EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA - HC) REPORT TO MANAGEMENT FOR THE AUDIT OF ECSA-HC FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 EY Building a better working world Ernst & Young Tel: +255 22 2927868/71 P.O. Box 2475 Fax: +255 22 2927872 Tanhouse Tower (4th Floor) E-mail: info.tanzania@tz.eycom 34/1 Ursino South, www.ey.com Building a better New Bagamoyo Road working world Dar es Salaam, Tanzania Ref: NKM/RM/SMA/60815156/168/17 22 May, 2017 The Director General East, Central and Southern Africa Heath Community Plot 157 Olorien, Njiro Road P0 Box 1009 Arusha, Tanzania Dear Sir RE: REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS OF THE EAST CENTRAL AND SOUTHERN AFRICA (ECSA-HC) FOR THE YEAR ENDED 31 DECEMBER 2015 We have recently completed our audit of the financial statements of East Central and Southern Africa Health Community (ECSA- HC) for the year ended 30 June 2016 and have pleasure in presenting this report. In it we draw your attention to matters, which we have noted, and which we believe should receive your attention. Our findings include current year internal control weaknesses, and status of internal control weaknesses reported in the audit of prior years. Where appropriate and feasible, we have included our constructive suggestions for improvement. The issues identified have been ranked based on our assessment of the possible risk to the organization. The rating used is explained in the table below: Risk Exp lanation isses which need to be addressed on an urgent basis. Medium Issues which need to be addressed at the first available opportunity. Issues which have little impact on the operations but considered industry best practice if implemented. The principal objective of our audit is to enable us to express an opinion on the truth and fairness of the financial statements as a whole. An audit opinion is based on the concept of reasonable assurance. It is not a guarantee that the financial statements are free of material misstatement. We explained our audit responsibilities and their limitations in our engagement letter. Audits are carried out in such a manner, as we consider necessary to fulfill our responsibilities as auditors and include such tests of transactions and of existence, ownership and valuation of assets and liabilities, as we consider necessary. The nature and extent of our tests vary according to our assessment of what is material in the context of the entity's financial statements, of the organization's accounting system and, where we wish to place reliance on it, the system of internal control or aspects thereof. A member firm of Ernal & Young Global Limiled. Building a better working world We cannot in practice examine every operating activity or project or accounting procedure, nor can we substitute for management's responsibility to maintain adequate controls at all levels of the entity. Our work cannot, therefore, be expected to identify all weaknesses in your systems and procedures, which a special investigation directed at those areas, might reveal. As to the possibility of irregularities, including fraud and, inter-alia, forgery, collusion and management override of control systems, the responsibility for the prevention and detection thereof rests with the management. Whilst irregularities may be detected during our audit, we are not required to and do not search specifically for such matters. Our audit should not therefore, be relied upon to disclose them. We shall be pleased to discuss with you an extension of our audit to examine more deeply any activities of the business, which may concern you. USE OF REPORT BY THIRD PARTIES This report is intended solely for the information and use of management of East Central and Southern Africa Health Community (ECSA- HC). It aims to assist the management and the board over and above our legal responsibility and forms part of a continuing dialogue between us. Accordingly, it is not intended to include every matter that came to our attention. For these reasons, we believe that it will be inappropriate for this report to be made available to third parties. If such a third party were to obtain a copy without our prior written consent, we would not accept any responsibility for any reliance that they might place on it. Please let us know if there is any further information that you may require. In conclusion we would like to express our appreciation for the cooperation and assistance given to us by both management and staff during the course of the audit. Yours faithfully, For and on behal of Ernst & Young Nee e Mssusa Engagerfient Partner EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 Ref Summary of issues/weaknesses Page 1 Current year observations related to property & equipment and other assets 1.1 Asset coding /tag numbers process needs improvement 2 1.2 Non provision of outstanding receivables from leaving employees 3 1.3 Incomplete fixed asset register 4 2 Current year observations related to expenditures 2.1 Reported expenditures not properly supported 5 2.2 Expenses not relating to year under audit 6 2.3 Understatement of expenses and inaccurate casting 7 2.4 Overstatement of expenses 8 3 Follow up of issues raised in the previous year's audit 3.1 Overdue member states contributions 9 3.2 Dormant bank account 10 3.3 Changes of bank account name 10-11 3.4 Revaluation of full depreciated assets 11 3.5 incorrect computation of PAYE and NSSF 12 3.6 Long outstanding VAT balances 12-13 3.7 Inadequate insurance cover 13 3.8 Late approvals of journal entries 14 3.9 Late preparations and approvals of bank reconciliations 14 - 15 3.10 Long outstanding staff imprest 15 3.11 Non submission of PAYE and NSSF 16 II EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 1. CURRENT YEAR OBSRVATIONS RELATED TO PROPERTY & EQUIPMENT AND OTHER ASSETS 1.1 ASSET CODING ITAG NUMBERS PROCESS NEEDS IMPROVEMENT Observation During our physical verification of items of property, and equipment (PPE) we noted that some items which requires asset