THE FINANCIAL STATEMENTS OF NAIROBI CITY COUNTY

Transcription

1 REPUBLIC OF KENYA REPORT OF THE AUDITOR-GENERAL ON THE FINANCIAL STATEMENTS OF NAIROBI CITY COUNTY FOR THE SIXTEEN (16) MONTHS PERIOD ENDED 30 JUNE 2014

2 REPORT OF THE AUDITOR-GENERAL ON NAIROBI CITY COUNTY FOR THE SIXTEEN (16) MONTHS PERIOD ENDED 30 JUNE 2014 REPORT ON THE FINANCIAL STATEMENTS I have audited the accompanying financial statements of Nairobi City County set out on pages 7 to 47, which comprise the statement of financial position as at 30 June 2014, the statement of receipts and payments, statement of cash flows and summary statement of appropriation for the year then ended, and a summary of significant accounting policies and other explanatory information in accordance with the provisions of Article 229 of the Constitution of Kenya and Section 8 of the Public Audit Act, Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Public Sector Accounting Standards (Cash Basis) and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The management is also responsible for the submission of the financial statements to the Auditor-General in accordance with the provisions of Section 7 of the Public Audit Act, Auditor-General s Responsibility My responsibility is to express an opinion on these financial statements based on the audit and report in accordance with the provisions of Section 9 (1) of the Public Audit Act, The audit was conducted in accordance with International Standards on Auditing. Those standards require compliance with ethical requirements and that the audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the County s internal control. An audit also includes evaluating appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statements.

3 Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, however, I am not able to obtain sufficient audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion 1. Accuracy of the Financial Statements The statement of receipts and payments reflects an amount of Kshs.24,419,155,746 under receipts. This amount differs with the figures of Kshs.3,911,654,036 and Kshs.7,367,225,606 reflected in the trial balance and the general ledger by Kshs.20,507,501,710 and Kshs.17,051,930,140 respectively, which has not been reconciled or explained. Consequently the accuracy of the financial statements could not be confirmed. 2. Accounting for Revenue The statement of receipts and payments reflects an amount of Kshs.12,239,627,414 under other receipts. These receipts relate to revenues generated by the City County and includes rates, licenses, fees, parking charges and other taxes levied by the County Government. Review of revenue records maintained revealed discrepancies between revenue collected and the revenue disclosed in the financial statements. While records maintained on selected parking lots revealed expected revenue of Kshs.32,054,000, the financial records showed an amount of Kshs.8,539,435. The difference of Kshs.23,514,565 was not reconciled or explained. Consequently the completeness and accuracy of revenue collected by the County Government cannot be ascertained. 3. Presentation, Disclosure and Unsupported Acquired Assets The statement of receipts and payments reflects an amount of Kshs.1,907,025,308 under acquisition of assets which includes an amount of Kshs.58,476,414, described as expenditure on recurrent items amongst other items that do not relate to acquisition of assets. Further, no supporting documents, including a Fixed Assets Register and or analysis was provided for audit review. In addition, none of the assets, including motor vehicles was presented for physical verification. Consequently, the existence of the assets and the validity of the expenditure on acquisition of assets cannot be confirmed. Further the disclosure of the expenditure of Kshs.1,907,025,308 as entirely acquisition of assets is misleading. 4. Assets and Liabilities Inherited from the Defunct City Council of Nairobi The County s statement of receipts and payments reflects an amount of Kshs.1,907,025,308 under acquisition of assets for the sixteen months period as at 30 June It also reflects pending bills amounting to Kshs.41,521,532,913 in note 27 to the financial statements as at the same time. However, the County s financial statements for the sixteen months period do not include the assets and liabilities of the defunct City Council of Nairobi, although the County management took possession of them. In addition, the Transition Authority is yet to formally hand over the assets and liabilities of the defunct City Council of Nairobi to the County Government. It is not 2

