Appointment of External Auditors: briefing by Auditor-General of South Africa

Standing Committee on Auditor General

18 August 2009
Chairperson: Mr M Masutha (ANC)
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Meeting Summary

The Chairman of the Audit Committee of the Auditor-General of South Africa (AGSA) briefed the Standing Committee on appointment of the External Auditors for the Office of the Auditor General (OAG), and clarified the functions of the Audit Committee in relation to the Auditor General and his work. The OAG had received an unqualified audit, which was appropriate, but that certain issues had been identified and dealt with. There were some real improvements in tackling issues. When members asked for further clarity, it was explained that poor management had been identified, but was addressed with a Finance Turnaround Plan to tighten control, and appoint people with the right skills. The former Chief Financial Officer had been suspended on suspicion of incorrectly handling the accounts and was later dismissed. The unqualified audit report reflected that matters had been correctly handled and rectified. 

The criteria used in appointing an external firm of auditors were outlined, and it was emphasised that this was a guideline, did not carry the force of law, and was a working document. The previous Standing Committee had agreed with the Audit Committee that a firm should be appointed ideally for a minimum of five, but no more than ten years, but there was no expectation of the ten-year period as the appointments were made annually, after performance was reviewed. The Audit Committee would only appoint a firm with capacity to do the work, it must have at least five partners, of whom three were based in Gauteng, and any firm must have passed the quality control by the Independent Regulatory Board of Auditors. The income earned from the OAG audit must not exceed 10% of the total earnings, otherwise independence of the firm would be compromised. Partner rotation every five years was recommended to avoid a close relationship with the management team. The firm was not permitted to undertake any other contracted-out work for OAG. The Audit Committee must approach the Standing Committee if it wished to change the auditors. The Standing Committee could appoint the auditors, but could not adjudicate upon their performance.

In answer to Members’ questions about the function of the Audit Committee and the External Audit firm, it was explained that the OAG set the way in which its staff or contractors performed audits on government entities, and these would report to the Auditor-General. The Audit Committee could not influence how the OAG performed audit functions. The decision whether to outsource any work, and the fees to be paid, also remained the sole responsibility of the Auditor-General. The Audit Committee had no influence at all in the actual work of the OAG, as it should not interfere with the independence of this institution. The Audit Committee and internal audit function appointed by it would check OAG internal office practices and procedures, and assess whether the OAG had met internal performance indicators, such as retention of staff, as well as the control consciousness and effectiveness of the OAG. The Remuneration Committee would address staff remuneration issues. The External Auditor would report upon whether performance and predetermined objectives had been achieved, including whether the deadlines set out in the Public Audit Act were met. If the OAG failed to do so, this would be commented upon in the External Auditors’ report.

Finally, the Audit Committee noted that it was seeking to appoint more members, since the absence of members made it awkward to hold meetings.

Meeting report

Appointment of External Auditors: Auditor-General of South Africa (AGSA) briefing
Mr Peter Moyo, Chairperson of the Audit Committee, Auditor-General of South Africa, gave a brief presentation stating that the Office of the Auditor-General (OAG) had received an unqualified audit from the external auditors. The Audit Committee believed that this was entirely appropriate, as they had engaged fully with the external and internal auditors. They were pleased with the attitude displayed by OAG. Over the years, this Office had shown real improvements and it had a positive attitude in tackling issues. The Audit Committee was of the view that the OAG had to be vigilant in handling serious issues, since the whole South African democracy could be compromised if it was not, and if its integrity was questioned. 

The Audit Committee had agreed that there were some problems picked up by the Auditor-General (AG) and Deputy Auditor-General. The Annual Report, together with the financial report, would firstly be tabled in Parliament, and then brought to the Standing Committee on the Office of the Auditor-General (SCOAG) in September, by which time the Members would be familiar with the work of the Audit Committee on areas of independence, governance, work carried out so far and evaluation.

Mr Moyo then presented upon the criteria used in appointing an external auditor. He emphasized that the criteria document was a guideline, not a rule or law, and that it was a working document that needed to be amplified (see attached presentation)

Mr Moyo then turned to the issue of retention and remuneration of staff, saying that there was a greater focus on controlled consciousness of the office, and that there were certain concerns on this issue.

Mr Moyo said that the Audit Committee required more than three members because if more than one member was absent the remainder could not hold a meeting.