code numbers were not coded for identification purposes. The absent of asset code numbers creates inconveniences and difficulties in performing assets verification exercises and it is time consuming in matching the respective assets in the asset register are the physical item during verification process, and it brings a difficult process in distinguish assets according to the donors. Specific examples Below is a sample of World Bank Project assets physically verified but did not have code numbers that are recorded in the assets register. Description Category Location LAPTOP - HP Office Equipment MFSN LAPTOP HP Office Equipment PO-FSN DESKTOP DELL Office Equipment ACCT OFFICE DESKTOP DELL Office Equipment MFSN DESKTOP DELL Office Equipment PO-FSN Risk rating: Medium Management may not be able to monitor the movements of respective assets maintained in fixed assets register as there could be difficulties in identifying which asset relates to which project. Recommendation Management is advised to consider that, all fixed asset items be appropriately labelled for easy identification, given a fixed asset number and this number recorded in the fixed asset register. The physical verification process could be more efficient as assets can be quickly identified and it reduces the risk that assets are double counted or movement without management approval and respective register updated accordingly. Management Comment Management acknowledges this finding and has undertaken an exercise to code the assets in question. Moving forward it will ensure that all assets are coded before delivered to the user. 2 EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 1.2 NO PROVISION OF OUTSTANDING RECEIVABLES FROM EX-EMPLOYEES Observation During our review of outstanding staff receivables/imprest we observed that the balance reported include amounts receivable from ex-employees who are no longer working with the entity (ECSA-HC). This could be an indicator of ineffective controls over the monitoring of staff imprest and retirement policy. The best practice for imprest retirement is to retire the imprest in two weeks' time after return from safari, and for ex-employee to make retirement of imprest during exit procedures, it includes a process of staff clearance procedures that should be followed before an employee leaves the office. Specific examples ECSA Staff Name Amount Outstanding as at 30.06.2016 Code IM29 MAKANI, AUSTIN/MR USD 915.85 Risk rating: Medium There are chances that management could not be able to recover the amount outstanding from ex-employees within reasonable time, and it can bring out a write-off of the balance without allocating to the activity performed by employee or obtaining a refund if the money was not spent. Recommendation Management is advised to review all staff advances receivable and identify all balances no longer recoverable and seek for approval for removing those balances in the financial records as allowed under the International Public Sector Accounting Standards. The entity policy should be reviewed /established regarding the recovery process for the staff who left without accounting for the advances due to them and other related matters of staff advances for future improvement of the process in totality. Enhance ex-employees clearance procedures to ensure the leaving staff is paying back the imprest due to him/her Management Comment The management has requested the president of the COPECSA, which was the employer of Mr. Makani, to deduct the amount from Mr. Makani's terminal dues. It will follow up with the COPECSA. Moving forward, ECSA-HC staff that are not employed directly with ECSA-HC and whose employee's accounts are not operated by ECSA-HC will not receive advances from the ECSA-HC funds. 3 EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 1.3 INCOMPLETE FIXED ASSET REGISTER Observation During our review of the fixed assets register, we observed that there some assets not included/recorded in the fixed asset register, as per IPSA 17 the cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: (a)lt is probable that future economic benefits or service potential associated with the item will flow to the entity; and (b)The cost or fair value of the item can be measured reliably. Since this asset has been used in various activities by ECSA, and there are probable future economic benefits flowing to an entity this asset should be recorded in FAR. Specific Examples Motor vehicle with Registration number T209CD 78, received from HRAA project for ECSACON, is not recorded in ECSA's Fixed Asset Register (FAR) Risk rating: High Matching concept of accounting could not be achieved, since the economic benefits flowing to the entity as a result of using the asset in various activities are not matched against costs of the assets including its maintenance and depreciation charges. Recommendation Management is advised to monitor all assets in use and ensure proper records are maintained including charges of depreciation in the books of accounts. Management Comment Management acknowledges this finding during the period under review and assures that this has been rectified in the year 2016/2017. 4 EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 2. CURRENT YEAR OBSERVATIONS RELATED TO EXPENDITURE VERIFICATION 2.1 REPORTED EXPENDITURES NOT PROPERLY SUPPORTED Observation During our audit and review of sub-guarantees' expenditure incurred during the year under review, we verified that some expenses especially those related to payments to suppliers and staff imprest were not properly supported. Specific examples 1. Payment amounting to USD 900 Paid to Leading Edge Technologies was made without any invoice only Quotation with reference number QU100109 dated 18/08/2015 from Leading Edge Technology, the amount was recorded in the GL CODE 90004. Refer to document GPV1 74072 2. Ground Travel allowance amounting to USD 1,400 paid to three consultants; John Kiiru - USD 500, Emily Evan - USD 500 and Claudette Ndayikonda - USD 400 was not sufficiently supported as there were no specified rates or basis for the amounts paid, the amount was recorded in the GL CODE 87006. Refer to document number JV1 0286. 