Common mSCOA Classification Errors: 15 Mistakes That Trigger AG Findings

mSCOA classification errors are among the leading causes of qualified and adverse audit opinions in South African municipalities. When revenue or expenditure is coded to the wrong segment, or when segments are left blank or outdated, the annual financial statements no longer present a true and fair view. The Auditor-General tests compliance with the Municipal Standard Chart of Accounts and reports material misstatements when classification is wrong. This article lists 15 specific mSCOA classification errors that municipalities commonly make, why each triggers an AG finding, and how to fix it. Addressing these mistakes reduces the risk of audit qualifications and supports the path to a clean municipal audit.

The 15 Common mSCOA Classification Errors

The following mistakes appear repeatedly in AG reports. For each, we describe the error, why it leads to findings, and the corrective action. A solid grounding in the mSCOA chart of accounts and the plain-language explanation of what mSCOA is will help your team avoid them.

1. Using the wrong item segment for capital vs operating expenditure

The mistake: Capital expenditure (e.g. purchase of vehicles, machinery, or infrastructure) is posted using item codes that belong to operating expenditure, or vice versa. Operating costs such as repairs or consumables are coded as capital.

Why it triggers an AG finding: The AG expects capital and operating expenditure to be clearly separated in line with mSCOA and GRAP. Wrong item classification distorts the statement of financial performance and the balance sheet (assets vs expense), and can lead to material misstatement of surplus/deficit and asset values.

The fix: Use the correct mSCOA item codes for capital acquisitions (e.g. purchase of PPE) and for operating expenditure (e.g. repairs, consumables, salaries). Maintain a mapping of your transactions to the official item list and train staff on the capital vs operating boundary. Software that enforces valid item codes by transaction type reduces this error at source.

2. Misclassifying grants between conditional and unconditional (wrong fund segment)

The mistake: Conditional grants (e.g. MIG, equitable share with conditions) are recorded in the wrong fund, or unconditional grants are mixed with conditional grants in a single fund so that conditions cannot be tracked.

Why it triggers an AG finding: The MFMA and National Treasury require conditional grants to be identifiable and spent in accordance with conditions. Wrong fund segment allocation makes it impossible to demonstrate compliance with grant conditions and leads to findings on grant reporting and, in serious cases, non-compliance.

The fix: Allocate each grant to the correct fund segment as per your approved fund structure and National Treasury guidance. Ensure that conditional grants are in funds (or with project/programme codes) that allow the AG to verify condition compliance. Reconcile grant revenue and expenditure by fund and project regularly.

3. Using generic “other” codes instead of specific classifications

The mistake: Transactions are posted to catch-all codes such as “other revenue,” “other expenditure,” or “sundry” instead of the specific mSCOA item and function codes that apply.

Why it triggers an AG finding: The AG and National Treasury rely on detailed classification for comparability and transparency. Excessive use of “other” codes undermines the usefulness of the AFS and Section 71 reports and is often cited as a material classification weakness.

The fix: Review the mSCOA item and function lists and map every type of transaction your municipality processes to a specific code. Eliminate or minimise “other” codes; where a transaction genuinely has no clear fit, document the rationale and use the closest specific code. Run periodic reports on “other” usage and correct postings.

4. Not updating the project segment when projects are completed or closed

The mistake: Expenditure continues to be posted to project codes for projects that have been completed, closed, or superseded. New phases or projects reuse old codes without proper closure of the old project segment.

Why it triggers an AG finding: Project-based reporting (e.g. for conditional grants or capital programmes) must reflect actual project status. Stale or incorrect project codes distort project reports and make it impossible for the AG to verify that grant-funded projects are properly accounted for.

The fix: Maintain a project register with clear open/closed status and effective dates. When a project is completed or closed, stop posting to that project code and reclassify any erroneous postings. Use the project segment only for active, defined projects and ensure your chart of accounts is updated when projects are closed.

5. Mixing up function segments (e.g. governance vs community services)

The mistake: Expenditure or revenue is allocated to the wrong function — for example, community services costs coded to governance or administration, or water revenue coded to a different function.

Why it triggers an AG finding: Function segment reporting is used to show how much each service area spends and earns. Wrong function codes distort segment reporting, undermine comparability with other municipalities, and can lead to material misstatement in the segment note.

