Report of the Auditor General on the Financial Statements of Uganda Revenue Authority- Corporate Services for the Year Ended 30Th June 2016

THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTHORITY- CORPORATE SERVICES FOR THE YEAR ENDED 30TH JUNE 2016

OFFICE OF THE AUDITOR GENERAL UGANDA TABLE OF CONTENTS

LIST OF ACRONYMS ...... iii 1.0 INTRODUCTION ...... 5 2.0 BACKGROUND INFORMATION ...... 5 3.0 ENTITY FINANCING ...... 5 4.0 OBJECTIVES OF URA ...... 6 5.0 AUDIT SCOPE ...... 6 6.0 PROCEDURES PERFORMED ...... 7 7.0 CATEGORIZATION AND SUMMARY OF FINDINGS ...... 8 7.1 Categorization of findings ...... 8 7.2 Summary of findings ...... 8 8.0 DETAILED FINDINGS ...... 8 8.1 Retentions of Operations Funds by URA ...... 8 8.2 Disclosure and Management of Land and Buildings ...... 9 8.3 Failure to revalue fully Depreciated Assets ...... 10 8.4 Un-utilized property (Scanners) ...... 11 8.5 Failure to Adjust the Sun System to provide detailed cash book ...... 12 8.6 Training outside the Approved Plan ...... 13 8.7 Bonding of Trained Staffs Process ...... 13 8.8 Selection of Trainers Process ...... 14 8.9 Management of Security Installation ...... 14 8.10 Outsourced Photocopying and Printing Services ...... 15 8.11 Delayed Bonus Payment ...... 15 8.12 Management of Staff Training and development Reports ...... 16 8.13 Management of Automated Barrier at Nakawa Headquarter ...... 17

LIST OF ACRONYMS

Acronym Meaning

URA Uganda Revenue Authority VAT Value Added Tax TID Tax Investigations Department TAI Treasury Accounting Instructions PFMA Public Finance Management Act, 1995 IAC Internal Audit and Compliance MoFPED Ministry of Finance, Planning and Economic Development ASYCUDA Automated System for Customs Data Analysis IPSAS International Public Sector Accounting Standards PPDA Public Procurement & Disposal Authority UCF Uganda Consolidated Fund PS/ST Permanent Secretary/Secretary to Treasury EFT Electronic Funds Transfer CCS Commissioner Corporate Services EAC East African Community MOU Memorandum of Understanding

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REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTHORITY - CORPORATE SERVICES FOR THE YEAR ENDED 30TH JUNE, 2016

THE RT. HON. SPEAKER OF PARLIAMENT

I have audited the accompanying financial statements of the Uganda Revenue Authority Corporate Services for the year ended 30th June, 2016. These financial statements comprise of the statement of revenue collection, statement of financial position, statement of revenue collection, statement of financial performance, statement of changes in net assets/equity and the statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management Responsibility for the Financial Statements Under Section 4 (1)(a) of the Uganda Revenue Authority (URA) Statute, 1991, the Authority is tasked with the mandate to assess, collect and account for all government revenue to which specified Uganda laws apply. Under Section 10(2) of the same Statute, the Commissioner General is responsible for the day-to-day operations of the Authority; the management of funds, property and business of the Authority and for the administration, organization and control of the other officers and staff of the Authority. These financial statements are also under Section 17(1) of the same Statute, the responsibility of the Authority and the Commissioner General.

This responsibility includes preparation and fair presentation of the financial statements in accordance with the Public Finance Management Act, 2015 and International Public Sector Accounting Standards (IPSAS), and for such internal controls as management determines is necessary to enable the preparation of financial statements that are free from material misstatements whether due to fraud or error.

Auditor’s Responsibility My responsibility as required by Article 163 of the Constitution of the Republic of Uganda, 1995 (as amended) and Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an

opinion on these statements based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that I comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing audit procedures to obtain evidence about the amounts and disclosures in the financial statements as well as evidence supporting compliance with relevant laws and regulations. The procedures selected depend on the auditor’s judgment including the assessment of risks of material misstatement of 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 financial statements in order to design audit procedures that are appropriate in the circumstances but not for purposes of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Part “A” of this report sets out my opinion on the financial statements. Part “B” which forms an integral part of this report presents in detail all the significant audit findings made during the audit which have been brought to the attention of management.

