Revenue Leakages, Prevention and Internal Controls in MMDAs

UNIVERSITY PROFESSIONAL STUDIES, ACCRA

SCHOOL OF GRADUATE STUDIES

REVENUE LEAKAGES, PREVENTION AND INTERNAL CONTROLS IN MMDAs. (A CASE STUDY OF THE LEDZOKUKU-KROWOR MUNICIPAL ASSEMBLY (LEKMA)

BY

Fafa Agormor (10060569)

Candid Kape Pwavra (10060629)

Matilda Worlanyo Anku (10060895)

A PROJECT SUBMITTED TO THE SCHOOL OF GRADUATE STUDIES, UNIVERSITY OF PROFESSIONAL STUDIES, ACCRA IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MASTERS IN BUSINESS ADMINISTRATION ACCOUNTING AND FINANCE DEGREE

CHAPTER THREE

APPLICATION OF THEORIES TO REAL LIFE SITUATION

3.0 Introduction

This chapter is organized into four parts, with the first part dealing with explanation of the nature of problem in LEKMA, the second part is on the solutions provided by the researchers to the problem, the third part talks about the contributions of the students to LEKMA revenue mobilization and prevention with the last part drawing conclusion on the chapter.

3.1 Explanation of the Nature of Problem in Organization

There had been an increasing demand for fiscal decentralization in both developed and developing countries due to the inherent benefits in terms of infrastructural development and quality service delivery. The pertinent question here is, has this been properly implemented at LEKMA? What are the challenges and the way forward with regards to fiscal decentralization in LEKMA?

 In view of the strategic location of the Assembly in the country, thus, its exact position between Tema an industrial hub of the country, and Accra, the capital city of Ghana, LEKMA is well placed to generate enough internal Revenue to meet its recurrent expenditure and local infrastructural development needs.

However, the situation in the Municipal Assembly (LEKMA) regarding Internally Generated Funds (IGF) performance showed huge gaps between projected revenues and reported actuals. Initial projected figures had to be revised downwards through mid- year budget review process in order to meet Functional Organizational Assessment Tool (FOAT) benchmarks as a result of massive revenue leakages from the system. This reflection does not depict the full potentials of the Assembly and the analysis below give evidence to back the statements made above using 2014 and 2015 composite budgets of LEKMA. The 2014 composite budget of LEKMA projected GHÈ» 5,710, 975.00as initial revenue target to be collected internally (IGF). However, only 54.13% of the projected figure was realized representing GHÈ» 3,091, 081.06by the end of the fiscal year. The trend in 2015 fiscal year was not anything different from the previous year’s achievement.  Out of the budgeted revenue of GHÈ» 6,889, 512.00to be collected internally, only 62.51% was realized, representing GHÈ» 4,306, 966.40in nominal figures. The worse performance which threw the whole Municipal Assembly into disarray was recorded in 2013 fiscal year. The Municipal Assembly had in its Composite budget GHÈ» 4,907, 779.40 as the amount to be mobilized internally. Only 44.87% of the projected amount was achieved, representing GHÈ» 2,202, 178.08in absolute terms.

The Internal auditor’s report (2013) of the Municipal Assembly revealed that, revenue collectors were indulging in under carboning. This is just one of the numerous revenue mobilization malpractices confronting LEKMA. Sixteen revenue officers of the Municipal Assembly were interdicted in connection with the above mention financial fraud. The report of the auditors also showed a lot of revenue leakages in the system due to weak internal controls and prevention mechanisms. The gravity of the situation also stems from the fact that, the units who are responsible for these internal controls are also handicap in terms of financial and non-financial resources. This prevented them from executing their constitutionally mandated duties and hence the massive leakages of IGF revenue. This worrying situation calls for an empirical researched that prescribes concrete solutions to the problems.

