Strategic Plan (continued), Blue Book Targets, and Audit Directive, including Materiality and Risk Management Processes: Deputy Auditor-General's briefing

Standing Committee on Auditor General

29 October 2009
Chairperson: Adv M Masutha (ANC)
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Meeting Summary

The Deputy Auditor-General continued with the presentation on the Auditor-General's (AG) five areas of commitment, which had been positioned in their strategic plan. He presented the Blue Book targets to the Committee. He stated that the overall objective for the establishment of the Auditor-General was to build public confidence and the way this ultimate outcome would be achieved was if the Auditor General began to achieve its objective of influencing the achievement of clean audits. He submitted that if all the five areas of commitment were done well the AG could target the achievement of clean audits to the extent of 60%, rising over a two year period to 100% by 2013.

The Auditor-General was fixed on building professional relationships that were driven by their understanding of the audit mandate to make sure that OAG could influence, ultimately, the people who would be doing the work within the institutions that OAG audited. It was explained that over the last three years the AG had been operating at a net deficit. It  had implemented a new revised funding model from 1 April 2009 and had increased the tariffs by some large percentages. The organisation was focused on retaining human resources to cut down on training costs, with a projected staff retention level of 70%. The last goal concerned the setting of standards of excellence within the organization.

Members discussed the projection of 60% with respect to clean audits, and raised several questions about the feasibility of putting a figure to the number of clean audits expected, when this was not entirely under the control of the Auditor-General.

The Attorney-General gave a presentation to the Committee on the audit directive and responded to a Member’s specific request for a presentation on materiality and risk management processes. Members wanted to know what would happen in the event of non-compliance by auditees with the Auditor-General's directives.
They also wanted to know if there had been any issues that had arisen out of the Auditor-General's consultations with stakeholders during interactions in the course of developing the audit directive.

Meeting report

Continuation of presentation of Strategic Plan of the Auditor-General (AG)
The Chairperson indicated that the agenda would proceed from where it had been left off on the previous week on the issue of the Auditor-General's strategic plan.

Mr Terence Nombembe, Auditor-General, stated that the purpose of the meeting would be to finalise the discussion on the strategic plan document and to reflect on whatever remaining information that needed to be presented. This would then be rounded up by reflecting on how, at an organisational level, the Office of the Auditor-General (OAG) intended to monitor and measure the manner in which it lived up to the five promises that it had put before the Committee. There were measures in the detailed strategic plan, which would help OAG to look at things at an operational level. However, there were also other measures that it wanted to share with the Committee, that would assist the AG to look at these issues at an output or outcome level. These measures had not as yet been shared with the Committee and linked to the broader high level organisational performance indicators.

Mr Kimi Makwetu, Deputy Auditor-General (DAG) indicated that at the last meeting, OAG had taken the Committee through the five areas of commitment that it had outlined in the strategic plan. OAG had also reported on the outcomes for the year ending March 2009, which in large part covered those five areas. A detailed strategic plan for the 2010/2013 financial period had been submitted to the Committee for members to consider it and the A-G had dealt with the same issue during an orientation exercise in the previous week. To wrap-up the issue, the A-G had proposed to reveal what it was that was supposed to be measured, in order to get the Committee to assess whether OAG were moving in the right direction.

OAG had therefore positioned the measures for the next three years that it thought would indicate progress with respect to each of the five goals. The overall objective was to build public confidence. This would be achieved by OAG achieving its objective of influencing the achievement of clean audits. OAG thought this was achievable because it had a number of interventions to ensure that it was at all times engaging with the parties to ensure that they were putting in place whatever would be required for a clean audit.

Mr Makwetu noted that OAG would not want to be measured on the clean audits while it was in the process of signing off audits, because this would mean that it was essentially expressing an opinion on something used as a measurement tool, which would lead to a conflict of interest.

