Picture: Corne Oberholzer is part of the Deloitte Local Government team

The poor state of municipal finances is now a well-documented phenomenon. In the 2010/2011 financial year for example, the Auditor General of South Africa (AGSA) found that only 13 of 283 municipalities achieved a clean audit.

There are many factors that contribute to achieving a clean audit, starting with political will from a leadership core that can be held accountable, but also a sense of ownership by all departmental staff, especially senior staff and managers.

But the most important ingredient is sound financial management and it requires the deployment of suitably skilled people at the right places, and a continuous building of internal capacity rather than a reliance on external parties such as consultants.

A lack of proper financial management leads to most of the problems identified by the AGSA as the nature and causes of qualified audits. Chief among these is the need to make adjustments to annual financial statements during the audit process. This means municipalities rely on auditing firms to identify errors and omissions.

Other problems include a failure to comply to acceptable accounting standards, an incomplete fixed asset register and a failure to reconcile the ledger with underlying supporting schedules.

But the biggest direct threat to the viability of a municipality is a failure to collect and adequately measure revenue. Another is having accounting officers fail to take reasonable steps to prevent irregular, wasteful or fruitless expenditure.

The AGSA identifies more than a dozen basic internal controls that are required to support sound financial management and corporate governance. These range from proper record keeping and reconciliation controls to regular and accurate reporting, compliance with the legislative framework, effective leadership culture and oversight responsibility as well sound HR and IT management.

Effective financial management is critical to any organisation. In the context of local government, a lack of sound financial management will have a direct adverse impact on service delivery as there is a strong correlation between sound financial management and effective service delivery.

To support service delivery and provide the necessary accountability, municipalities should create and maintain authentic, reliable and usable records. These are essential to help ensure a clean audit. Ideally, an integrated electronic document management system should be used.

The next crucial area of focus should be timeous and regular reporting. Financial activities need to be reported daily, weekly, monthly and quarterly depending on their scale and frequency. This allows for better preparation for audit.

The principles of reporting (transparency, accountability and stewardship) should underlie the preparation and presentation of financial statements that are required to give a true and fair view of the financial position and performance of a municipality.

The Municipal Finance Management Act (MFMA) and reporting guidelines add to the onus of quality and relevance of financial reporting. They emphasise the importance of preparing regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information.

Finally, provincial government needs to put in place governance and oversight functions over municipalities to monitor and report on progress made by municipalities to resolve challenges. Where such systems exist, they need to be used effectively.

Equally important is the need to align service delivery, performance management and reporting.

The framework for municipalities to improve financial management, governance and ultimately service delivery is in place. What municipalities require is guidance through partnerships to help them implement the framework, and to use that opportunity to build their own capacity.

The technical and complex nature of financial management may require a municipality to partner with a consultant. But when they do, municipalities, or government in general, must build skills transfer as an element of the service level agreement to ensure that the municipality is left with requisite capacity at the end of the contract period.