To resolve this problem, a study design which gives the broad objective framework of the researcher’s enquiry (Brown, 2006) provided a basis for collecting and analyzing the data to inform policy direction. In order to put the nature of the problem in the right perspective and better analyze for solutions, a descriptive study was employed. The main purpose of the study was to describe the already existing strategies, challenges and the causes. In view of this, descriptive approach is best suited for the study. According to Miller and Brewer (2003), qualitative technique aids the investigator to explore further potentials and challenges to achieve the desire objectives of the study. The researchers wanted to explore other strategies that could be used to improve revenue mobilization and reduce leakages in the system. According to Neuman (2007), the subjects or concerns in the research design includes the purpose of the study, the type of investigation, the type of the sample which will be used, the methods by which the required data will be collected, as well as the process that will be followed for the analysis. The study used the exploratory and descriptive approach to evaluate revenue mobilization challenges in LEKMA. The research technique provided an opportunity for the researcher to interact with respondents in the field of study, which enabled the researcher to generate valid data and information using multiple sources of evidence. According to Stake (1995), interviews techniques enables the researcher to achieve reality by drawing closer and getting involve in the phenomenon under study in order to understand the environment and its participants. Robinson (2002, p.178) defines case study as a “strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence”. The topic under study is a case study because it is impossible to study all MMDAs in Ghana concerning their revenue mobilization. The research also aim at putting the theory into empirical test and unearth the challenges confronting LEKMA in terms of their revenue and expenditure.

3.1.1 Data Sources

Data used for analyses by the researchers came from both primary and secondary sources. The interview schedule was used to collect primary data. In using this instrument, the researcher considered all laid down ethical procedure in research (Stake, 1995). Primary data included interviews conducted by the researchers. Core management staff of the assembly as well revenue collectors and rate payers were interviewed to allow for more in-depth evaluation. The researchers conducted 34 interviews comprising key personnel in revenue mobilization across all the responsible departments of the Assembly, revenue collectors and rate payers. These are stakeholders play vital role in the efficient mobilization of revenue for the Assembly. In addition to this, key officers interviewed have the capacity to formulate and implement policies concerning IGF mobilization of the Assembly. The documentary analysis was done because documentary information is relevant in a case study research (Yin 2003). Seeking answers to the research questions required an examination of the organization’s annual budgets and financial statements.

3.1.2 Target population and sampling technique

The target population for the study was core management staff of the assembly, revenue collectors and rate payers. Purposive and convenient sampling technique was employed to select the respondents who could provide relevant required information and who were available to participate in the study. A small sample size was chosen because of the constraints; time and money. Furthermore, the small sample was used as the study did not set out to test hypotheses but to gather expert opinions necessary in answering the research questions.

Interviews were conducted with these persons. Excerpts of interview have been replicated as evidence in this report. A level of measured but subjective interpretation, in line with the subjective view and interpretive position taken by the researcher, was applied in analyzing respondents’ responses.

3.2 Solution Provided for the Problem

Upon our review and analysis of both primary and secondary data gathered, the following are the proposed solutions to the challenges.

1. LEKMA should adopt and implement software that will generate and assign a Unique Tax Identification Number to every tax payer in the database. This becomes a permanent code that identifies the business and the rate payer in case of none payment.
2. Rates should be collected electronically through mobile money and other banking system. LEKMA should partner with the Banks which will provide an opportunity for tax payers to use their Unique Tax Code to pay at the bank and obtain receipt. This will prevent fraud through physical cash handling as reported in the challenges.
3. LEKMA should employ the use of Geographical Information System (GIS) to identify old and new business and properties within the municipality. Through this computerized system, a comprehensive database will be built which will then improve the revenue collection.
4. LEKMA should adopt ”one community one stakeholder meeting project” in addition to the town hall meetings for every fiscal year. This will promote awareness creation, transparency and accountability. Through this, rate payers and other stakeholders will get to know what their taxes are used for.  Challenges such as lack of education, sensitization, transparency and accountability will be minimised.
5. Refresher training for revenue collectors and contractors should be done on a regular basis in areas such as communications skills, customer relation ethics, revenue mobilization strategies, local governance Act, Assembly by-laws and other control mechanisms to ensure efficiency.
6. LEKMA should advocate for the printing of General Counterfoil Receipt (GCR) with adequate security features so as to avoid duplication of the receipt by revenue collectors and contractors.
7. Revenue targets should be set for collectors and contractors which should be closely monitored and supervised to ensure that the overall target of the Assembly is achieved.
8. LEKMA should intensify the prosecution of rate defaulters in accordance with the bye laws of the Assembly to ensure that rate payers meet their civic obligations as well as serve as a deterrent for future defaulters.
9. Regular field monitoring and supervision should be carried out by the superintendents to ensure that revenue collectors and contractors are deterred from engaging in fraudulent activities.
10. All revenue collectors should be bond and stiffer punishment meted out to those found in financial fraud.

