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FLYNOTES: MUNICIPALITY – Financial statements – Accounting officer – Duties to keep proper records – Prescribed norms and standards – Municipality refusing to pay service provider balance owed – Compilation of compliant financial statements – Municipality failed to keep proper records and failed to comply with Act – Municipality indebted to service provider for balance owing – Local Government: Municipal Finance Management Act 56 of 2003.

 

IN THE HIGH COURT OF SOUTH AFRICA

MPUMALANGA DIVISION

(MIDDLEBURG LOCAL SEAT)

 

CASE NO. 437/2017

(1) REPORTABLE: YES

(2) OF INTEREST TO OTHER JUDGES: NO

(3) REVISED:

Date: 05 May 2023

Signature:

 

In the matter between:

 

ALTIMAX (PTY) LTD                                                          APPLICANT

 

And

 

MSUKALIGWA LOCAL MUNICIPALITY                           RESPONDENT

 

JUDGMENT

 

Mankge J

 

Delivered:     This judgment and order was prepared and authored by the Judge whose name is reflected and is handed down electronically by circulation to Parties / their legal representatives by email. The date of the order is deemed to be the 5^th May 2023.

 

Background history

 

[1]        The plaintiff is a company that specializes in accounting, advisory and training. The company on 16 July 2014 entered into a service level agreement with the defendant (Msukaligwa Municipality, “the Municipality”).

 

[2]        The plaintiff claims payment of the balance allegedly due by the defendant in terms of this agreement. The defendant alleges that the plaintiff failed to perform its duties as per the signed agreement. For this very reason, they are not entitled to the outstanding invoice amount.

 

[3]        In terms of this agreement the plaintiff was hired to provide consulting services in the compilation of the 2013/14 financial statement, which includes:

 

-GRAP compliant annual financial statements for the year ending 30 June 2013/14,

 

-Updated fixed asset register (FAR hereafter) for the 2013/14 financial year,

 

-Performance report for 2013/14 financial year.

 

[4]        Both parties had identified responsibilities for each party that were recorded in the said agreement. I will only highlight the municipalities’ responsibility for this purpose, since it is the one that in my view led the municipality to withhold the payment of the outstanding invoice.

 

[5]        The agreement recorded that the municipality shall perform the following responsibility amongst others:

-to provide the service provider with all the necessary information regarding the compilation of the Annual Financial Statements, updating of the Fixed Asset Register and the objectives as determined by the Municipality.

 

[6]        The pure legal question to be asked is whether the plaintiff perform in terms of the agreement? Did the plaintiff compile a 2013/14 financial year annual statement which includes GRAP compliant, as well as the updated fixed asset register and performance report for 2013/14 financial year?

 

[7]        If the answer to the above highlighted questions is positive, the plaintiff would have complied with its responsibility in terms of the agreement, the plaintiff would then be entitled to the payment of the outstanding invoice amount and this court would be constrained to grant the relief sought in the plaintiff’s particulars of claim.

 

[8]        The long history of litigation between the parties is dealt with comprehensively in the parties heads of argument which was filed on 24 March 2023 and I do not deem it necessary to repeat it herein, save to state that, the defendant has attempted to seek the declaration of the agreement as invalid and unenforceable on the basis that it is inconsistent with the law in particular section 217 of the Constitution.

 

[9]        In addition to the declaration of invalidity, the defendant also sought an order that all the payments it has made to the plaintiff in terms of the agreement be declared irregular expenditure. This application it would seem from the papers from both parties that, it was heard and dismissed before a different judge.

 

[10]      It is common cause that the plaintiff compiled and submitted the annual financial statements and other reports to the defendant which was duly accepted by the municipality. The municipality also made payments to the plaintiff for serviced rendered.