PART “A” Opinion In my opinion, the financial statements present fairly in all material respects, the financial position of Uganda Revenue Authority - Corporate Services as at 30th June, 2016 and its financial performance and cash flows for the year then ended, and comply with the International Public Sector Accounting Standards and Uganda Revenue Authority Statute, 1991.

Report on other legal requirements

As required by the Uganda Revenue Authority Statute, 1991 and the National Audit Act, 2008, I report to you, based on my audit, that: i. I have obtained all the information and explanations, which to the best of my knowledge and belief were necessary for the purpose of my audit. ii. In my opinion, proper books of account have been kept by the commission so far, as appears from my examination of those books; and iii. The statement of financial position and statement of support, revenue and expenses are in agreement with the books of account.

Emphasis of matter Without qualifying my opinion, I draw your attention to the following matter, which is also included in statement of financial position:-

 Retentions for Normal Operations The authority’s releases have been based on retentions from the revenue collection accounts instead of a direct charge on the Consolidated Fund as required by section 15 of the Public Finance Management Act 2015. There is a risk that the retentions were in violation of the cited sections of the law, hence non-compliance.

John F.S. Muwanga AUDITOR GENERAL KAMPALA 21st December, 2016

REPORT OF THE AUDITOR GENERAL AND SUPPLEMENTARY INFORMATION

PART “B” DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTHORITY - CORPORATE SERVICES FOR THE YEAR ENDED 30TH JUNE 2016 This section outlines the detailed introduction, background information, entity financing, audit findings, management responses, and my recommendations in respect thereof.

1.0 INTRODUCTION In accordance with Article 163(3) of the Constitution of the Republic of Uganda, 1995 (as amended) and Section 17(2&4) of the Uganda Revenue Authority Act CAP - 196 of 1991, I am required to audit and report on the public accounts of Uganda that is to say, all public offices including branches countrywide. Accordingly, I carried out the audit of Uganda Revenue Authority Corporate Services Department to enable me report to Parliament.

2.0 BACKGROUND INFORMATION URA is located at Plot M193/M194 Nakawa Industrial Area as its head office, while the Domestic Tax and Customs departmental heads occupy up-to the ninth floor of the tall towers of crested towers. The Authority has 86 branches countrywide.

URA was established by an Act of Parliament Chapter -196 of 1991 for the assessment and collection of specified revenue, to administer and enforce the laws relating to such revenue and to provide for related matters.

3.0 ENTITY FINANCING URA was financed by retentions from revenue collections as authorized by Treasury. A sum of UGX.211,700,609,186 was retained during the year for both recurrent and development expenditures, another UGX.7,042,629,778 was received from development partners resulting into total receipts of UGX: 218,743,238,964 which constituted 92% of its approved budget estimates of UGX.236,882,204,000. The shortfall in budget financing amounted to UGX.18,138,965,420 which constituted 8%.

4.0 OBJECTIVES OF URA URA major objectives include;  To administer and give effect to the laws or the specified provisions of the laws set out in the ACT, and assess, collect and account for all the revenue to which those laws apply.  To advise the Minister on Revenue implications, tax administration and aspects of policy changes relating to all taxes referred to in the Act.  To perform such other functions in relation to revenue as the Minister may direct.