4 known when these assets and liabilities will be handed over to the County Government. Consequently, the financial statements presented by the County Government are not fairly stated. 5. Cash and Bank Balances The statement of financial position reflects an amount of Kshs.241,786,403 and Kshs.48,778,221 under bank and cash balances respectively. Review of the operations of the cash book revealed that cash was being used at source instead of banking and accounting for the collection using the County Revenue Fund Account in accordance with the requirements of the Public Finance Management Act, Further, the cash book balance of Kshs.48,778,221 reported in the financial statements differed with the year end cash count balance of Kshs.114,158,994 by Kshs.65,380,773. It is not clear and management has not explained why a balance of Kshs.114,158,994 was held in cash posing a serious security risk. In addition, the bank balance of Kshs.241,786,403 differed with the twenty five (25) account balances of Kshs.146,373,858 presented for audit by Kshs.95,412,545. No reconciliation or explanation was provided for these variances. Further, the County Government has other sixteen (16) dormant bank accounts, whose balances amounted to Kshs.35,459,356 that have not been disclosed in these financial statements. Consequently, the completeness and accuracy of the cash and bank balances disclosed in these financial statements is doubtful. 6. Compensation of Employees The statement of receipts and payments reflects an amount of Kshs.11,567,795,921 in respect of compensation for employees. The amounts include fines and surcharges and overpayments amounting to Kshs.8,720,960 and Kshs.20,541,011 respectively. No documentation was availed to support the fines, surcharges and overpayments. In addition, included in the figure of Kshs.11,567,795,921 is an amount of Kshs.125,834,020 paid as non-practicing allowance and another Kshs.500,000 paid in the last quarter of the year as wages for temporary employees. No documentation was availed to support the validity of these payments. Further, no analysis was provided to support details of employees who had joined or left the service of the County Government during the year. As a result, the validity, completeness and accuracy of the employee compensation expenditure figure of Kshs.11,567,795,921 could not be confirmed. 7. Account Payables (Pending Bills) Note 27 to the financial statements discloses pending bills amounting to Kshs.53,312,376,122 comprising of supply of goods and services to the County of Kshs.6,314,194,819, deductions for staff pensions of Kshs.5,476,648,390, and other pending bills amounting to Kshs.41,521,532,913. 3

5 Review of available information revealed that bills relating to supply of goods and services arose from invoices for services and goods that could not be accounted for. Further, the pensions payable to staff increased by Kshs.2,490,650,968 during the year while other payables includes a contingent liability of Kshs.29,002,754,176 whose nature was not disclosed. Consequently, the validity of the pending bills disclosed in note 27 to the financial statements could not be confirmed. 8. Accounts Receivables Annex 8 to the financial statements reflects an analysis of accounts receivable amounting to Kshs.96,612,044,238 as at 30 June, 2014 representing an increase of 49% from the previous year s (2013) figure of Kshs.64,712,675,633. In addition, the figure of Kshs.96,612,675,633 is mainly composed of rates receivable amounting to Kshs.96,151,740,633. It is clearly evident that the County management has failed to collect rates. Additionally, the increase of Kshs.31,899,368,605 within the year has not been supported or explained and no efforts appear to have been put in place to collect the outstanding accounts. Consequently the validity of the accounts receivable figure of Kshs.96,612,044,238 could not be ascertained and the recoverability of the debtors figure is therefore doubtful. 9. Outstanding Imprests Note 24 D to the financial statements reflects an outstanding imprest balance of Kshs.51,292,189 attributable to the County Government. However, a balance of Kshs.235,903,246 was carried forward from the previous period of March to June The County Government has not established an imprest register to record transactions involving imprest and it is not clear why recovery measures have not been taken. Consequently the accuracy and recoverability of the imprest figure of Kshs.51,292,189 reflected in the notes to the financial statements could not be confirmed. 10. Outstanding Loans The statement of receipts and payments reflects proceeds from borrowing amounting Kshs.1,517,773,468 as at 30 June 2014 and interest payments amounting to Kshs.128,921,975. However, review of loan records revealed that the County Government had additional outstanding loan balances of Kshs.3,377,221,967 in nine (9) accounts, which differed with the cash book balance of Kshs.3,680,010,163 by Kshs.302,788,196. Further, examination of the cash books and bank statements revealed that an amount of Kshs.888,859,539 was paid as interest for the loan and overdrafts, which resulted to unexplained variance of Kshs.759,937,563. There is no evidence that the overdrafts had been approved by either the County Assembly or the National Treasury. In addition, the statement of receipts and payments reflects repayments of principal on domestic and foreign borrowings amounting to Kshs.471,211,259. However, examination of cash books and bank statements revealed that an amount of Kshs.2,355,248,087 was 4

6 used as repayments for the loans and overdrafts. This resulted in a difference of Kshs.1,884,036,828 which could not be explained. Consequently, the completeness, accuracy and validity of the loans and interest figures disclosed in the financial statements could not be confirmed. 11. Fund Balance The statement of financial position as at 30 June 2014 reflects an amount of Kshs.341,856,813 as the net financial position. However, this amount could not be confirmed as the current position due to various errors noted in the statement of receipts and payments. Disclaimer of Opinion Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, I have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly I do not express an opinion on the financial statements. Edward R. O. Ouko, CBS AUDITOR-GENERAL Nairobi 19 May