INSTITUTE OF MUNICIPAL FINANCE OFFICERS Internal controls Section P 1. Introduction The term "corporate governance" is associated with the trend to greater economical and social responsibility. Accountability, transparency and openness in reporting and disclosing information are imperative to the practice of good governance. During March 2002 the King Report on Corporate Governance in South Africa ("King II") was published with the aim of "promoting the highest standards of corporate governance in South Africa". The characteristics of corporate governance are discipline, transparency, independence, accountability, responsibility, fairness and social responsibility. While all corporate entities were encouraged to adopt the report, these recommendations were only intended to bind "affected companies", the definition of which include public sector enterprises and agencies governed by the Public Finance Management Act and the Municipal Finance Management Act ("MFMA'). Although the code is intended to be binding on all "affected companies", King Il does not have the same force as law. The MFMA introduced an approach of management for results instead of management for compliance. Some characteristics of this approach amongst others include: · performance agreements for accounting officers that include performance measures; · cleary defined responsibilities for resources and outputs; · alignment of strategic planning and budgeting processes; and · appropriate internal control and risk management principles. The concept of internal control is discussed in this section and the content does not provide a comprehensive internal control framework but merely and illustration on internal controls. 2. Definition of internal control Internal control is a process effected by the municipality, management and other personnel, and designed to provide reasonable assurance regarding the achievement of objectives in the following categories: · economy, efficiency and effectiveness of operations; · internal financial control; . compliance with applicable laws and regulations and supervisory requirements; 1 PRICEWATERHOUSE( COPERS
Internal controls Handbook for municipal finance officers · supporting financially sustainable service delivery; . the reliability of reporting; and · behaving responsibly to stakeholders. It is imperative for management and the municipality to note that not all internal controls are of a financial nature. Internal controls extend to other operational areas in the municipality such as human resources, IT and access to buildings amongst others. Internal controls in human resources may be achieved by establishing effective human resource policies and procedures that enhance a municipality's control environment. These policies and procedures should address hiring, orientation, training, evaluations, counselling, promotions, compensation and disciplinary actions. In the event that an employee does not comply with a municipality's policies and procedures or behavioural standards, a municipality must take appropriate disciplinary action to maintain an effective control environment. (See discussions on control environment and control activities in this chapter for further explanations.) Listed below are five essential components of internal controls that should be present in order to implement an effective and efficient internal control system: . The control environment - this relates to the municipalities' governance and management functions and the attitudes, awareness and actions of those responsible for governance. The risk assessment process - this relates to