5.0 AUDIT SCOPE The audit was carried out in accordance with International Standards on Auditing and accordingly included a review of the accounting records and agreed procedures as was considered necessary. The audit was carried out with regard to the following objectives:-

a. The financial statements have been prepared in accordance with the requirements of the Public Finance Management Act, 2015, and fairly present the income and expenditures for the year and of the financial position as at the end of the year.

b. All URA retentions for operations and tax refunds were utilized with due attention to economy and efficiency and only for the purposes for which the funds were provided.

c. Goods and services financed have been procured in accordance with the PPDA Act and regulations.

d. Evaluating and obtaining a sufficient understanding of the internal control structure of the authority, assess control risk and identify reportable conditions, including material internal control weaknesses

e. Management was in compliance with the Government of Uganda Financial Regulations, Income Tax Act, NSSF Act, Employment Act and other internal policies and guidelines as issued from time to time.

f. All necessary supporting documents, records and accounts have been kept in respect of all activities, and are in agreement with the financial statements presented.

6.0 PROCEDURES PERFORMED The following audit procedures were undertaken:- a. Retentions Obtained all communications authorising retentions and reconcile amounts to the authority’s cashbooks and bank statements. b. Expenditure The URA payments vouchers were examined for proper authorization, eligibility and budgetary provision, accountability and support documentation. c. Internal Control System Reviewed the internal control system and its operations to establish whether sound controls were applied throughout the period. d. Procurement Reviewed the procurement of goods and services under the authority during the period under review and reconciled with the approved procurement plan. e. Fixed Assets Management Reviewed the use and management of the assets of the Authority during the period under review. f. Financial Statements Examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by management; as well as evaluating the overall financial statement presentation. Confirm accuracy, quality and completeness of the accounting records maintained. g. Compliance makers Confirm the authority’s compliance with the regulations, Acts and other directives with regard to entity operations.

7.0 CATEGORIZATION AND SUMMARY OF FINDINGS 7.1 Categorization of findings The following system of profiling of the audit findings has been adopted to better prioritize the implementation of audit recommendations: No Description Category 1 Has a significant/material impact, has a high likelihood of High significance reoccurrence, and in the opinion of the Auditor General, it requires urgent remedial action. It is a matter of high risk or high stakeholder interest. 2 Has a moderate impact, has a likelihood of reoccurrence, and Moderate in the opinion of the Auditor General, it requires remedial significance action. It is a matter of medium risk or moderate stakeholder interest. 3 Has a low impact, has a remote likelihood of reoccurrence, and Low significance in the opinion of the Auditor General, may not require much attention, though its remediation may add value to the entity. It is a matter of low risk or low stakeholder interest.

7.2 Summary of findings

No Issue Raised Category 8.1 Retentions of Operations Funds by URA High 8.2 Disclosure and management of land High 8.3 Failure to revalue fully depreciated assets High 8.4 Un-utilized property (Scanners) High 8.5 Failure to adjust the Sun System to provide detailed cash book High 8.6 Training outside the Approved Plan Moderate 8.7 Bonding of Trained Staffs Process Moderate 8.8 Recruitment and Interview Management Process Moderate 8.9 Selection of Trainers Process Moderate 8.10 Management of Security Installation Moderate 8.11 Outsourced Photocopying and Printing Services Low 8.12 Management of Staff Training and development Reports Low 8.13 Management of Automated Barrier at Nakawa Headquarter Low

8.0 DETAILED FINDINGS 8.1 Retentions of Operations Funds by URA Section 15 of the URA Act, 1991 requires the funds for the Authority to be appropriated by Parliament and that its expenditure shall be a charge on the Consolidated Fund. Section 15 of the Public Finance Management Act, 2015 further provides that after

approval of the annual budget by Parliament, the Secretary to the Treasury shall issue the annual cash flow plan of Government which shall be the basis for release of funds by the Accountant General to the Accounting Officers.

The authority retained a total of UGX.437,279,609,180 from the revenue collection accounts, out of which UGX.201,739,609,186 was to cater for operations and UGX.235,540,000,000 for tax refunds. The authority has continued to base its releases on retentions from the revenue collection accounts instead of a direct charge on the Consolidated Fund as required. This action is not in compliance with the above cited sections of the law.

Management explained that Funds for URA operations for the year were appropriated by Parliament and the retentions were based on the authority of the Honorable Minister of Finance. The retention was on the understanding that revenue collection accounts are part of the Consolidate Fund Account and therefore the retention by URA is a direct charge on the Consolidated Fund account.