Mr Moyo then noted that in regard to appointment of external auditors and partner allocation, AGSA would look at practical solutions. It had been agreed with the previous Standing Committee that firms of external auditors should be rotated regularly, as this was good business policy.

Ms J Sosibo (ANC) wanted further  explanation on the reference to the problems that beset the office of the Auditor-General, and the actions taken to correct them.

Mr Kimi Makwetu, Deputy Auditor-General, Office of the Auditor-General, explained that the leadership of the finance department within the office of the Auditor-General had not been up to scratch. There had been poor management. The problem was diagnosed, and a Finance Turnaround Plan was established. Its focus was to tighten control and bring on board people with the right skills to handle the finances of the OAG. The person who had been the Chief Financial Officer was suspended following allegations that he had incorrectly dealt with the accounts, and was later removed from office on conclusion of the investigation. Institutionalised processes were at present in place. The recent unqualified audit results reflected the steps that had been taken in putting matters right.

Mr Moyo confirmed that the Auditor-General and Deputy Auditor-General had picked up all these problems and acted swiftly. This was an indication that the processes and procedures in place were working, and this had made the work of oversight of the Audit Committee much easier.

Mr N Singh (IFP) asked the Audit Committee for its views on the appointment of external auditors to do the work within the Office of the Auditor-General, in relation to the Auditor-General himself, and the Audit Committee. He also asked for more detail about the splitting of work between the Office of the Auditor-General and external auditors, and about the issue of fees. Thirdly, he asked about the retention and remuneration of staff in the OAG.

Mr Moyo explained that the differences lay in the nature and execution of duties. Some of the work carried out within the office of the Auditor-General was concerned with audit functions. These audit functions related to the work the Auditor-General did when performing audits of the entities under the audit control of the OAG. People who performed these audit functions answered to the AG, not to the Audit Committee. The questions around auditing any Government entities rested solely with the AG, and the Audit Committee could not influence how the AG would perform his or her work in this regard.

However, there was an Internal Audit function, which was responsible for auditing whatever happened in the OAG itself. That internal audit function was appointed by, and reported to the Audit Committee. The Audit Committee was only involved in the scope of external auditors who audited the Office of the Auditor-General itself.

Mr John Biesman-Simons, Chair of Finance, Audit Committee, AGSA, confirmed that the OAG included two aspects. Firstly, an audit was done on performance indicators. AGSA was subject to quality control reviews, similar to the private audit firms. The Independent Regulatory Board of Auditors reviewed the underlying quality of the work done, not the output sent and reviewed by the Standing Committee on Public Accounts (SCOPA). The Audit Committee drew considerable comfort from that.

Mr Moyo then turned to the issue of splitting work and fees, and confirmed that the Audit Committee was not involved with this area. That remained the sole responsibility of the Auditor-General, who made the determinations as to what work should be contracted out, and what were the fees. The role of the Audit Committee in relation to the fees was very small.

With regard to staff retention and remuneration, Mr Moyo explained that that the Audit Committee was looking at the control consciousness and effectiveness of the OAG, and raising any concerns. It would examine how, and how effectively, this had been done. The Remuneration Committee would look into issues of remuneration. From time to time the Deputy Auditor-General would asks the Chairman of the Audit Committee for his input purely on risk matters.

Mr Biesman-Simons added that in terms of the Public Audit Act, the financial statements of the Auditor-General had to include performance and predetermined objectives. The External Auditor has to report on whether these objectives had been achieved. One of the predetermined objectives was that the Auditor-General must meet the deadlines outlined in the Public Audit Act. The Audit Committee could not dictate to OAG how it should do its work, but if it failed to meet the deadline, and if that was reported in the Annual Financial Statements and then reported upon by the external auditors, then the Audit Committee was concerned because, as part of its mandate, it had to review financial statements. Similarly, the OAG, in dealing with issues of staff retention, would be setting targets for itself, and if those targets were not met, and this caused concern to the Audit Committee, it would advise the Deputy Auditor-General to put plans in place on these issues, and report back to the Audit Committee..

Mr Singh sought more information about vacancies in the Audit Committee.

Mr Moyo said that the Audit Committee had made a proposal that there be more than three members of the Audit Committee, because if one member was not able to attend a meeting it was difficult to continue with the meeting and conclude matters.

Prof G Ndabandaba (ANC) asked the Audit Committee how broadly or narrowly it would define “influence” in the work of the Auditor-General.