From 2010-2100, the AG intended to concentrate on leadership visibility, a strengthened human resource base in the organisation, leading by example in terms of a clean audit environment within the A-G itself, and effectively utilising the resources that OAG obtained from fees that it charged. If all these things could be done well, OAG could target the achievement of clean audits in others. It was hoping to achieve 60% clean audits, rising over a two year period to 100% by 2013. If all these things happened as OAG proposed OAG would be positioning itself to have a progressive interest in the number of audit opinions within the environment of the Public Finance Management Act (PFMA) as well as the environment of the Municipal Finance Management Act (MFMA).

Mr Makwetu noted that in the 2008/09 years, there had been 25% achievement of clean audits under the PFMA. In the municipal sector, where there were a number of challenges within this sector, the baseline was set lower. In order to achieve the clean audits, OAG would need to ensure that it continued to identify the root causes of all the outcomes that were impacting on the environment and be able to recommend the necessary actions. It was intending to put the product element at 40% of the overall effort.

The visibility of the leadership was about building professional relationships that were driven by their understanding of the audit mandate, to make sure that OAG could ultimately influence the people who would be doing the work within the institutions that OAG audited. If OAG could continue to engage them on all the issues that required action, then that influence would at least trigger the desired outcome of clean audits. OAG was putting a lot of emphasis, in its strategic plan, on its own visibility for staff (internally) and for stakeholders externally, who included Parliament, the Executive and the administrative functionaries in all the three spheres of government.

In terms of the funding resources, OAG had been operating at a net deficit over the past three years. OAG had implemented a new revised funding model from 1 April 2009, where tariffs had been substantially increased. It could then commit, from 2010 onwards, to a target that would hover around 5% to 6% of its net revenue. OAG had not operated at this level before and it would be a difficult task, but it believed that there was alignment of resources and tariff regimes to enable it to generate that level of surplus. When the surplus had been realized, OAG could then engage with the Committee as to what should happen to that surplus. It would not be substantial, but it could help in sustaining the AG’s needs over time. Over time, there would need to be an upgrade and increased replacement of fixed assets, amongst others. Cost containment principles must be implemented. At the same time OAG also wanted to ensure that it did not unnecessarily increase the cost of auditing to government.

In so far as the human resource element was concerned this also became very critical, because the more people OAG retained in the organisation for a long time, the less it would have to spend on re-training and re-introduction of staff to the AG’s methods of auditing. OAG was setting its targets for retention, particularly at supervisory and managerial levels, at 70%, rising over the next few years, so that  OAG could be able to reap the benefits of the investment that it had put into trainee accountants as well as their internal growth then to become managers and supervisors.

The last goal was setting standards of excellence within the organisation. OAG would not settle for annotations to its own audit reports. In its presentation on the Annual Report OAG noted a clean audit with no qualifications and no matters of concern raised by auditors. Before OAG went out to “preach the gospel of clean audits” it must have a clean slate itself. OAG would also lead by example in terms of  the transformation of the environment in which it operated, and was aware of the need to promote the transformation of the profession in general.

Dr G George (DA) commented that on page 1, where the Deputy Auditor-General had spoken about influencing the outcome of clean audits, an objective needed to be clearly measurable. However it seemed a bit nebulous if, despite advice and good guidelines to departments, they nonetheless did not achieve a clean audit. He was not sure if this was under OAG’s control. If not, then this was not something against which OAG should be measuring itself. He suggested that it might make more sense to set a goal such as trying to ensure that departments followed guidelines. He was worried that OAG was setting itself up for failure on this goal.

 Dr George also commented on the issue of the surplus on page 3. He agreed that efficiency and effectiveness were important. However, he wondered if there was a need to target for a surplus, rather than meeting the budget. He hoped that OAG was not padding the budget, and wondered if it was correct to budget for a surplus.

Mr M Steele (DA) echoed Dr George's comments that it would not be wise to make an objective from something that the OAG could not control, as it could be held accountable for actions by individuals, or structural inefficiencies lying outside the OAG’s own offices. He did not see a problem with striving for increased clean audits, but for the OAG to make this into a target without qualifying it, in this way, would be dangerous.

Ms S Tsebe (ANC) noted that the code of conduct for public servants required them to declare their interests. She asked where the weaknesses picked up by OAG lay, whether it was in the legislation, or the implementation, since the policy seemed to exist only on paper.