I advised the Accounting Officer to comply with the law by liaising with Treasury to harmonize the Act and the method of financing the Authority.

8.2 Disclosure and Management of Land and Buildings A sum of UGX.18,696,610,905 was disclosed in the statement of financial position as land and building. A review of the financial statements together with the supporting asset register revealed that thirty six (36) plots of land captured in the asset register have not been revalued for a long time because they were recorded in the books at their nominal values. For instance, Malaba (plots 20-32) with running lease of 49 years and Busia (plots 48-60 & 111-127) with a running lease of 94 years have been developed with existing new structures under the one stop border post but have its land disclosed at UGX.1,000 and UGX.300,000 respectively in the books of accounts.

I further noted that URA Malaba customs enforcement office operates on land whose ownership is uncertain. I was not availed with the ownership titles to this land. 9

The value of land reported in the financial statement is likely to be misstated.

Management explained that URA has had a challenge with full adoption of revaluation model having consulted with the Government valuer whose response has not been forthcoming.

I advised the Accounting Officer to ensure that land is revalued to reflect the current market rates. Management should consider in liaison with the Government Valuer the use of private valuers in case the challenges are not resolved.

8.3 Failure to revalue fully Depreciated Assets A review of note (28) regarding Intangible Assets on page (103) to the accounts revealed that with the exception of e-Tax, all the intangible assets were fully depreciated despite being in use. For instance, the Sun System and Electronic Cargo Tracking Systems are still fully operational yet they are disclosed at zero net book value in the current financial statements.

The other assets that are still actively in use to date include Disaster Recovery Solution, Audit Management Software and Procurement Software System whose treatment appeared inconsistent. Failure to revalue the depreciated assets may misrepresent the asset balances in the financial statement and also mislead the users of the financial statements to believe that these assets are no longer in use yet they are in productive use.

Management explained that URA is facing a challenge with Ministries responsible for Land & Works that are mandated to carry out valuations because they have not been responsive. Besides, NITA-U which would have been the alternative to value the entity IT systems has not developed capacity yet. Management further indicated that there is lack of funds in the budget to hire professional private valuers since hiring them would cost the entity a lot of money.

I advised the Accounting Officer to liaise with Ministry of Finance, Planning & Economic Development with a view of funding the gap and have the assets revalued.

8.4 Un-utilized property (Scanners) The authority acquired two mobile scanners in 2007 and the capitalized cost was UGX.5,178,194,999 for each scanner all totaling to UGX.10,356,389,998. However, these scanners have never been deployed to their respective operational areas mainly because the required site specifications for X-ray operation and maintenance services had not been built at the border posts of Malaba and Busia.

The scanners had been depreciated to NIL by the end of FY 2011/12 but were later revalued in 2015 at UGX.1,140,000,000 as per table below.

Asset Descripti Name Accounting Base Amount Transact Accumulation Revalued Code on Period ion Date Depreciation up amount May to FY 11/12 2015

3010114 Volvo 9002 2008/011 5,178,194,999 5/6/2008 (5,178,194,999) 570,000,000 Mobile Data Scanner Modem

3010115 Volvo 9002 2008/011 5,178,194,999 5/6/2008 (5,178,194,999) 570,000,000 Mobile Data Scanner Modem

According to the recovery plan issued by NUCTECH (manufacturers), management currently requires USD.514,407.60 to have the equipment restored to full operation. The assets are likely to wear down to scrap before being put to use.

Management explained that the scanners can only be deployed after an up-grade in technology to be compatible with the ASYCUDA World. Data from the scanners needs to be captured into ASYCUDA World through an interface and be detached from the scanner operator to allow for independent management by Customs Business Center.

I urge the Accounting Officer to lobby for additional resources to enable the upgrade of the scanners and have them operationalized.

8.5 Failure to Adjust the Sun System to provide detailed cash book According to the URA Accounting manual reference B5, the authority should comply with the Treasury Accounting Instructions to the extent funds are drawn from the Uganda Consolidated Fund.

