performing budgetary functions assigned to
the mayor
Legally required to accept responsibility and accountability for all
income and expenditure, all assets and the discharge of liabilities and
the proper and diligent compliance with the MFMA
General management of financial administration
Establishment of the budget and treasury office
Charged with a wide range of specific financial and accounting
responsibilities which will be highlighted later
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Chief financial Officer
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Minimum specific responsibilities assigned to this
position
MSA: Charged with duty to make investments on behalf
of the municipality if so delegated
MFMA:
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Assume administrative responsibility for the budget and treasury
office
Advise the MM on the exercise of assigned powers and duties
Assist MM in the administration of the bank accounts
Advise senior managers on the exercise of assigned or delegated
powers and duties
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Chief financial Officer (Cont)
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Perform such budgeting, accounting, analysis, financial
reporting, cash management, debt management, supply chain
management, financial management, review and other duties as
may be delegated
Make investments if so delegated
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Top Management
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Top management consists of the MM and all senior
managers responsible for managing the votes. A vote is
defined as being any one of the main segments into
which the annual budget is divided
Top management must assist the MM in managing and
coordinating the financial administration of the
municipality
Take all reasonable steps within their areas of
responsibility to ensure all of the following:
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That the system of financial management and internal control is
diligently adhered to;
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Top Management (Cont)
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That the financial and other resources are effectively, efficiently,
economically and transparently utilised;
That unauthorised, irregular and fruitless and wasteful expenses
and losses are prevented;
That all revenues due are collected;
That assets and liabilities are properly managed and assets
safeguarded and adequately maintained; and
That all information required by the MM in order to ensure
compliance with MFMA is timeously submitted
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Top Management (Cont)
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Key matters in regard to which top management must
play a significant and active role include:
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The formulation and implementation of financial policies;
Designing and implementing an effective internal and external
reporting structure;
Developing and implementing sound and efficient financial
systems and procedures;
Formulating and implementing effective risk strategies and
mechanisms; and
Supporting important governance-related structures such as the
interaudit unit and the audit committee.
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WHAT ARE THE AREAS OF COMPETENCIES?
Three (3) areas of competencies required by everyone
involved in municipal finance and accounting, identified:
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Legal framework
Technical skills/knowledge
Financial governance
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Legal framework
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Thorough knowledge of all applicable legislation a
prerequisite for sound financial governance
Specific statutes relating to municipal finance and
accounting:
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The Constitution of the Republic of South Africa, 1996 (Act 108
of 1996)
Local Government: Municipal Systems Act, 2000 (Act 32 of 2000)
Local Government: Municipal Finance Management Act, 2003
(Act 56 of 2003) together with its Regulations and national
directives, where applicable
Procurement legislation such as PPPFA (Act 5 if 2000) and
Broad-Based Black Economic Empowerment Act (Act 53 of 2003)
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Technical skills/knowledge
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Range – basic to comprehensive
Fields of knowledge:
Integrated development planning
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Obligated to undertake developmentally orientated planning
Plan must, inter alia, link, integrate and coordinate plans
Take into account proposals for the development of the
municipality
Must align the resources and capacity of the municipality with
the implementation of the plan
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Technical skills/knowledge (Cont)
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Core components relating to financial management:
 The council’s operational strategies
 A financial plan which must include a budget projection for at
least the next three years
Goes further than a list of capital projects
Include internal transformation needs and operational strategies
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Technical skills/knowledge (Cont)
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Budgets
Important mechanism in giving effect to service delivery
strategies
Provides the tool for implementing of the IDP
Comprises of an operating budget and capital budget
Divided into votes which should represent the principle
activities
Top management collectively and severally responsible
for aligning service delivery outputs with realistically
available financial and other resources
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Technical skills/knowledge (Cont)
Annual Financial Statements
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Purpose is to provide information in a manner that is
useful to a range of users, particularly the council, MM
and top management
It represents the results of the implementation of
operational strategies and the impact thereof on assets,
liabilities and net assets during a specific year
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Technical skills/knowledge (Cont)
Annual Financial Statements (Cont)
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Detailed objectives of AFS are to provide information
relating to the following:
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The way in which planned results were achieved;
Economic resources, financial obligations and net fixed assets;
The way in which cash and other liquid resources were obtained
and spent;
The municipality’s ability to meet its obligations; and
Meaningful comparisons, explanations and interpretations which
will help users understand the financial information better;
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Technical skills/knowledge (Cont)
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Revenue Management
To meet the objectives of local government as set out in the
Constitution, the system of municipal finance must be based on the
basic policy principles of revenue adequacy and certainty and
financial sustainability
Ability to maintain, Improve or extend service delivery is directly
related to the ability to raise revenue
Bulk of municipality’s revenue is raised through property rates and
service charges determined in accordance with policies and by-laws
developed to suit local circumstances
Council responsible for policies while top management responsible
for execution
Revenue management includes indigent support, credit control and
debt collection, customer care and debtor management (Billing)
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Technical skills/knowledge (Cont)
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Debt Management
Significant investment in property, plant and equipment
required to provide services
Revenue raised from rates and service charges
insufficient to finance such investment
Rely on external loans and other capital receipts
A municipality may only spend money on a capital
project if it has complied with the following:
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The council has considered the total projected cost;
The future operational costs and revenues on the project,
including the impact on rates and tariff implications have been
considered;
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Technical skills/knowledge (Cont)
Debt Management (Cont)
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The project has been approved by Council;
Sources of funding have been considered and are available; and
Money for the project has been appropriated in the capital
budget.