 

[11]      It is therefore common cause that the invoice amount of R2 739 683.94 is outstanding. (municipality merely asserts that it refuses to pay this amount and contends that the plaintiff did not perform its duties as per the signed agreement). The circumstances in which this dispute has arisen, it is likewise common cause. It is common cause that the total amount which was charged by the plaintiff in terms of the agreement was a total figure of R15 008 377.70 inclusive of VAT, and that only an amount of R11 698 172.38 was paid, leaving the balance of R2 739 683.94 outstanding.

 

The Evidence

 

[12]      The plaintiff led evidence of Ms. Carstens the managing director of the plaintiff, and her evidence supported entirely all the allegations that were pleaded by the plaintiff in the particulars of claim. Ms. Carstens evidence in a nutshell was to the effect that, her company Altimax (Pty)Ltd was appointed as a service provider to provide consulting services to the defendant for the compilation of the defendant’s 2013/4 year annual financial statements.

 

[13]      She testified that the plaintiff was also did the preparation of the defendant’s annual financial statement’s according to the general recognized accounting practice (GRAP), also prepared the defendants’ financial position and its financial performance and cash flow for the financial years concerned as contemplated by chapter 12 of the MFMA.

 

[14]      Ms. Carstens also placed on record that they requested information leading to their preparation of the municipality’s financial statements. She further place on record that as a service provider they work only with the information that is given to them by a client, and she confirmed in this case that all the data that they used was furnished to them by the defendant.

 

[15]      She also testified that their duty towards the defendant was to prepare accurately and that they could not fabricate or supply information that was not given to them by the defendant. The information that they use was based on historical information given to them by the defendant.

 

[16]      Ms. Carstens testified that she requested information from the defendant’s relevant officials a number of times, and that her requests most of the times were never replied to by the defendant’s officials. There were a number of requests placed on record by Ms. Carstens, I don’t intend to mention all of them in this judgment, I will however highlight a few.

 

[17]      On 24 February 2014 Ms. Carstens wrote an email to the municipal manager (“MM”), and stated as follows: “We kindly but urgently await your response to our letter dated 12 February 2014 and more specifically regarding assistance with the interim audit scheduled for March 2014”. On 27 February 2014 Ms. Carstens write yet another email to “MM” and it begins by the following “I am following up on the email below, sent on 24 February 2014, I have not had any confirmation from you on the arrangements below. Just to confirm that we will be arriving on site on Monday 3 March 2014, as indicated below. . . . we kindly appreciate some office space for the team, See you on Monday”.

 

[18]      It would seem from the email dated 28 February 2014, the “MM” replied to Ms. Carstens by stating only the following: “. . . At the Council Meeting held on 27 February 2014, Council resolved to costs curtailment measures, as such the Executive Council Members and Management will be sitting on the implementation of the changes as per the adopted adjustment budget. On the interim audit schedule, the Municipality have gone for the closed tender. I will advise that we recall our Monday meeting.

 

[19]      It was the evidence of Ms. Carstens that the interim audit was aimed at preparing for financial year June 2014, ahead of the year end.  Ms. Carstens testified that in the emails she had also copied one Silaule (director municipal support at the provincial office, Mr. Khumalo Ehlanzeni Municipality. She testified further that she was surprised when she was informed about the close tender as their 2013 contract was not terminated.

 

[20]      Ms. Carstens testified that the meeting did not take place, and Altimax team did not go on the site. She testified further that GAP analysis was done and a 40 Page report was send to the mayor. She testified that in terms of this report the Municipality Financial statements were in a disaster state, and in the report the plaintiff mentioned a list of things that were not done properly. She testified that the municipality did nothing to deal with the Auditor General’s report.

 

 [21]     By way of example in the GAP Analysis report the plaintiff on VAT states the following “Vat was not accounted for correctly during the year as the VAT input and VAT output per supporting documents submitted did not agree to the VAT input and output recorded in the accounting records. Due to the nature of errors and the financial line items affected, it was impractical to determine the value of the misstatements. In the same report the plaintiff further gives a warning to the defendants as follows “No actions were taken to ensure all VAT transactions are correctly accounted for in year 2012 and 2013 financial years. These expenses should be evaluated on a one by one basis to remove qualification” (Own emphasis is underlined).