Accordingly, section 403 of the Treasury Accounting Instruction (TAI) provides that the cash book is a register, where all receipts and payments shall be entered. Posting or maintaining the cash book will be done as prescribed in Appendix D to the Treasury Accounting Instructions (TAI) which guides that unless authorized by the Accountant General, Accounting Officers/Receivers of revenue/imprest holders will maintain cash books which will show:

 DR: i.e. receipts side – (Date, Particulars, Folio, Receipt No. /Voucher No, Cheque No, Amount received, Cost center & Accounts to be credited).  CR: i.e. payments side – (Date, Particulars, Folio, Voucher No, Cheque No, Amount paid, Cost centre & Accounts to be debited).

However, the Authority has continued to present a cash book that lacks particulars and the payee details. The narrations explaining the nature of payment and the particulars of the payees were omitted from the cash book provided for audit.

Management seems not to have implemented the recommendation that the system will be adjusted as promised in the previous year. This limited the scope of my audit since the cash book could not be properly analyzed in terms of selection of key items by nature or category of expenditure during the audit planning and execution.

Management explained that this matter will be addressed once the Enterprise Resource Planning (ERP) software applications is implemented as configuration of the current system necessitates the change order from the vendor with costs implications.

I advised the Accounting Officer to expedite the change to enable capture of the relevant information as provided for in the TAI cash book format. 12

8.6 Training outside the Approved Plan Section 9.2 and 9.3 of the URA Policy and Guidelines for the Management of Staff Development provide that implementation of the training plan to be guided by the approved training priorities which have a direct relationship with the authority’s mission and goals.

It was noted that twenty seven (27) trainings all external mostly strategic in nature valued at UGX.740,079,731 were organized and conducted outside the approved training plan.

Management explained that the Staff Development Policy is under review and is expected to be ready before end of financial year June 2017.

I advised the accounting Officer to ensure fast tracking of the approval and implementation of the proposed amendments of the Staff Development Policy.

8.7 Bonding of Trained Staffs Process Section 11.4 of the URA Staff Development Policy specifies the basis for bonding staff being either duration of the development program or financial cost.

The review of the Annual Staff development report revealed that 55 staffs were sponsored in trainings in MCP programmes worth UGX.1,050,121,767 of which 11 staffs who attended courses such as project management professional certification, and ITIL life cycle intermediate course worth UGX.211,676,967 were not bonded. It was further noted that of 11 members, two of whom were beneficiaries of the certifications indicated above have left the Organization. Management did not adhere to the staff development policy.

Management explained that the Staff Development Policy is under review and will address these issues by end of financial year June 2017.

I advised the Accounting Officer to expedite the review process of the policy and have the qualifying staff bonded.

8.8 Selection of Trainers Process The current Staff Development policy does not provide for the method of how trainers are recruited. I established from the HRD that there is a pool of trainers for particular subjects whereby trainers are selected to facilitate in various subjects, and where need arises they request Heads of Departments to recommend them depending on the courses.

A review of evaluation reports indicated that the selected trainers sometimes fail to turn up for scheduled classes citing conflicting work engagements. Other comments included the trainers coming to facilitate without ample preparation which affected the quality of training offered.

Management in their response explained that the Staff Development Policy is under review and will address these issues. It’s expected to be ready before end of financial year June 2017.

I advised the Accounting Officer to ensure that URA policy is reviewed to ensure a competitive approach is used and an open internal advert be placed on the intranet open to all staff so that the staffs that have the essential requirements apply and are interviewed and selected. Management should also consider putting in place a mechanism whereby the organization can use the training services of retired staff who were trainers prior to retirement.

8.9 Management of Security Installation Section 12.2.1 of the URA records classification scheme requires correspondences on CCTV cameras, including recordings to be kept for not less than 7 years. However, it was noted that the available space for storing recorded footages of activities by the installed CCTV system at the URA Nakawa Headquarters premises was

inadequate. The CCTV system could only store footages for 5 days after which it would over write the recorded data.

