RISK MANAGEMENT AND INTERNAL AUDIT Key role that Auditors play in Local Government in fostering clean Audit Objectives: Towards 2014 and beyond DEPARTMENT.

RISK MANAGEMENT AND INTERNAL AUDIT

Key role that Auditors play in Local Government in fostering clean Audit Objectives: Towards 2014 and

beyond

DEPARTMENT OF COOPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS

CONTENTS/INDEX1. Context

a. 15 year review

b. Overall Municipal Assessment

c. The PA and the Delivery Agreement

d. Factors influencing Municipal Performance

2. Audit Findings

3. Legal Instruments

4. Evolving Role of internal Audit

5. Governance

6. Control

7. Risk Management

8. Role of Risk Management towards achieving clean audit

9. Role of Internal Audit Management towards achieving clean audit

10. The Tri-partite Alliances of Assurance

“A dynamic organization is exposed to a staggering array of risks, as rich and diverse as the opportunities it enjoys.”

(Shimpi, 1999:16). “Corporate governance is about successfully managing the

three R’s: risk, return and reputation … it is long hand for good, commonsense commercial management. ”

Nobby ClarkeFormer Chairman, Fosters

Some Nuggets

4

Context – 15 year review

4

Macro-trends of the 10 Year Review :

• Demographic change: 1996 – 2007 population grew by 20% & the number of households at double that rate (39%);

• Fast growth in the labour force in the first decade has slowed since 2004 to 2% p.a.;

• Sectoral composition of employment has shifted away from the primary sector to the finance and business services sectors;

• The patterns of internal migration in the first decade have continued since 2004.

New macro-trends:

Binding constraints to economic growth, e.g. “structural unemployment of the low-skilled” & “shortcomings in infrastructure planning”;

Negative macro-social trends, e.g. increase in income inequality and erosion of trust and confidence in government;

Challenges in governance and the macro-organisation of the state, e.g. the legitimacy of public institutions have been tested in a number of ways;

Recent global economic challenges and shifts in the economic weight of different countries in Africa (increasing dominance of Nigeria and Egypt, in relation to SA).

Macro-trends impact on local government !

5

Overall Assessment

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Overall the system of local government is working, but it is in distress. There are many failures &

weaknesses that stem from external factors to internal ones in municipalities.

- Findings in various thematic areas are NOT equally applicable across municipalities-

A BOLD DECISIVE INTERVENTION IS NEEDED TO TURN THE TIDE IN

LOCAL GOVERNMENT

OUTPUTS IN THE DELIVERY AGREEMENT

Differentiated approach

Access to basic services

Community Work ProgrammeSupport to Human Settlements

Ward Committees

Municipal Finance & Administration

Single window of coordination

7

Factors influencing municipal performance

7

ExternalFactors

Demographic Patterns & Trends (in-migration;

household growth;rural – urban migration;

growth of informal settlements; farm evictions

Macro- / micro- economic(unemployment; revenue base

declining; tax evasion by businesses & foreigners)

IGR (weaknesses in policy & Regulatory frameworks,

voluntarism; fragmented support;Poor oversight;

unfunded mandates)

InternalFactors

Political Management & Stability (intra & inter political conflicts;

limited ability to develop & enforce by-laws)

Professional administration & Management (lack of

skilled staff; unqualified staff & appointments; conflict of Interest)

Financial Management (lack of systems & controls)

Accountability (poor mechanisms of community consultation

& feedback; ward committees poorly resourced)

External and Internal Factors differ and impact differently on different municipalities

88

Financial Management – Audit Findings (2009/10)

2008/09 09/10Audit Opinion Number % NumberAdverse 10 07Disclaimer 103 53Qualified 50 50Unqualified – emphasis of matter

113 120

Unqualified – no findings

04 07

Audits outstandingTotal: 283 283

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1. Total of 110 municipalities: qualified, disclaimer or adverse opinions; an improvement from in 2008/09 of 163

2. General improvement of unqualified opinions from 113 (2008/09) to 120 (2009/10)

3. Total of 7 municipalities had no findings – clean unqualified audit

4. Key problems: lack of internal controls & poor state of asset registers & instability of governance / leadership positions & poor quality budgets & poor quality in-year financial reporting & limited political oversight

Financial Management – Audit Findings (2009/10)

Legislative Instruments: Mandate

Risk Management and Internal Audit is set up in accordance with the following acts, regulations and best practices:

• Municipal Finance management Act ( MFMA);• Treasury Regulations and operates in

accordance with theInternational Standards for the Professional Practice of Internal Auditing as defined by the Institute of Internal Auditors; and

• King III

King III - Recent trends

• Renewed focus on Governance, Internal Audit, Sustainability, Business Rescue and Risk Managt

• Pressures are emerging to sharpen risk assessment focus on strategic, operational, and business risks

• Various hybrid governance regimes• Information is required to predict the future• “One view – one risk aggregation”• Assessing the ‘Cost of compliance’• The search for value

THE EVOLVING ROLE OF INTERNAL AUDIT

From the recording, ticking & crossing of 1941 what is the position of the IA in the public sector today?

Today IA has a three-pillar position:Governance

Control

Risk management

THE EVOLVING ROLE OF INTERNAL AUDIT

Governance• Public sector governance relates to the means

by which goals are established and accomplished. It also includes activities that ensure a government’s credibility, establish equitable provision of services, and assure appropriate behavior of government officials whilst reducing the risk of public corruption.

THE EVOLVING ROLE OF INTERNAL AUDIT

Control• Management control in the public sector

includes all the policies and procedures put in place by a government and the management of public sector entities aimed at promoting accountability of resources. Another term for management control is internal control. In the public sector, controls are mainly in-built in the public financial management system

THE EVOLVING ROLE OF INTERNAL AUDIT

Risk management• Risk management is an important responsibility for any

public sector entity for effective and efficient use of resources

• The demand for proper risk management strategies in the public sector emanates from the complexity and dynamism of the operating environment, ever-increasing needs of society coupled with general unpredictability pattern and dwindling of resources for national development.

• Risk management should constitute an essential part of the strategic management process of any entity involved in the implementation national development strategies.

Roles and responsibilities within IA

• Review & assess the soundness, adequacy & reliability of financial & performance management systems

• Review & assess the effectiveness of internal controls & make recommendation where appropriate

• Review and assess the adequacy of procedures to ensure the entity’s assets and interests are adequately protected & risks are identified and effectively managed.

• Check for compliance with legislation and the entity’s integrity and ethical standards, policies and procedures

• Promote and assist the entity in the effective use of resources

• Undertake independent investigations into allegations of fraud and irregularity in accordance with government policies, procedures and relevant legislation.

• Coordinating with external auditors

Importance of Risk Management

• Risk is defined as an uncertain future event which can prevent an organisation from achieving set objectives.

• Risk Management is a central part of an organisation’s strategic management.

• Risk management protects and adds value to the organisation and its stakeholders through supporting the organisation’s objectives.

• Good Risk Management focuses on identifying key risks in line with the set objectives and developing appropriate strategies.

Importance of Internal Audit

• IA is a corporate governance cornerstone - along with the Accounting officer, executive management, the audit committee and the Board.

• IA helps management improve the internal control environment and to comply with new legislation and regulations for enhanced corporate governance and best practices.

Role of Risk Management towards achieving clean audit

• Develop and comply with sound risk management policies and frameworks;

• Establish Risk Management structures to oversee implementation of risk management;

• Conduct a risk assessment at least annually - to be able to identify what can go wrong in

line with the set objectives and develop appropriate strategies.

Role of Risk Management towards achieving clean audit (Cont.)

• Monitor your risks on a regular basis and identify emerging risks;

• Management must integrate Risk Management in their day to day activities;

• Comply with the relevant acts and regulations;• Embed the culture of risk management throughout the

organisation;• Implement controls which will detect, prevent fraud and

corruption.

Role of IA towards achieving clean audit

• Evaluate the internal controls, risk management and governance processes for adequacy, effectiveness and efficiency.

• Provide assurance on internal controls and the effectiveness of risk management.• Assess compliance with the requirements of the MFMA and the Treasury Regulations and any other applicable laws and regulations and management policies and procedures.

Role of IA towards achieving clean audit (Cont.)

•Provide improvement/practical recommendations thereon•Evaluate a department’s general computer environment and software applications in use•Provide advice on internal and computerized controls on new systems being developed and on existing ones. •Evaluate processes and control measures implemented by management to ensure economical acquisition, effective and efficient use of resources.•Benchmark performance against best practices.•Follow up on action plans committed to by management, on findings raised by AG and other Assurance providers

Combined assuranceWhat is combined assurance?

Thank you

QUESTIONS