2Monthly Market Barometer — July 2011Credit Research
City of Johannesburg — audit qualification reveals deeper problemsAudit qualification
The City of Johannesburg (CoJ) released final audited results for FY:10 at the end of July — more than a year late. The audi-tor general has not yet received an annual report;
we have therefore based our analysis on the substantially qualifiedannual results
. Due to the magnitude of the qualification, we highlight the audit findings first:
raised but not billed amounted to R425m
, comprising property rates of R223.4m and service charges ofR201.6m.
A total of
R2.2m was included in revenue but was incorrect due to billing errors
relating to rates and services. Theauditor “could not quantify the full extent of the errors” because of a lack of information.
Revenue amounting to R732.2m was raised in the wrong period
Journal entries totalling
R1.9bn were processed in order to correct billing errors but these entries could not beverified
. Therefore, it appears that
revenue was additionally inflated by R1.9bn
The difficulties in verifying revenue resulted in
unverifiable debtors of R2.8bn
.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.
Statement of comprehensive income
When analysing municipalities, we calculate revenue by excluding all capital items and government grants. On this basis, wecalculate revenue at R18bn — increasing by 21.8% y/y. However,
we do not believe that this figure is accurate
. The auditorhas highlighted that property rates were potentially overstated by R996.7m, and service charges by R1.6bn, while incorrect journal entries further inflated revenue by R2.6bn. Therefore,
revenue appears to be overstated by R5.2bn
. On this basis,total revenue amounts to R12.8bn, and therefore, revenue actually declined by 13.6% y/y.The bulk of the city’s revenue is earned from property rates and service charges (for the sale of water and electricity). As perthe financial results, total rates and service charges amounted to R16.2bn (FY:09 – R13.1bn). However, if we exclude R5.2bnof incorrect and unverifiable revenue,
this amount decreases to R11bn
; and therefore, revenue from rates and servicecharges fell by 15.5%.
We question why the results are so severely misstated
. The CoJ has stated that the integration of a new SAP computersystem (implemented during FY:10) with the old system was the primary reason for the billing errors. This is troubling; we be-lieve that the
integration of accounting systems is generally unlikely to cause such substantial errors
. The actual costof the new system “Project Phakama” was not disclosed; however, we believe that the cost may be around R449.5m (additionsto computer systems, as part of intangible assets).
Rm FY:10 FY:09 % change
Revenue 18,000 14,776 21.8%EBITDA (1,756) (2,654) 33.9%EBITDA margin -9.8% -18.0% -Operating loss before finance charges (2,941) (3,424) 14.1%Finance costs 1,662 1,232 35.0%Cash interest cover 2.7x 3.5x -
Sources: Standard Bank Research; Annual results
Table 1: Statement of comprehensive income (as disclosed by the CoJ) — FY:10 highlights