Mr Makwetu responded that this issue related to the recommendations that OAG made in its audit reports, and was related to what had occurred when OAG picked up weaknesses in processes and financial transactions. The recommendations that OAG made were not always followed by actions. OAG was trying to focus on this.

Ms Tsebe responded that she had understood what was being said on those recommendations. However, she wanted to know whether OAG recommended anything in regard to conflicts of interest. There seemed to be a practice of referring matters elsewhere and she wondered if OAG itself could act.

Mr Nombembe responded that OAG did not question the logic of the authors of legislation or policy. Its role was always concerned with whether that policy or legislation was implemented. If OAG were to question the adequacy or logic of legislation or policy then it would be getting into a territory where it did not belong.
Mr Steele pointed out that there was a Standing Committee on Public Accounts report on the issue of conflict of interest, and that this was primarily up to the Public Service Commission (PSC) to review.

Ms Tsebe also asked Mr Makwetu if OAG had a debt recovery plan in its funding model.

Mr Makwetu responded that OAG was trying to find a way to “nudge”  its debtors to pay up their debts, and affirmed that the AG had a debt recovery plan.
Mr L Ndabandaba (ANC) commented that the concept “lead by example” was an exciting one that could motivate other organisations and departments. It was not the A-G's responsibility to influence other departments directly but he enquired whether there were any measures that it could suggest to be followed, to positively influence other departments.

Ms J Sosibo (ANC) commented on what Mr Makwetu had said about identifying root causes, and asked, in respect of those departments who performed badly, why the OAG had not yet come to the root of their problems, and what mechanisms it would be applying.

The Chairperson commented on issues that had been raised by both Dr George and Mr Steele, and said that these went back to the basics of the core mandates of role players, especially in the turnaround to achieve full accountability. He wondered if there was not a contradiction in terms. Mr Makwetu had said that it was not up to OAG to ensure that departments got clean audits. Ultimately, it was up to the department being audited to ensure that it had done what it was required to do to achieve a clean audit. He suggested that the OAG was trying to force departments to do something, and he requested clarification on the use of the word “influence”.

Mr Makwetu responded that this was a very important matter, which had been raised again in debates about whether OAG should have this as a target. OAG had agreed it could not be measured on this objective, because it did not have control over it, but it was highlighting it to give an indication of how its five goals would achieve the main objective.

Going back to the basics, the relationship between the AG and those whom it audited (the auditee) was divided by a very clear line of responsibility, articulated by the role of the Chief Financial Officer as the executive authority in a department. If the CFO and the Director General were to disappear from a department, the accountability to produce a set of financial statements could be compromised. The OAG had no control over how long the accounting officers were to stay in a department, and therefore did not control the people who led the whole accounting process. Another significant aspect was that the OAG had no control over the department’s vacancies. Again, this point had been raised to highlight it.

Mr Makwetu said that it could also cause a conflict between professional ethics and performance targets, which he felt would affect the independence of auditors, if there was measurement. This could give rise to the possibility that OAG would be giving judgments biased towards attaining 60% ratings.

The Chairperson commented that this was a critical and central issue. OAG needed to locate it in its proper context. He did not think that this should reside in a set of the OAG’s goals, which were specific to the office. He thought perhaps it could be stated as a goal to be set for the whole sector, so that everyone would have it as a collective vision. If OAG contextualised it in that manner, then there would not be any contradiction, and OAG would not have to battle with it.

Mr Makwetu agreed that this message had filtered into the public service, as evidenced by the emphasis on targeting clean audits that was contained in many of the departments’ annual reports and strategic plans for the upcoming periods.

The Chairperson also commented that he thought the word “influence” was more appropriate, because it conveyed the sense of contributing towards something rather than determining it.  The only issue then was whether it should be a measurable target.

Mr Nombembe asked for clarity on what the Committee expected of the OAG. The Committee had observed that this target of 60% should not be mentioned in the strategic plan without being qualified to some degree. Perhaps there needed be some clarification as to what kind of qualifiers needed to be put in to clarify the context.  The weighting allocated to this was small, and the issue was whether it was to be left in the strategic plan, and, if so, how it should be qualified. It was necessary to move to a decisive position because this gave meaning to the role of the OAG as a Chapter 9 institution.