 

[22]      In the same report and with regard to the asset register the plaintiff gave the following warning to the municipality “All additions from 2013-14 will be componentized and added to the asset register. These include additions from the repairs and maintenance, Project files and donations. The municipality will have to assist our project team with the identification of source documentation as well as to address balancing differences between the Project files and the General ledger”.

 

[23]      Also in the report on “Land sites” the plaintiff wrote “We will make use of the 2013 report as bases and will be update the 2014 report through a desktop exercise for the two landfills sites. All information required need to be supplied by the municipality”.  In terms of this report in a number of items the plaintiff gave a stern warning on Current status: “Nothing has been done or updated, and that the on 2014 Audit Report, no monthly recons performed between the consumer listing and the consumer deposits, Deposit register not updated on a monthly basis, Possible effect “Qualification”

 

[24]      All the underlined portions in my view, is not consistent with the service provider who is failing to perform in terms of the agreement. What is gleaned from the underlined portions is that this was a service provider who were pretty much on their knees begging for the client to pull up their socks, in light of the possible audit qualification on 2014 Audit Report.

 

[25]      Let me pause and look at what the legislation requires of the plaintiff and the defendant where financial statements is to be compiled.

 

Compiler’s responsibilities

 

[26]      The plaintiff’s mandate in so far as the defendant’s financial statements were concerned, was simply to provide consulting services for compilation of the defendant’s 2013/14 year annual financial statements.

 

[27]      Compilation is described as a basic summary of the company’s financial statements using data provided by the company concerned (in this case the company concerned will be the defendant “Msukaligwa Municipality”). In terms of compilation unlike audit it provides no assurance, there are no tests performed and the auditor does not examine any internal controls. (See: “Ageras.com”)

 

[28]      One of the compiler’s responsibility is to obtain knowledge and understanding to compile financial statements, and to compile financial statements using information provided by management.  If financial statements materially misstated or misleading, the compiler may propose amendments to ensure that financial statements are not materially misstated. Also, financial statements should be compiled in accordance with the applicable framework. The compiler is also required to issue practitioner’s compilation report in required form, and the compiled financial information. (See: Compilation, Independent Review & Audit by SAIPA).

 

[29]      The evidence of Ms. Carstens was very clear that they provided the defendant with the accounting practice that is GRAP complaint in all material respect.  Her evidence was also clear that, the plaintiff was a company who was ver much alive to the responsibilities placed on them as an accounting company. In all their documents attached one can easily grasp that when the deal with the client they exercise a high degree of precision, and they conduct themselves professionally. 

 

[30]      This court also heard through her testimony what GRAP means and why it was important that the plaintiff as an accounting firm should comply with GRAP. It is my considered view that, from the evidence of Ms. Carstens and the plaintiff’s documents attached there is one thing which becomes apparent, that the plaintiff’s behavior was always consistent and that they always check their behavior against their ethical standards. I am persuaded that the plaintiff passed the ‘GRAP’ muster with distinction. In this regard maybe I must also emphasize the following: GRAP means an accounting practice complying in material respects with standards issued by the Accounting Standards Board (See: Section 1 of PFMA).

 

[31]      I now turn to consider the responsibilities of the defendant (“Municipality”).Its responsibilities in so far as the financial statements are concerned are that, every municipality and every municipal entity must prepare annual financial statements (AFS) for each financial year, which fairly presents the state affairs of the municipality, its performance against its budget, its management of revenue, expenditure, assets and liabilities, its business activities, its financial results and its financial position as at the end of the financial year, amongst others and also disclose the information required in terms of section 123, 124 and 125 of the Act. (Section 122 (1) of Municipal Finance Management Act 56 of 2003 (“MFMA”).