3.3 Contribution of Students to Organization

The contributions of the students to Ledzorkuku Krowor Municipal Assembly in terms revenue mobilization, leakages and prevention techniques cannot be over emphasized. Students’ professional and personal skills, experiences and capability are being leverage on to augment the expertise of the Assembly staff handling revenue mobilization and expenditure portfolios. The students also contributed immensely to the organization’s revenue and expenditure policy decisions by collecting detailed information on revenue mobilization leakages and prevention to enable top management design and implement strategies with high level of efficiency. This has become very crucial given that LEKMA hardly meet their IGF revenue projections. Students also contributed to the deepening of fiscal decentralization in Ghana, Africa and the world at large through the findings and the recommendation from this study. The prime objective of decentralization is to take governance closer to the people, improve on quality service and infrastructural provision and to promote transparency and accountability in the expenditure of public funds. Students prescribed solutions in this regard which will increase revenue of the Assembly and subsequently leads to quality service delivery.

3.4 Conclusion

This chapter has discussed the application of theories to real life. The researchers discussed in detail the research design, approach, strategy, time horizon, methods and procedures employed in data analysis. The descriptive research design guided the researchers’ evaluation of revenue mobilization leakages, prevention and internal controls in Ledzorkuku Krowor Municipal Assembly. In order to collect more detailed and evidence based data, a multi-method data collection technique involving both qualitative and quantitative data collection techniques were employed. Students employed convenient and purposive sampling approaches to select respondents who could provide relevant required information and who were more available to participate in the study.

CHAPTER FOUR

LESSONS LEARNT AND CHALLENGES

4.0 Introduction

This chapter discusses the lessons learnt from undertaking this project and challenges the researchers confronted and how they were resolved. Analyses and interpretations of data collected had also been covered in this chapter. Excerpts from the interviews are integrated as confirmation of respondents’ perspectives which is accepted in social research theory (Yin, 2009). To ensure ethical requirement in this kind of research namely; assuring anonymity of identity and confidentiality of respondents, generic terms like ‘officer, rate payer’, among others are used in place of personal names (Yin, 2009).

4.1 Lessons Learnt

In both empirical and theoretical literature, designing and implementing policies, programmes and strategies aimed at ensuring effective and efficient revenue mobilization are not without limitations. In our interview with the officials of the Assembly, it came out evidently that the Municipal Assembly has some revenue mobilization strategies in place. This was what the Municipal Finance Officer (MFO) said with regards to revenue mobilization strategies of the assembly.

We have revenue mobilization strategies in place and they include; Building the capacity of revenue collectors, frequent sensitization and education of rate payers, involvement of rate payers in the budgeting process, holding stakeholders meetings with rate payers to determine their ability to pay, involving revenue collectors in annual revenue projections, enforcement of revenue, establish a data base of all economic activities in the municipality, mobilization laws, using Assembly members in the hard to collect areas, etc.

Upon further investigation and evaluation of the revenue mobilization challenges, we realized there were implementation issues. Revenue collectors were not involved in coming out with annual IGF targets, they were not frequently trained, no up to date data base on economic activities within the municipality and enforcement of revenue by-laws were poorly handled. Another key management staff has this to say on why they are not able to enforce the by-laws to the later as an assembly.