The Chairperson responded that his understanding of the context of the weighting was that if it depended solely on the AG's intervention to achieve clean audits, and was not dependent on what the departments, Parliament or the Executive did. However, because it was a shared goal, vision and responsibility, and because different role players each played their role in different ways, the weighting should be based on the extent to which the goal could be measured for the OAG, and, because the OAG could not control the outcomes, that weighting should then be modest.

Dr George and Mr Steele repeated their earlier position on the matter. Dr George maintained that this objective did not belong in the strategic plan and it could not be measured accurately. The word 'influence' was very nebulous and he did not think it could actually be measured effectively.

Mr Steele submitted that it was unwise to put a number value to something that was qualitative.

The Chairperson suggested that the problem could be addressed by a refinement of the language used.

Ms Tsebe was of the view that the AG should be given time to review this and come up with an acceptable draft.

Mr Ndabandaba commented that his research experience had shown that one could make projections of this nature with respect to the numbers suggested in the strategic plan.

Mr Nombembe responded that perhaps what OAG had to do was to provide more motivation on the context, which informed how OAG had arrived at its projections. It could be useful to attach certain conditions and specific riders to each of the projections.

The Chairperson suggested that OAG could include notes on the projections, which spelt out the context.

The Chairperson also questioned what informed OAG’s optimism that by 2013 it could have clean audits right across the spectrum. He did not know how many countries in the world could boast of having clean audits throughout the entire public sector. This, to him, sounded rather too utopian.

Dr George indicated that the DA would bend to the majority view regarding the decision to keep the objective in the strategic plan. At the end of the day, one had to ask why this was being done. It was a scorecard that would be published and would receive comment. In a worst case scenario, the OAG could do a great deal, but no department would get a clean audit. This could pull down the OAG’s own scorecard. The rider and explanation on this would have to be very clear.

The Chairperson commented that Dr George had made his point, and stated that this was precisely what OAG wanted to happen because it had to be measured in terms of how it performed. If OAG failed as a collective, all had to take responsibility, including the opposition.

Presentation on the Audit Directive - including the request to present on Materiality and Risk Management Processes as requested by Mr M Steele
Mr Nombembe presented the audit directive to the Committee, in the form of the attached document.

Ms Sosibo asked about the guidelines on page 3, specifically whether they were up to the same standard as international norms. Secondly she enquired what steps the OAG would take if entities did not perform according to the audit directives.

Mr Nombembe responded that insofar as the guidelines for investigations were concerned, OAG was confronted with a complete lack of authoritative standards for conducting forensic audits. All the standards were country-specific or firm-specific. They did use a common logic on the credibility of evidence, the credibility of due process and the credibility of the final report. Everyone followed the same principles to do with proper planning, proper field work and due process, although there was no one document that spoke to forensic audits. OAG had taken all the principles and had written them down and formalised them in a document. OAG was happy that it was in line with all standards that were acceptable in the auditing field.

The Chairperson noted that OAG interacted with various stakeholders and wanted to check if there had been any issues that should be brought to the attention of the Committee.

 Mr Nombembe responded that he was not aware of any pending issues. All those with whom the OAG had engaged had a clear appreciation of the basis of these standards or directives. This was not something that OAG had created itself; it had merely formalised and reaffirmed something with which the profession was already familiar. The international standards on auditing had a perspective of public sector auditing, which was consistent with most international standards.

Mr Nombembe then responded to the question raised by Mr Steele on the issue of materiality and risk, which would fall under the ambit of international standards on auditing. The manner in which OAG would define issues of materiality would be to ensure that a level of materiality was based on specific criteria. The level of materiality would be determined according to the likelihood of error. There might be a need to dig deeper to ensure that the more minute errors were not escaping the net. However, there was no exact science to it, and it was all up to an auditor's professional judgment.

The meeting was adjourned.


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