3. Payment made to MICA Computers amounting to USD 1702.74 was made based on Pro-forma Invoice only there were no invoices for such payment, the amount was recorded in the GL CODE 88002 (World Bank Nutrition Project TB) Risk rating: High There is exposure that booking unsupported expenses in project cost could lead to recording expenditure not related to ECSA-HC and its respective project activities and therefore misstatement of project costs. Recommendation Management of ECSA-HC is advised to conduct regular training to the staff and emphasize the importance of keeping proper financial records and posting in the general ledger expenses that has proper, adequate and sufficient supporting documents. Management Comment Management has noted the findings above together with the recommendation. The Sub- recipient has now recruited a Finance officer who will be oriented and trained on the Secretariat's rules and financial procedures. It is therefore hoped that such incidents will not happen again. In the meantime, we will attempt to locate these documents for our own internal satisfaction. 5 EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 2.2 EXPENSES NOT RELATING TO THE YEAR UNDER AUDIT 201512016 Observation During our review of expenditures we noted that there were expenses recorded in the current period but they are not relating to the current accounting period. Specific examples * Invoice number 1179 dated 30/10/2014 from Advanced Business Software amounting to USD 3,250 was recorded in the GL CODE 86001 with a document reference GPV1 74110 * Invoice number 292 dated 05/06/2015 and delivery note number 486 dated 05106/2015 from Tan Fire and General Supply amounting to USD 195.77 paid with document reference BPV1 31880 recorded in the GL CODE 90099 Risk rating: High We recommend the ECSA-HC should record all the expenditures relating to the respective year to avoid overstatement. Misstatement of expenditures results to misleading of users of financial statements especially donors. Management comment Management acknowledges this finding and is aware of both payments made to Mr. Kalinga the IT Consultant for support of the accounting software; and the other to Tan Fire and General Supply for the maintenance and service of the office fire extinguishers. These should have been charged/accrued and booked to creditors/payables in the prior year. Moving forward management shall ensure that all payables are recorded in the year in which it arises in line with the accrual principle, international Accounting Standards and Generally Accepted Accounting Practice (GAAP). 6 EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 2.3 UNDERSTATEMENT OF EXPENSES AND INACCURATE CASTING Observation During our review of expenses we noted that there were some expenses which were incorrectly captured/recorded in such a way that the amount recorded in the ECSA-HC's records were smaller compared to the actual expenditure supporting documents specifically during staff imprest retirement. Examples * Supporting documents attached to JV10286 Air tickets for attending capacity assessment of EAPHLNP Laboratories, when casted amounted to USD 4,115.93 but have been recorded in the GL CODE 87001 as USD 3,834. * Supporting documents attached to JV10323 dated 20/06/2016 Air tickets amounting to USD 5,521 while in the books GL CODE 87001 was recorded as USD 4,741. Risk rating: Medium Recognizing less expenditures relating to staff imprest given with more amounts. One may not have used all the staff imprest given and the balance being used by the person. Without proper casting it's not easy to identify that a person has accounted for less amounts as compared to the imprest given. Recommendation We recommend the ECSA-HC should ensure proper casting when recording the expenses to recognize actual amount spent in the general ledgers. Management Comment We acknowledge the findings above. The amount on the receipt and documentation were indeed higher than the amount in the GL. This is because some of the expenditures on the receipt were personal for the officer in question. Had the whole amount on the receipt been recorded then the officer would have been entitled to a refund. He was honest to explain that some were personal. However, moving forward we shall inform staff to get separate receipts for personal items and Office accountable items of expenditures. 7 EAST CENTRAL AND SOUTHERN AFRICA HEALTH COMMUNITY (ECSA-HC) REPORT TO MANAGEMENT FOR THE AUDIT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 2.4 OVERSTATEMENT OF EXPENSES. Observation During our expenditures verification we noted that there were misstatement of expenses recorded in the books of accounts. Some invoice amounts were recorded twice while others higher expenditure amounts were recorded in the system than the invoice amounts resulting to overstatement of expenditures. Specific example * Invoice number 945 dated 01/07/2015 from Warrior Security Services amounting to USD 945 was recorded twice in the GL CODE 90014 leading to overstatement of expenses by USD 945. * Invoice number INV30258 dated 16/03/2016 amounting to USD 330 from World Travel and Tours was recorded as USD 1,080 in the GL CODE 87001 leading to overstatement of expenditure by USD 750 (Global Fund project) Risk rating: High The amounts recorded twice or more than invoice figure overstate the actual current year spending as a result management will fail to establish the reasons for the variance between the budgeted and actual amounts. Recommendation We advise management of ECSA-HC to ensure the correct invoice amount is recorded to the system. Also, for the invoices already recorded should be stamped posted to avoid double posting and consequently resulting to misstatements of the accounts and mislead the users of the financial information. 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