Future operational costs of capital expenditure could
include one or more of the following:
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Interest on external debt;
Maintenance costs;
Staffing;
Operating expenses; and
Depreciation
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Technical skills/knowledge (Cont)
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Cash Management
Proper management of cash resources is paramount in
ensuring financial viability and sustainable growth and
development.
Requirements for effective cash management:
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All monies collected and banked as soon as possible.
Effective control over expenditure and proper planning
Administer and control available cash effectively through proper
management of bank account/s
Recognise interdependency between cash management
and investment management.
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Technical skills/knowledge (Cont)
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Supply Chain Management
Each municipality to have and implement a supply chain
management policy.
Policy must give effect to prevailing legislation, be fair,
equitable, transparent, competitive and cost effective
Municipality must act in accordance with policy when
procuring goods or services, disposing of goods,
selecting contractors or selecting external mechanisms
Council approves the policy and is obligated to delegate
powers and duties to MM to –
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Discharge responsibilities i.t.o. prevailing legislation;
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Technical skills/knowledge (Cont)
Supply Chain Management (Cont)
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Maximise administrative and operational efficiency; and
Enforce reasonable cost-effective measures for the prevention of
fraud, corruption, favouritism and unfair and irregular practices
in the implementation of the policy
Supply chain management consists of demand
management, acquisition management, logistics,
disposal, risk and performance management systems
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Technical skills/knowledge (Cont)
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Management of fixed assets
Municipality has the responsibility of stewardship which refers to the
holding of someone else’s assets by a steward who is charged with
the acquisition, financing, maintenance and utilisation of such assets
Fixed assets are represented by property, plant and equipment
Management of fixed assets primarily consists of the following:
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Asset register;
Depreciation/revaluation;
Maintenance;
Stocktaking;
Safekeeping; and
Accounting
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Technical skills/knowledge (Cont)
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Risk Management and Internal Control
Risk management is a process consisting of the following steps:
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Step 1:
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Step 2:
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Step 3:
MM, CFO and top management must
proactively, purposefully and regularly identify and
define current as well as emerging risks
The assessment of such risks by considering the
estimates of likelihood, severity and consequence in
regard to the occurrence thereof
Identify appropriate and cost-effective methods of
obviating or managing risks
Risks commonly arise in the following categories: Operational,
strategic, external, physical and financial
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Technical skills/knowledge (Cont)
Risk Management and Internal Control (Cont)
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Internal control
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Defined as the plan of the organisation and all the coordinated
systems to assist in achieving objectives
Not only about detecting errors and fraud but also promoting the
municipality’s operational efficiency
Legislative obligation to institute proper internal control e.g.
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MM responsible for the implementation, maintenance and
management of systems of internal control relating to assets and
liabilities, debtors and revenue and creditor payments
Each senior manager and each official exercising financial
management responsibilities required to take all reasonable steps to
ensure that the system of financial management and internal
control is carried out diligently
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Technical skills/knowledge (Cont)
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Financial Management Information Systems
Qualities of a good financial management information system are:
Meaningful, adequate, timeous and user-friendly
Stewardship and accountability implies that management must be
supported by information systems which will enable it to –
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Ensure and demonstrate properly that assets and resources have not
been misappropriated; and
Assets and resources have been applied to the best advantage.
Examples of such systems are: Annual budget; general ledger;
assets and risk management; consolidated billing; cash
management; fleet management and procurement.
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Technical skills/knowledge (Cont)
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Performance Management
Can be defined as a strategic approach to management
which equips governance structures, management,
employees and the community with a set of tools and
techniques to plan regularly, monitor continuously and
measure periodically the performance of the municipality
in terms of a set of indicators and targets for efficiency,
effectiveness and impact.
It is a critical planning and control system that makes
the municipality and its employees, individually and
collectively, accountable to ensure that plans are
implemented, that they have the desired developmental
impact and that resources are used effectively.
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Governance
Seven (7) primary characteristics of good governance (King II):
Discipline; transparency; independence; accountability; responsibility;
fairness and social responsibility
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Good governance is the product of intelligent action and courage
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Good governance will flourish only in an environment of
transparency, accountability and professionalism
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Many of these qualities already captured in the statutes governing
the administration of municipalities.
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Compliance not, ipso facto, good governance
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Following basic requirements contained in legislation constitute the
foundation of good governance:
Statutory roles, responsibilities and duties; financial policies and
delegations
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Minimum competency levels
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National Treasury has introduced regulations which
recognises the minimum skills, knowledge and
experience required by MM, CFO, senior managers, all
other financial officials and supply chain management
officials
NT has registered a unit standard based certificate in
municipal financial management approved by SAQA at
levels 5 and 6
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Conclusion
What everyone should know about Municipal Finance and Accounting Publication sponsored by INCA CBF
Title:
Principle authors:
Co-author &
projects coordinator:
Consulting editors:
Publisher:
ISBN:
Price:
Municipal Finance and Accounting
M Fourie and L Opperman
D Scott
W Zybrands, K Kumar and B Jwili
Van Schaik Publishers
978 0 627 02657 7
+/- R500
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Thank you
Mare-Lise Fourie
(Non-Executive Director, INCA Capacity Building Fund)
Tel:
Fax:
E-mail:
012 329 1646
012 329 1646/0866959341
[email protected]
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