 

Municipality’s responsibilities

 

[32]      The accounting officer of a municipality is responsible for managing the financial administration of the municipality, and must for this purpose take all reasonable steps to ensure; that full and proper records of the financial affairs of the municipality are kept in accordance with the prescribed norms and standards; that the municipality has and maintains effective, efficient and transparent systems of financial and risk management and internal controls, the accounting officer is also responsible for and must account  for all bank accounts of the municipality, including any bank account opened. . . amongst other things (Section 62 (1) and (2) of “MFMA”).

 

[33]      The accounting officer of a municipality must prepare the annual financial statements of the municipality and, within two months after the end of the financial year to which those statements relate submit the statements to the Auditor General for auditing. (Section 126 (1) of “MFMA”).

 

[34]      Against the above backdrop, I now need to briefly outline the evidence of the defendant. The defendant led evidence of one Mr. Africa Mavimbela who testified that he was the defendant’s manager legal services and that the objective of entering into the Service Level Agreement with the plaintiff was that the plaintiff must compile annual financial statements and report in terms of GRAP standards. He testified that the Auditor General gave a negative report, and that 80% of the plaintiff’s invoiced account was paid by the defendant.

 

[35]      Mr. Mavimbela conceded that the outstanding amount is withheld as according to the defendant “the product that the defendant received from the plaintiff was not according to the agreement”.  He explained that the financial statements and the asset register was not compliant with GRAP standards. He testified that there was no way that the defendant would pay the outstanding amount as they received the product that they did not agreed on with the plaintiff, he also asserted that, it was going to be a wasteful expenditure on the municipality side if they paid the outstanding amount.

 

[36]      When asked about the plaintiff’s view that the municipality was not cooperating with the service provider by supplying accurate data needed, Mr. Mavimbela replied by stressing that the plaintiff should have asked for the amendment of the agreement and tell the defendant that they are unable to achieve what is expected of them in terms of the agreement.

 

[37]      It was also the Mavimbela’s contention that, the plaintiff should have issued a formal notice of default to the defendant, and he contended that as manager legal services he did not receive any such notice from the plaintiff. He testified that the plaintiff did not request any extension of time and the defendant did their part in meeting the plaintiff “half-way”, so he argued.

 

[38]      Mr. Mavimbela mentioned a number of times during his testimony that the service that they received from the plaintiff was not of quality, and that the Auditor General’s report stated that the defendant’s financial statements did not comply with GRAP standards, in a nutshell that was the defendant’s evidence in resisting the claim for the payment of the outstanding balance of R2 739 683.94.

 

[39]      The evidence of the defendant did not thoroughly deal with updated fixed asset register (FAR) at all. I will still address the issue of asset register anyway for completeness sake. The Auditor General’s report found in the main that the defendant disposed the assets during the year but not all disposals were accounted for in the financial statements.

 

[40]      In terms of “Local Government Capital Asset Management Guideline” It is strongly recommended that the asset register as prescribed by the MFMA should be under the responsibility of the CFO. The asset managers should ensure that appropriate systems of physical management and controls are established and carried out for all assets”

 

[41]      In terms of the above named guidelines an asset register is a complete and accurate database of the assets that is under the control of a municipality and that is regularly updated and validated. An adequate asset register is integral to effective asset management. It is a basis of an asset management information system and should contain relevant data beyond that required for financial reporting. The underlined portions of the statement are in my respectful view setting a higher standard on the municipalities to always ensure that they keep an updated asset register (Own emphasis is underlined).