The limitation we have in this area has to do with political interference. Especially when we are getting closer to an electioneering period, for fear of losing the election they do not allows to punish those who flout the laws to deter others. We are constrained but all cannot be attributed to politicians, we are also to be blamed for our inefficiencies.

The researchers leant further that, logistics constraints especially on the part of revenue collectors contributed to the poor implementation of the strategies as well as the enforcement of the by-laws.

The next objective of the study was to evaluate the existing internal controls in the Municipal Assembly. Selected officers were interviewed which included the internal auditor of the organization. In this section, the researchers wanted to know the exact internal controls the Assembly has and how they are implemented and the challenges faced. This is what the Municipal Internal Auditor had to say on internal control issues during our interview.

This is a legal and a well-established institution and therefore have internal controls in place ranging from revenue mobilization to expenditure. The LI 1961 outlined the functions of each unit and department at the local level. However, ensuring effective internal controls is a shared responsibility. Let me give you internal controls we have as an Assembly; 

Daily checks of their general counterfoil receipt and verifying the daily banking of cash into the Assembly’s account, Field audit and periodic inspection of value books, Regular monitoring of revenue activities, revenue collectors are to submit their returns daily for verification, Weekly auditing of revenue collectors cash books, we do periodic field audits, monitoring of reports by rate payers, Weekly performance of field audit, tracking of the value books to ensure that the value books used are from the Assembly’s stock and duly registered in the stock register of the Assembly, that the revenue collected paid to the Assembly’s account within the 24hrs.

With regards to the challenges they faced by the Assembly in their implementation of revenue strategies, the following were the major concerns raised; revenue collectors’ attitudes towards revenue collection, rate payer’s connivance with collectors to under pay the required rate bill and logistic constraints. These three concerns surfaced in our interviews with the key management staffs as being the major causes of revenue leakages from the system. However, a lot of progress had been made in these areas to remove barriers and bad nuts from the system to improve IGF performance. This was evident via the interviews and our personal verification from the 2016 fiscal year revenue performance. Key revenue items such as business operating permit (BOP) and property rates showed an upward trend.

Another key objective of the study was to identify the channels of revenue leakages from the system and what causes it. In view of this we had interviews with some rate payers and revenue collectors. It was very interesting during our interview with one of the rate payers and commenting on the channels, of leakages this is what she has to say;

People who come for the taxes sometimes come at the wrong time when we does not have any money with huge bills, so they take bribe from us and go. Sometimes they come back to take again and others do not come again. We also realized they have their own receipts different from assembly’s receipt which they issue sometimes when they take the bribe.

Our taxes collected goes into individual pocket, so at the end the Assembly do not receive the supposed revenue and that is why we sometimes do not pay. I will not give my money to someone to spend.

We did not limit our interviews to only individual rate payers, institutions were also added since they pay both BOP and property rates and more especially we needed varied opinions from different perspectives. During our interview with one of the executives of a bank, this was what he had to say concerning the causes of revenue leakages.

They do not give us enough education on what the taxes are used for and moreover, they failed to use an electronic system to mobilize the revenue. Taxes paid in cash to revenue collectors or task force causes corruption and mistrust.

For the purpose of obtaining a comprehensive view of the situation on the ground, the researchers had interviews with some key revenue collectors of the Assembly. Two major concerns runs throughout our interviews with them namely; inadequate motivation and lack of frequent trainings on the job.

In summary the lessons leant through this project work include;

1. Educating rate payers that it is their civic responsibility to pay taxes and also on the uses of their taxes are vital in local government revenue mobilization processes.
2. Training revenue collectors on the new revenue mobilization tools, techniques and the revenue mobilization strategies of the Assembly is essential.
3. Stakeholder consultative meetings which involve rate payers in fee-fixing and rate imposition of the Assembly is very important in facilitating effective and efficient revenue mobilization within the local government system.
4. Another important lesson is the issue of transparency and accountability. Local authorities or duty bearers within the sub-national governments, ability to account to the citizens or local constituents builds trust between rate payers and the Assemblies. Proper accountability promotes effective revenue mobilization and increase the willingness to pay.
5. Electronic technique of revenue mobilization cannot be disregarded. Automation of the tax collection system discourages corruption, temptation to steal and increase efficiency in the revenue mobilization drive. The responsibility to secure electronic equipment to migrate local authorities to this stage is a collective effort.