The fix: Define clear rules for which function code applies to each type of activity and revenue stream. Train budget holders and finance staff on function classification. Reconcile function totals to expectations (e.g. water function vs water fund) and investigate variances. Use a chart of accounts that restricts valid function codes by transaction type where possible.

6. Failing to use the correct region segment for ward-based expenditure

The mistake: Where the municipality reports by ward or region, expenditure (e.g. ward allocation spending, regional projects) is posted without the correct region segment or with an incorrect or default region code.

Why it triggers an AG finding: Geographic reporting is often required for grant reporting, council oversight, or public disclosure. Missing or wrong region codes make geographic reports unreliable and can trigger findings on completeness and accuracy of segment disclosure.

The fix: Identify all transactions that must carry a region segment (e.g. ward-based allocations, regional projects). Ensure the region segment is mandatory for those transaction types in your system and that staff select the correct ward or region. Reconcile region totals to ward allocation reports and correct misallocations.

7. Incorrect costing segment allocation (indirect costs allocated to wrong cost centres)

The mistake: Indirect or overhead costs (e.g. IT, HR, finance) are allocated to the wrong costing segment or cost centre, or not allocated consistently, so that service cost and tariff calculations are wrong.

Why it triggers an AG finding: The costing segment supports cost allocation and activity-based costing. Incorrect allocation distorts cost recovery analysis and can affect the fairness of tariffs and subsidies. The AG may report on the reliability of cost information used for pricing and budgeting.

The fix: Document your cost allocation methodology (e.g. allocation keys for shared services) and apply it consistently. Use the costing segment to attribute indirect costs to the correct cost centres or activities. Review allocations at least annually and ensure they align with the methodology disclosed in the AFS.

8. Revenue classification errors (exchange vs non-exchange revenue)

The mistake: Exchange revenue (e.g. water sales, rates) is classified as non-exchange revenue (e.g. grants, subsidies), or the opposite. Item codes for revenue do not match the economic substance of the transaction.

Why it triggers an AG finding: GRAP and mSCOA require revenue to be classified correctly as exchange or non-exchange. Wrong classification affects the revenue note, segment reporting, and can lead to material misstatement and non-compliance with the reporting framework.

The fix: Apply the correct mSCOA item codes for each revenue type: exchange revenue (rates, service charges, interest, etc.) vs non-exchange (grants, subsidies, donations). Train revenue staff and ensure your revenue system (billing, grants register) feeds the general ledger with the correct item and fund codes from the start.

9. Not classifying employee-related costs to the correct item codes

The mistake: Salaries, benefits, leave pay, or other employee costs are posted under generic or incorrect item codes (e.g. “other expenditure”) instead of the specific mSCOA item codes for employee costs (e.g. basic salary, overtime, medical aid, pension contributions).

Why it triggers an AG finding: Employee costs are a major line item in municipal expenditure. Incorrect item classification distorts the AFS and makes it impossible to compare personnel costs across municipalities or to analyse cost structure. The AG routinely checks that employee costs are properly classified and disclosed.

The fix: Map all payroll categories (basic salary, allowances, benefits, leave, etc.) to the correct mSCOA item codes. Ensure your payroll or HR system posts to the general ledger with the right item (and function, fund) codes. Reconcile payroll totals to the ledger by item and correct any misclassified postings.

10. Using incorrect fund types for ring-fenced services

The mistake: Revenue or expenditure for a ring-fenced service (e.g. water, electricity, sanitation) is recorded in the operating fund or in another service fund, instead of the designated ring-fenced fund.

Why it triggers an AG finding: The MFMA and municipal finance policy require ring-fenced funds to be accounted for separately. Mixing funds distorts fund statements, undermines tariff and cost recovery analysis, and can result in non-compliance findings.

The fix: Enforce fund segment rules so that all revenue and expenditure for a ring-fenced service is posted to the correct fund. Do not allow water revenue or electricity expenditure, for example, to be posted to the operating fund unless there is a documented, approved transfer. Reconcile each fund to its expected revenue and expenditure and investigate misallocations.

11. Capital project expenditure not linked to the correct project segment

The mistake: Expenditure on capital projects (e.g. infrastructure) is posted without a project segment or with a wrong or generic project code, so that project-level reporting does not tie to actual spend.