 

[42]      There is a higher level of accountability that is expected from public officials and servants. (I respectfully agree with this notion) (Insitute of Municipal Finance Officers (IMFO) 2013 Mnguni 2022)

 

[43]      Ms. Carstens testified at length how the plaintiff repeatedly requested data for the purposes of updating asset register, she also testified that in the GAP Analysis report the plaintiff mentioned that all assets have to be verified each year is a MFMA requirement. This is indeed found on page 15 of the report. From this it is clear to me that had the defendant been compliant with its responsibilities in terms of MFMA and had it listened when this call was made in the GAP Analysis report, the defendant would have complied with the updated fixed asset register (FAR) for the year 2013/14 financial year, but again on this one the defendant left its legislative and constitutional responsibilities to the service provider where they ought not to have done so in my view.

 

[44]      Throughout the evidence of the defendant, the defendant did not acknowledge its own regulated responsibilities in terms of the “MFMA”, and in terms of the Constitution. They did not even deny the evidence if Ms. Carstens about the municipality not cooperating with the service provider. The defendant appeared to be a party who just signed a contract (at the very last hour of the financial year (two weeks after the municipality’s financial year came to an end) and from the defendant’s relevant officials then took a back-seat in the whole process. In my humbly view this attitude can easily be considered as a dereliction of duty by the municipality’s personnel, in particular the accounting officer.

 

[45]      The defendant’s testimony about the plaintiff’s failure to send a notice of default, I find it unhelpful to the defendant’s course, if this is looked against the defendant’s failure to comply with its own laws and with reporting requirements. The undisputed evidence of Ms. Carstens was th  at, there was persistence after persistence on the part of the plaintiff and this was blatantly ignored by the defendant, this in my view is a behavior which is consistent with a party who lacks the appreciation and the degree of its legislative responsibilities.

 

[46]      This is where “the employee’s poor performance is permeated with willful failure to do his duty with serious consequences. . .” (Labour Law in South Africa). The consequences of this conduct is evident from the GAP Analysis Report compiled by the plaintiff, as well in the Audit Report. It would seem the defendant’s accounting officer ignored its statutory obligations in terms of the Act, and expected that the Service Level Agreement will perform miracles forgetting that provision of data was necessary from their side. In my view there was a serious need for consequence management to place after the submission of GAP Analysis report and 2015 Auditor-General’s report.

 

[47]      I find the defendant’s action in this regard highly disturbing, especially in light of the Section 152 (1) of the Constitution, “The object of Local Government (1) “to provide democratic and accountable government for local communities, to ensure the provision of services to communities in a sustainable manner, to promote social and economic development, (2) “ a municipality must strive, within its financial and administrative capacity, to achieve the objects set out in subsection (1)”

 

[48]      When regard is had to the Constitutional obligations placed on the defendant, one can easily conclude that the defendant failed to consider the community they were supposed to serve. And my view is that there is a need for greater awareness by municipal leadership of

 

[49]      I am in full agreement with the following view from the Supreme Court of Appeal, with regard to relationship between the municipality and its ratepayers. That “there is fiduciary relationship between a local authority and its rate payers. Local government should be a representative of the inhabitants of its area of jurisdiction, and its actions should be open and transparent”. (Kempton Park/Thembisa Metropolitan Substructure v Kelder 2000 (2) SA 980 (SCA). This court heard from Ms. Carsten who has many years of experience working with the municipalities what is the effect of qualified audit on the municipality, that in the main it affects the municipality’s budget for the next financial year. This in my view is a clear failure in the fiducial relationship on the part of the municipality.

 

[50]      I have no doubt in my mind that if regard is heard to the responsibilities of the municipality, in terms of “MFMA” as sketched above, that either the defendant lacked the understanding of the laws that regulate them as a constitutional entity or the defendant simply refused to pay the plaintiff’s balance amount, and without a course.

 

[51]      I am of the firm view that if the defendant was complaint with its own laws, if Msukaligwa municipality stayed its course of “securing sound and sustainable management of the financial affairs of the municipality” and if the accounting officer understood his/her functions that the preparation of the financial statements was actually his functions in terms of the Act, I have no doubt in my mind that Altimax would have been provided with an already prepared financial statements, in line with the Act.  And Altimax would have worked from a much better document.