4.2 Challenges encountered 

Executing this project work was not all that smooth. We were confronted with a lot of challenges ranging from research design to its execution.

The first challenge we faced had to do with the research instrument and the interviews thereafter. As mentioned earlier in this work, we wanted to explore a lot of areas within the local government revenue mobilization scheme so as to prescribe solutions which will greater impact on the revenue mobilization of the Assembly. There are laid down ethical considerations that must be adhered to in social science research namely; anonymity and confidentiality. Our major challenge was how to get interpretations for our respondents who were not literate in order to preserve anonymity and confidentiality. In view of this we have to make several trips to them which was a herculean task. Added to this, designing an instrument to cover a lot of areas on the topic was not that easy considering the complicated nature of fiscal decentralization and the various stakeholders involved.

Furthermore, our analysis of the situation employed both secondary and primary data. Retrieving or getting access to annual composite budgets and financial statements of the previous years for the necessary reviews was a big challenge. Several calls and personal visits were made before those documents were made available. Reviewing and analyzing the data therein was also challenging and exciting. One key issue was the incorrect postings (2015 fiscal year) and some revenue items which had no unique codes. This inconsistency post a big challenge to us in the analysis and the Key Officers had to come in to rectify the situation. We were told that, this problem occurred on the field as revenue collectors were not able to describe the business well.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This last chapter of the study gives the conclusion and recommendations. In this chapter, the researchers give the conclusions and recommendations of the study.

5.1Conclusion

Findings from the project work supports both theoretical and empirical literature which says that, sensitization and education of rate payers on their tax obligation and the uses of their monies have a positive impact on revenue mobilization. Transparency and accountability as well as the provision of efficient service and developmental projects to the local residents increases their willingness to pay and decreases if the reverse is applied. This suggests that citizens are now more concern about accountability and cannot be taken for granted.

Fiscal decentralization is very crucial in the decentralization process and demands central government commitment to ensure its success. Linking fiscal federalism theory to the findings from this study, revealed that some core components or elements in the theory has not been applied. Components such as effective revenue mobilization scheme, efficient service delivery, and efficient internal controls to prevent revenue leakages have not been fully executed. This was clearly showed when local constituents were demanding physical projects to showcase for the taxes they pay. Notwithstanding that, the findings also support theory from the public commodities with different geographical pattern of consumption. The results showed that residents were asking for projects and services that suit their consumption pattern.

5.2 Recommendations

The main objective of this study was to assess revenue leakages, internal controls and prevention in local authorities. The study did found that there exist revenue mobilization leakages and thus has few dynamic policy recommendations for LEKMA, policymakers and stakeholders in local governance system.

Transparency and accountability from local authorities or duty bearers must be enforced. LEKMA must therefore design and implement policies which gives enough punishment to corrupt local government official and those who fail to properly account to their local constituents.

Furthermore, involving ratepayers in fee-fixing and rate imposition through stakeholders meeting is very crucial in revenue mobilization within the local government system. This calls for a policy direction to make their involvement mandatory. Assembly members at LEKMA should pass a resolution to this effect.

Capacity building should not be limited to top management of Assembly but must be extended to lower ranks as well. Building the capacity of revenue collectors is vital in local government revenue mobilization and the promotion fiscal decentralization. Management of LEKMA should direct policy to make their training a priority. They are implementers of revenue mobilization strategies formulated by LEKMA and therefore need to be equipped with the latest techniques in revenue mobilization.

Automation of revenue collection process is another important way of achieving efficient revenue mobilization and prevention of fraud. LEKMA should adopt and implement policies that mandates it to migrate onto automated system of rate paying

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