Management in their response explained they have a challenge with storage space. Priority for existing storage has been given to data of the business application systems such as e-tax, ASYCUDA World, Sun System etc. however they are in the process of acquiring more storage space.

I advised the Accounting Officer to upgrade the CCTV footage archiving capability that is in line with the URA records retention policy.

8.10 Outsourced Photocopying and Printing Services Among the recommendations in the benchmarking report that formed basis for adoption of the outsourcing service was that the solution will definitely reduce the number of machine outlay resulting in reduction of power cost. In 11 out of 20 offices/stations sampled, I observed that they maintained both the URA owned and the leased printers from MFI Documents Ltd. In offices such as RPD both machines run at the same time. In some stations, it was explained that they use the URA owned printers because the service provider delays to provide toner or repaid the leased machines, in some offices staff admitted to not using them but kept them there for emergency.

The Accounting Officer explained that the procurement is being tendered. The matters highlighted will be addressed. Board of survey is scheduled to do a country-wide survey of printers and photocopiers which report will be used in determining the deployment of outsourced printers.

I advised the Accounting Officer to ensure that all equipment is utilized optimally.

8.11 Delayed Bonus Payment According to section 4.0(b) of the URA bonus policy, in order to enable the staff to attach meaning and relevance of the bonus payment to their achievement, the bonus 15

payment shall be made as soon as the year’s target has been met, and in any case, not later than two months from the end of the financial year to which the target relates.

However, it was noted that the bonus was paid on 11th January 2016 which is six months after the target was met. The revenue target was surpassed during the financial year 2014/15 implying the bonus should have been paid not later than 31st August, 2015.

Management in their response explained that they were desirous of making the bonus provision within the budget for this year, but the MTEF was not adequate to cover the planned budget expenditure.

I advised the Accounting Officer to liaise with the relevant stake holders to ensure adequate funds are availed to make the payment in time.

8.12 Management of Staff Training and development Reports Section 10.5(2) of the Staff Development Policy requires that all staffs who attend staff development activities provide a progress report on the implementation of the action plan to the Head of Human Resource within six months from the date of completion of the development program. The Head of Human Resource will refer to the development reports to determine the relevance and value of the development activities.

The review of documentation available in HRD revealed that since 2005, (304) staff were bonded to date. There is no record showing progress on the trainings being done and no effective date for start and end for the bonding period. Monitoring the progress of the training completion would help HRD to establish the effective dates for bonding. Management in their response explained that currently this process is being managed manually making update of the database quite slow. However, with implementation of the ERP, management shall be able to fast track status of the bonding agreements and also update staff on the bonding agreements instantly.

I advised the accounting Officer to update the Bonding records to ensure courses undertaken by staff are monitored closely to enable decision making on courses that have been abandoned, completed or in progress, and effective date of start and end of bond periods after completion of studies undertaken by staff.

8.13 Management of Automated Barrier at Nakawa Headquarter An automated barrier was sourced and installed at the URA Nakawa Headquarters main gate in Financial Year 2014/15. The barrier has metallic bars and spikes on either sides of the entry and exit of the gate.

At installation of the automated barrier; the Security Office requested the URA Estates Unit to construct diversion drainage where the spikes were housed. The Estates Unit did not act on the requests to construct diversion drainage. During the rainy season(s), rain water and silt clogged the channels, causing difficulty in movement of the spikes which often resulted into the blowing of the electric motors that ran the bars and the spikes.

At the time of this report, the barrier was still on warranty and its supplier was in the process of finding a replacement of the damaged elements. However, when the warranty expires; URA will pay the bill(s) on maintenance and fixing the barrier.

It was explained that this was not handled at the time due to financial constraints. However funding has been provided and this is to be handled where the construction of proper drainage to protect the automatic Barrier should be prioritized.

I advised the Accounting Officer to ensure this is done expeditiously but also within the law.

APPENDIX 1

FINANCIAL STATEMENTS