 

[52]      The evidence of Ms. Carstens was that they communicated with the defendant a number of times from January 2014 requesting the defendant’s participation and further warning the defendant of the material misstatements that was apparent from the information at their disposal.

 

[53]      I also need to mention that even the 31 March 2015 Auditor General’s report, also highpoint the responsibility of the accounting officer and the AG this at paragraph 2 of the report as follows: “The accounting officer is responsible for the preparation and fair presentation of these financial statements in accordance with the South African Standards of Generally Recognized Accounting Practice (SA Standard of GRAP) and the requirements of the Municipal Finance Management Act of South Africa, 2003 and the Divisions of Revenue Act of South Africa, 2013 (Act 2 of 2013) (DoRA), and for such internal control as the accounting officer determines is necessary to enable the preparation of financial statement that are free from material misstatement, whether due to fraud or error” (Own emphasis is underlined).

 

[54]      The underlined portions above are a clear indication that the suggestion by the defendant that the responsibility of complying with GRAP was that one of the plaintiff and plaintiff alone is misconceived if not mischievous if regard is had to the above guidance by the auditor general as well.

 

[55]      Also the National Treasury created a GRAP implementation guide for municipalities. The municipality’s chart of accounts (COA) should be investigated in depth to determine all the accounts which are not yet fully GRAP compliant. The necessary adjustments and re-allocation of accounts should then be done. It might be found that currently various GRAP accounts that would be required are not provided for as yet in the municipality’s account system. These accounts need to be identified and created accordingly ensuring that the COA addresses all the disclosure requirements of GRAP to enable the compilation of GRAP compliant annual financial requirements of all relevant GRAP standards and ensuring that the COA is set up in such a way that it can collect and provide this information for accounting and financial statements. (GRAP compliant SCOA 25 September 2008).

 

[56]      The above in my view also strengthen what I have found above, that the GRAP compliant is actually the responsibility of the municipality first, before that responsibility is shifts to a service provider. In this case the defendant should have simply done that before approaching the service provider for services.

 

[57]      The plaintiff compiled the annual financial statements as tasked by the defendant in the Service Level Agreement. The defendant self-defeated itself by failing to comply with their statutory obligations as outlined above. It is clear from the undisputed evidence that the defendant did not achieve GRAP compliant annual financial reports due to the municipality’s non-compliance with MFMA- of 2003. The evidence point to one direction only, that the defendant failed to keep proper records, that is a likely reason for its failure to produce accurate information upon request.

 

Conclusion

 

[58]      Consequently, the defendant is indebted to the plaintiff in the undisputed sum of R2 739 683.94. with interest as at the date of this judgment.

 

Costs

[59]      The general rule is that the successful party should be awarded costs. The plaintiff in this case have counted a number of reasons why this court should grant costs order on a scale between attorney and client. The defendant dragged the plaintiff to the trial, and yet they knew that they have no defence to the claim, this is evident from the evidence of Mr. Mavimbela and obviously their failure to call a witness from the AG’s office which they undertaken to call albeit late.

 

[60]      The defendant also persisted with challenging the plaintiff’s claim on the principle of legality, even after this was fully determined and decided on by the court of law, the defendant caused the plaintiff to prepare on topics that they fully knew that they will abandon at an eleventh hour.

 

Costs

 

[61]      I am accordingly in respectful agreement with the plaintiff that the entire conduct of the defendant justify the costs as prayed for.

 

MT MANKGE

JUDGE OF THE HIGH COURT

 

Appearances:

Counsel for the Plaintiff:	Adv. Jacobs SC
Instructed by:	Johan Du Preez Attorney, Pretoria.
Counsel for the Defendants:	Mr. Mutamba
Instructed by:	TMN Kgomo & Associates Inc, Evander.
Dates heard:	13-16 March 2023
Date for submissions:	24 March 2023
Date of Judgment:	5 May 2023

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