Mr Moyo replied that the Audit Committee’s scope of influence in the work of the Auditor-General was non-existent. If it was to try to influence the OAG, it would be interfering with OAG’s independence, and this would be contrary to the Constitution, because the OAG was a Chapter 9 institution. Of prime importance to the Audit Committee was that it should not interfere in the work of the OAG, but should maintain and uphold the OAG’s reputation.

Mr Moyo explained the appointment of an external auditor. For the past ten years, one firm had been performing the audits on the OAG. The Audit Committee and the previous Standing Committee had agreed that it was desirable to rotate the external firm of auditors. The contract had been set out as a period of ten years, renewable every year. This was good practice. The Audit Committee was also working on partner rotation every five years to avoid the situation where the auditor might become too close to the management team. In addition, he highlighted that the outgoing firm would in future be asked to make recommendations to the incoming firm about the OAG, which should protect the new firm against any wrongdoings that might exist by the OAG. The new audit firm could refuse appointment if it became aware of any issues. This was a way to protect the reputation.

Ms S Tsebe (ANC) asked whether, if the contract was renewed every year, there was any guarantee that the full ten-year period would be adhered to.

Mr Moyo explained that there was no guarantee. The Audit Committee would monitor the performance of the External Auditor and make a recommendation either to retain or dismiss that firm after reviewing its performance at the end of each financial year. If the Audit Committee decided not to renew the appointment, it would have to approach SCOAG, before the end of the third year of its five-year term, so that the Audit Committee was given permission to seek out another external audit firm.

Prof Karin Barac, Member of the Audit Committee, AGSA, said when a firm was appointed as external auditor, this was for a one-year contract only. There was no expectation of more than a year’s contract, as the firm’s performance was reviewed, and its contract renewed, annually.  If the Audit Committee made no recommendation to change that firm, then it could be re-hired for a period of up to, but not more than, ten years.

Prof Ndabandaba felt it was a good business policy to rotate the firms.

Mr N Singh (IFP) wanted to know the term of appointment for an audit firm

Mr Moyo explained that in many cases auditors were appointed for a year, but reiterated that an Audit Committee would need to re-confirm the appointment every year. In terms of the Public Audit Act, SCOAG must appoint a firm annually, on the advice of the Audit Committee. This Audit Committee would therefore let SCOAG know if it was not happy with the services offered by the external audit firm, and the full process would be followed to appoint a new firm.

Mr J Matshoba (ANC) proposed to the Committee that Members confine themselves to the recommendations of the previous SCOAG, instead of trying to come up with rules, as that would further complicate the issue.

Dr D George (DA) suggested that every year a decision should be made on the appointment or re-appointment of the external auditor. A set of criteria for appointing, or not re-appointing, the firm should be applied, for every year within that ten-year period.

Mr Moyo advised that the external audit firm would have to start work end of October for the next financial year. The Audit Committee had devised a set of criteria that would be used for appointing new auditors. It had also come up with external criteria, such as the fact that this firm was not permitted to undertake any other work for OAG (by way of contracted-out work), since the independence of the external firm would be compromised. The Audit Committee also looked at the level of fees. The general norm in the auditing profession, to determine independence relative to income, was that the income earned from one particular client should not exceed 10% of total earnings. If it did exceed this amount, then independence was deemed to be compromised.

The Audit Committee would also look at is the size of the firm in relation to what the OAG audit demanded. Only a firm with capacity to do the work would be appointed. This firm must have at least five partners, and three of those partners should be based in Gauteng, so as to ease communication between the firm, the OAG and the Audit Committee. Even if the Audit Committee were to consider appointing a small firm, it would have had to have passed the quality control from the Independent Regulatory Board of Auditors. In regard to partner allocation by the external firm, practical solutions were sought. All of this was detailed in the criteria document designed by the Audit Committee.

Mr M Steele (DA) asked who, between SCOAG and the Audit Committee, was doing the adjudication and evaluation.

Mr N Singh (IFP) stated that the responsibility of SCOAG was to appoint the firm, not to adjudicate upon its performance. .

Mr Moyo noted that from a practical point of view, the ten-year issue was articulated in the criteria, but that the five-year term was an internal matter. The final recommendation was that an external audit firm should ideally serve for a minimum period of five years, but for no more than ten years.

The meeting was adjourned.


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