6.2 Nairobi City County audit report excerpts, 2013

offices, and thus were no longer responsible for the accounts, documents, and assets they had been managing in years before. This legal uncertainty and poor governance resulted in very substantial losses, presumably in both fixed and financial assets. Audits performed on the transition year of 2013 found irregularities in bank accounts, but also, strangely, commercial banks of CCN were reluctant to furnish audits by providing reliable information to auditors on the defunct CCN’s bank accounts, and thus presumably millions of shillings were lost (box 6.2).

BOX 6.2

Nairobi City County audit report excerpts, 2013

Failure to take over by the county government The County Government of Nairobi had not officially taken over the assets and liabilities of the former City Council of Nairobi (CCN). Overall, the audit found that the NCC [Nairobi City County] had 16 departments whose work was not coordinated and which operated as independent units. No handing-over notes were prepared and business continued as usual and as a result; it has not been possible to conclusively confirm the accuracy of the assets and liabilities taken over from the former CCN. A senior management committee to take over the role of the CCN during transition was not established as directed by the then Ministry of Local Government vide Circular no. MLG/1333/TY/52 of 18 February 2013.

Cash and bank balances The defunct CCN historically operated 40 bank accounts, of which 16 were dormant, while 12 had credit balances totaling K Sh 35,459,356.20. However, the county did not produce for audit all the cashbooks and bank reconciliation statements to confirm the accuracy of the cash and cash equivalents.

Failure to close bank accounts The Ministry of Local Government had issued instructions vide Circular no. MLG/1333/TY/52 of February 18, 2013, requiring all defunct local authorities accounts to be closed and the existing funds transferred to the General Rate Fund Account and as soon as practicable, a Single Account to be opened at the Central Bank of Kenya. However, the accounts were not closed as required and business continued as usual and instead four new accounts were opened. Failure by CCN bankers to confirm cash and bank balances It was not possible to confirm whether the forty bank accounts disclosed by the former CCN were the only accounts operated before the transition period as the CCN bankers, mainly Equity Bank, Cooperative Bank of Kenya, Kenya Commercial Bank and the National Bank of Kenya, did not respond to our requests for disclosure of all accounts previously held and also requiring them to confirm the balances in each account. The number of bank accounts varied from different lists presented for audit with some lists showing 40 or 41 and others 42.

Under-banking of revenue collected Revenue records made available for audit revealed that during the period January 1 to June 30, 2013, a total of K Sh 5,511,732,231 was collected from the various sources of revenue, but only K Sh 5,258,849,088 was banked that caused under-banking of K Sh 252,883,143.

The audit also revealed that out of the total underbanked revenue, K Sh 29,021,813 was subsequently issued as IOU’s to various officers while the balance of K Sh 223,861,330 represented checks cashed by county staff for various miscellaneous activities, such as purchase of goods and services and numerous consumable items.

It was also noted that during the period under review, cess income totaling K Sh 60,725,305 was collected in various divisions but only K Sh 57,889,995 was receipted at the cash office and banked, resulting in a difference of K Sh 2,835,310 not accounted for and banked.

Source: OAG 2013.

The Office of the Auditor General (OAG) had performed annual audits on a business-as-usual basis despite the landslide of changes in devolution, governance, and personnel and against the background of the stipulation of the Transition Act. Following this approach, the OAG reports designated the incoming officers and governing entities to be responsible for the takeover of the documents, accounts, and assets, even though no officers or entities were in power for handovers months after elections. Also, reliable asset registers had not existed before transition, neither at the national nor the local level, and establishing such registers requires years not weeks to complete. The OAG audit specialists found that by September 2013, several directives had not been followed (see box 6.2). It is important to note that asset takeover in the form of inventorying was still technically possible by the incoming officers and county governments, so making them responsible was still sensible.

Informal takeover and use of assets, 2013–18

NCCG—without formal takeover, inventorying, and valuation—from its inauguration started to use and develop assets in a business-as-usual manner, especially those that formed the material basis of local services to ensure uninterrupted provision of services. Other assets unrelated to services (for example, land) remained unaccounted and unattended, so many may be lost or encroached. The OAG 2014 report recommended that “the County Government should coordinate with the Transition Authority on the asset and liability take over.” However, the research team has found no evidence that the TA had provided NCCG or any other county government guidance, documents, or templates on takeover that could have been used before and beyond the TA planned completion of asset validation, verification, and audit.

NCCG has been using and developing most of the assets of the defunct local government since March 2013. Despite the unresolved issues discussed in a later section, NCCG has taken a pragmatic approach in using and developing the assets. The magnitude of new investments is very significant; compared with the inherited K Sh 86 billion in current assets (table 6.6) plus the unmeasured value of fixed assets, the county invested nearly K Sh 10 billion in new assets, continued some debt service, and repaid over K Sh 10 billion in debt between 2013 and 2018 (table 6.3). Thus, the clear takeover and valuation of the inherited assets remained unresolved, but the asset management became increasingly important for adequate protection and management of both the old and new assets. NCCG moved ahead with establishing an Asset Management Directorate (AMDR) in 2016 (the first such entity in Kenya) with mandates to facilitate the establishment of a reliable asset management framework, systems, and procedures. AMDR had made reasonable progress by 2018, including drafting an asset management policy, a strategy, a short-term plan, a concept and terms of reference (ToR) for hiring a firm to establish and populate a reliable initial asset register, and a concept for a computerized integrated asset management system.

AMDR became later a secretariat for the County Asset and Liability Committee (CALC) and has played a vital role in organizing and supporting the asset verification fieldwork under CALC. The implementation of the asset verification and validation program and the new elections in 2017 had delayed progress toward the goals set by AMDR and left asset management policy, strategy, and plans in draft form without approval by higher governing bodies of the newly elected county government.