Briefing by Auditor General South Africa (AGSA), South African Institute of Chartered Accountants (SAICA) & National Treasury

Meeting report

Auditor General of South Africa (AGSA) Presentation
Terence Nombembe, Auditor-General (AG), commenced the presentation by recapping the strategic direction that the Office of the Auditor-General (OAG) had adopted in terms of its strategy. Highlighted in the Auditor General South Africa (AGSA) report was the need to provide auditing fees that were in line with government’s cost minimisation policy. AGSA designed its tariffs in such a way that it was able to cover its operational costs while being able to provide economical service fees to the government. In considering these tariffs, discussions were held with the Select Committee on Auditor General (ScoAG), to attempt to reach the best possible funding model to accommodate the objectives of government and its auditing service requirements, as well as a model that could best enable AGSA to operate economically and be able to recover its costs. The details of these discussions were all recorded in the AGSA report on its Broad Funding Model. Included in the strategic directives of the funding model were provisions for contracted service providers in the private sector. Adjustments had also been made to include the varying costs that were incurred when the private sector performed professional services by way of the AG outsourcing work to chartered accounting professionals. The variations in AGSA's costs when members from the South African Institute of Chartered Accountants (SAICA) professional services were involved had shown to increase the costs of auditing by 30%.

Ms Julia Bailey, Head of Audits, AGSA, then explained in detail the tariff calculation methodology that guided AGSA in how it charged for its services to government ,and how this was factored to include the changes when it outsourced its work to SAICA professionals .

She tabled and took Members throught the AGSA Hourly Tariff calculation formula, and explained the factors that were considered in the tariff calculation, such as the recoverable hours of staff, annual salaries and the mark up factor. A 7% salary increase was also assumed when doing the calculations (see document). The result of the tariff calculation was a charge rate of R824 per hour as well as a salary fee increase of 7.28% for the auditees (see document). SAICA tariff rates were also calculated in the same way, but the only difference was that the SAICA’s mark up factor was slightly higher than that of AGSA, making their tariff rates 30% higher than the AGSA rates.

Discussion
Mr M Steele (DA) asked whether AGSA had quantified a cost benefit analysis of using the SAICA professionals for auditing services.

Mr Nombembe replied that AGSA did quantify a cost benefit analysis on outsourcing and the major advantage of outsourcing was that it reduced the workload of AGSA. It was impossible for AGSA to undertake all of the audits itself, because at some point this would prove to be uneconomical, especially since if AGSA were to take on extra staff to perform the work during peak hours of the audit process, they would then have little to do at other times. Travelling costs and the efficiency history of the outsourced companies also formed important considerations for AGSA when undertaking its cost benefit analysis on outsourcing.
 
Mr N Singh (IFP) asked AGSA if it would be not easier to increase staff capacity with the AG’s office to avert the 30% mark up that private companies were charging for their services.

Mr Nombembe replied that since there was a shortage of 22 000 accountants in South Africa it was not an easy task to find the right qualified personnel to fill up vacancies. As much as AGSA might wish to take on all the work, it would not be practically possible to recruit qualified staff who were competent enough to carry the work. That was another reason why outsourcing was the preferred alternative. 

The Chairperson added that he was aware that AGSA was absorbing a higher number of newly qualified auditors in South Africa than any other private company.

The Chairperson suggested that the Committee meet on Thursday 12 November to discuss  the adoption of the Committee Report on the AGSA deliberations.

Mr Singh made a comment that when auditing work was outsourced it became hard for the Committee to authenticate the report since some of the audited reports did not bear the signature of the Auditor General but were rather signed by the outsourced company.

Mr Nombembe replied that all outsourced audits were signed by the AG and that no audit was ever signed by a private company if it was outsourced. Mr Nombembe said that if such inconsistencies occurred then the OAG should be notified so he could look into it.

Mr Steele asked which countries influenced AGSA’s funding structure.

Mr Nombembe replied that AGSA’s funding structure was quite unique in the sense that it used both the Ministry of Finance and Parliament as funders, as well as monies that it received for services rendered. The country closest to the funding structure that South Africa used was New Zealand, which received a bulk of its operational funding through services rendered.

South African Institute of Chartered Accountants (SAICA) Presentation
 Nasiegh Hamdulay, Regional Executive, SAICA Southern Region, introduced SAICA and gave a brief profile of what it was as an organisation and who it represented, and how. The strategic partnership in which SAICA was involved with the public sector and Africa was one that was based on its ability to influence financial reporting and auditing. Key collaborations with entities such as the National Treasury, AGSA and the Accounting Standards Board (ASB) were all crucial in leading public sector initiatives successfully in South Africa. SAICA’s focus areas within the public sector were covered with standards, activities and legislation that governed its relationship with the public sector (see document). The presentation also covered contract work relationships between SAICA and the public sector from investigations to quality control and audits on Schedule 2 public entities. AGSA rates were also covered in the presentation, with the 30% higher tariff being discussed (see document).

Discussion
Mr L Ndabandaba (ANC) asked how SAICA recruited membership and how it played a role in placing graduates into jobs.

Mr Hamdulay replied that in order for members to qualify for membership with SAICA they had to be qualified Chartered Accountants. In respect of placing graduates into companies, SAICA was involved in a programme called Thuthukani in which it was training graduates to be placed into auditing and accounting firms.

Mr Steele aasked if SAICA had any partnerships or relationships with universities, as in the case of AGSA and Fort Hare.

Mr Hamdulay replied that SAICA had partnerships with 10 accredited universities, in which BCom Accountant students from historically disadvantaged backgrounds were assisted,

National Treasury (NT)presentation
Mr Freeman Nomvalo, Accountant General, National Treasury, presented on the role of AGSA, as well as the role of Accounting Standards, in ensuring public accountability and fiscal transparency, and explained how these applied in the South African environment (see document). Legislation that governed the accounting standards, as well as how these fitted into the general government strategy of public delivery, were also discussed in his presentation, and he explained how these drew from best international practices. Powers, functions and the legislative framework of the National Treasury were also outlined and explained as well as the strategic partnerships with stakeholders ranging from Parliament, to departments to legislatures (see document).

Mr Steele asked how the accounting standards worked, and how they took into account the relative size of business entities.

Mr Nomvalo replied that the legislation provided for guidelines of how different entities were affected by the accounting standards, stating that Fair Value was a strong determinant of which laws governed what types of companies .

The Chairperson said the Committee was satisfied with the presentations made and thanked the presenters for taking their time to present to the Committee.
 
The meeting was adjourned.