Joburg's revenue overstated

A Standard Bank report on the City of Johannesburg's financial status has found the city inflated its revenue for the 2009/10 financial year by R1.9 billion, because of refunds related to the billing mess.

The city acknowledges that its financial results for the 2009/10 year were qualified for the first time in several years, a situation it takes seriously and promises to rectify. However, it did not respond to several queries as to why revenue was overstated or unverified.

The results, issued more than a year late, cover the period during which the city changed billing systems, moving its disparate legacy systems onto SAP through Project Phakama, at a cost of R580 million.

The city started implementing Phakama in November 2009, and completed the move in June 2010. However, thousands of Johannesburg accountholders complained about grossly over-inflated bills, inaccurate meter readings, illegal disconnections and a lack of service from the city's call centre.

Standard Bank notes the city processed journal entries worth R1.9 billion to correct billing errors, but these entries could not be verified, resulting in the city's revenue being inflated by R1.9 billion. This is in addition to other concerns raised by the Auditor General (AG) over the city's financial statements.

The billing crisis stemmed from post-implementation issues with Phakama, as the city had problems with interfacing SAP modules with some departments, such as the deeds office and credit control management. Human errors also crept into the system.

However, Standard Bank says the city's statements that the SAP integration was the primary reason for the billing errors are “troubling”.

“We believe that the integration of accounting systems is generally unlikely to cause such substantial errors.”

However, the city's annual report states the move to the new billing system was “triumphant”. It admits, however, that there were issues with system and people and process integration.

Mayor Parks Tau, on being appointed after the May elections, said previously the city was “well aware of the issues that need to be addressed”. The city recently claimed the crisis is over, and all outstanding issues would be solved by the end of this month.

The AG qualified the city's financials due to a number of reasons, including unbilled income, and unqualified correction of errors. Some numbers were accounted for in the wrong period.

According to the AG's report, the city's financial statements “did not fairly present the financial position of the municipality with regards to revenue and consumer debtors”. The results were “subject to material amendments as a result of the audit”, the AG says.

Johannesburg did not “adequately” implement a system to make sure that revenue is billed correctly and that corrected journal entries are recorded in the right period, says the AG's report.

Standard Bank points out the city released its results “more than a year late”. The bank's report is based on the city's “substantially qualified annual results”.

“Due to the size of the qualification, we believe that considerably less reliance can be placed on the revenue and debtors as disclosed in the annual results.”

The bank argues that the results are “largely unreliable” as revenue worth R5.2 billion was either incorrect or unverifiable, while debtors of R2.8 billion could not be double-checked. It questions “why the results are so severely misstated”.

According to the city's annual report, “revenue collection exceeded expectation with a citywide total collection of R16.5 billion at a percentage rate of 92.7%”. It says this was due to multiple interventions to improve collections. However, Standard Bank says it cannot “determine a concrete collections rate”.

The bank says unverified journal entries worth R1.9 billion were made to correct billing errors. “Therefore, it appears that revenue was additionally inflated by R1.9 billion,” argues Standard Bank's report.

Standard Bank has “many concerns regarding the city's latest financial statements”. It says the city's controls are not adequate and it does not “place a great deal of reliance on the numbers as reported”.

However, the bank says that, given the city's size and adequate controls, the financial situation would improve vastly. “However, as these results are more than a year overdue, the possibility exists that these problems may be repeated in financial year 2011.”

Janine Pein, head of credit research at the bank, points out the report is based on old numbers. “Since more than a year has passed since then, I do believe that the report does not reflect the current financial situation of the city,” she says.

Pein adds it is “most likely the city has taken actions to remedy the problems” cited in the report, and points out that it should not be viewed out of context.

“The report is only intended for a specific audience of institutional investors, who are aware of the context of the report and the fundamentals behind the analysis. Therefore, without this understanding, extracting sound bites from our report may lead to a misleading interpretation,” she adds.

Gabu Tugwana, communication director in the city's public liaison department, says the city received unqualified audit opinion for the previous three consecutive years. “The city takes this qualified opinion very seriously and views it as an opportunity for positive introspection that will result in improvement of the control environment.”

Tugwana says the audit for the year to June is already under way and the city's leadership and management have engaged in numerous processes to address all the issues raised in the audit report. The city and the AG are also working together to ensure risks are understood and mitigated, he says.

“In addition to this, extensive workshops have been undertaken with management regarding the strengthening of the control environment,” says Tugwana. The city's risk and assurance services unit has also verified the control environment and made recommendations to improve it where necessary, he adds.

“The city is committed to ensuring a return to an unqualified audit opinion and has even engaged the services of a reputable audit firm to assist in the audit process and resolution of the problem areas highlighted in the 2009/10 audit,” says Tugwana.