Why it triggers an AG finding: Capital projects, especially those funded by conditional grants, must be traceable in the ledger. Missing or wrong project codes prevent the AG from verifying that grant conditions are met and that project reporting is accurate.

The fix: Require a valid project segment for all capital project expenditure. Maintain a project list with unique codes and ensure procurement and payments for projects use the correct project code. Reconcile project expenditure to the project register and to grant reporting schedules.

12. Repairs and maintenance vs capital improvements misclassification

The mistake: Repairs and maintenance (operating expenditure) are capitalised, or capital improvements (e.g. upgrades that extend useful life or capacity) are expensed as repairs. The item and asset treatment are inconsistent with GRAP and mSCOA.

Why it triggers an AG finding: The boundary between capital and expense is tested by the AG. Wrong classification affects both the statement of financial performance and the balance sheet (assets and depreciation) and is a common source of material misstatement.

The fix: Apply a clear policy for capital vs repairs: typically, day-to-day repairs and maintenance are expense; replacements or improvements that extend life or increase capacity are capital. Train staff and ensure the correct item codes (and asset recognition, where applicable) are used. Document significant judgements for the AG.

13. Prepaid expenditure and accruals not properly classified

The mistake: Prepayments (e.g. insurance, subscriptions) or accruals (e.g. leave, services received but not yet invoiced) are not classified with the correct item, function, or fund segment, or are posted to suspense or incorrect accounts.

Why it triggers an AG finding: Prepayments and accruals form part of the statement of financial position and must be correctly classified for the AFS to be complete. Wrong or missing segment allocation can lead to material misstatement in current assets/liabilities and in expense recognition.

The fix: Ensure that prepayment and accrual journals use the same segment logic (item, function, fund) as the underlying expense or revenue. Allocate to the correct cost centre and period. Reconcile prepayments and accruals to supporting schedules and ensure they are not left in generic “suspense” accounts at year-end.

14. Inter-departmental transfers without proper elimination

The mistake: Transfers between departments, funds, or cost centres are recorded in a way that double-counts revenue or expenditure, or the elimination entries required for group or segment reporting are missing or wrong.

Why it triggers an AG finding: Inter-departmental or inter-fund transfers must be eliminated or presented correctly so that consolidated figures are not overstated. Failure to eliminate or classify correctly leads to material misstatement in segment and fund reporting.

The fix: Define clear rules for how internal transfers are coded (e.g. specific item codes for transfers) and ensure that elimination entries are posted where required for consolidated reporting. Reconcile transfer balances between departments/funds and document the elimination methodology for the AG.

15. Failing to reclassify items when mSCOA regulations are updated

The mistake: National Treasury updates the mSCOA structure (new codes, renamed or retired codes), but the municipality continues using old codes or has not mapped existing data to the new structure.

Why it triggers an AG finding: Compliance with mSCOA means using the current, published structure. Use of superseded codes is non-compliance and can cause reconciliation failures with Section 71 and AFS templates, leading to material findings.

The fix: Monitor National Treasury circulars and mSCOA updates. When the chart of accounts is revised, update your system, map old codes to new ones, and reclassify prior-period balances if required. Run a gap analysis after each update and train staff on changes. Software that is maintained for mSCOA updates reduces the risk of falling behind.

How mSCOA-compliant software reduces classification errors

Many of these mSCOA classification errors occur because transactions are captured manually without validation against the official segment and code combinations. mSCOA-compliant municipal software addresses this by building the chart of accounts and validation rules into the system: invalid segment combinations are rejected at entry, mandatory segments are enforced for relevant transaction types, and reports are generated from the same classified data that feeds the general ledger and Section 71. That does not remove the need for trained staff and clear procedures, but it prevents a large class of errors that otherwise surface only at year-end or during the AG audit. For municipalities aiming to improve audit outcomes, Dolobha is built for South African municipal finance and supports an mSCOA-aligned chart of accounts, Section 71 and Section 72 reporting, and the disciplines that underpin MFMA compliance.

Summary

The 15 mSCOA classification errors above are preventable with clear policies, training, and the right systems. Addressing them systematically reduces the risk of Auditor-General findings and supports the goal of a clean audit. For the framework itself, use the mSCOA chart of accounts guide and the what is mSCOA plain-language guide; for audit readiness, see how to achieve a clean municipal audit.