The Auditor-General of South Africa (AGSA) presented its Annual Audit Report, and the Chairperson of AGSA’s Audit Committee presented the Audit Committee Report. The Committee was informed that the Financial Report and Report on Performance was finalised within the required time frames, and that the external auditors had issued an unmodified report. Moore Stephens, the external auditors, had now merged with BDO, who were time-barred from performing an external audit, and were also contracted in to perform work for AGSA. This meant that the Audit Committee would have to appoint new auditors, so it sought permission to proceed with a new appointment, on the same terms as the previous appointment. In respect of the internal audit, the Audit Committee had appointed Gobodo to replace Deloitte and Touche, with effect from April 2011, with work to commence in November 2010. The Audit Committee also would be increased to four members instead of three later in the year. Members asked why the terminology of “unmodified” was used instead of “unqualified”, saying that there was a need to be consistent. Members questioned why the audit committee was to be increased. They asked whether any contractual obligations had been breached by Moore Stephens when it had merged, questioned how long Deloitte Touche had attended to the internal audit and asked whether the appointment of Gobodo may not result in a conflict of interest, since the Auditor-General had worked for that firm in the past. Members noted that the appointment of external firms to undertake the internal audit was more cost effective than maintaining an office for this function, and that many State Owned Enterprises were adopting the same approach, although some Members said that there was a need to build internal capacity. Members enquired what “housekeeping” issues meant and whether the report on these issues had raised any concerns. A Member also asked whether it was the norm to submit only one recommendation for appointment as external auditor to the Standing Committee, and questioned the criteria, especially the criterion that the appointed firm must be based in Gauteng, and requested that this be revisited so that it was merely a recommendation. Members pointed out that it was likely that many small firms may merge to qualify to undertake AGSA work in future.
The first part of the presentation on the Annual Report, by the Auditor-General, outlined the goals, which aimed to ensure that AGSA produced reports that were simple, clear and relevant and triggered moves to clean audit administration and accountability in the public sector. Other goals related to improving the visibility of leadership and clear communication in championing the implementation of audit recommendations. AGSA undertook quarterly visits to auditees to check implementation of key controls. The Deputy Auditor-General then presented on the funding model. He noted that there had been a focus on stabilising the margins and cash flow situation, and the overall financial performance had changed from a deficit to a surplus, which AGSA hoped to sustain in future. It was strengthening its human resources, by a comprehensive trainee auditor scheme and focused recruitment and retention initiatives, which had led to the overall vacancies decreasing from 724 in 2007, to 383 in the current year, with lower attrition rates than other departments. The AGSA aimed to lead by example, and outlined its initiatives for risk management, internal controls, transformation and quality and timeliness of Auditor-General of South Africa’s products. The matters on which the Standing Committee would be required to deliberate included the net surplus, appointment of auditors and the date of Annual Report hearing. The Committee noted that the hearing on the Annual Report would take place in two weeks.
Auditor-General of South Africa (AGSA) Annual Report 2010/11
AGSA Audit Committee Report
Mr Peter Moyo, Chairperson of the Audit Committee, Auditor-General South Africa, presented the Audit Committee’s Report. He informed the Committee that both the Financial Report and Report on Performance had been finalised by the Auditor General South Africa (AGSA) within the required time frames, and the external auditors had issued an unmodified report. The Audit Committee had engaged with both external and internal auditors, and the management letter from the external auditors raised no material issues. It did raise some “housekeeping” issues, which were adequately dealt with by management, and the financial impact of these issues had not been material enough to affect the audit opinion. The Audit Committee was satisfied with how management had dealt with the reported issues, no matter how small these were, and was also satisfied that the control environment was conducive to the preparation of reliable financial information.
Mr Moyo noted that the auditing firm Moore Stephens had merged with BDO. However, BDO could not be appointed as auditors for AGSA, as they were time barred and they had been contracted in to do work for AGSA. The Audit Committee would therefore have to appoint new auditors. The Audit Committee required permission from the Standing Committee on the Auditor General to proceed with a new appointment, on the same terms as the previous one. Among the criteria used to arrive at the short-listed firms was that audit firms were required to have five partners, of whom at least three of those partners, including the engagement partner and key audit team members responsible for the AGSA’s audit must be based in Gauteng. The firm was also required to demonstrate that it had sufficient in-house capacity to perform the audit, and would not be over-reliant on the AGSA audit fee. Another criterion was that the firm should be able to meet the AGSA’s Black Economic Empowerment (BEE) 10% procurement requirement. It should be prepared to rotate the partners responsible for AGSA’s external audit every five years. The appointment would be for a period not exceeding ten consecutive years, which was subject to annual review and confirmation.
The Committee was informed that for the internal audit, the Audit Committee had appointed Gobodo to replace Deloitte and Touche. This appointment ran from April 2011, and work would commence in November 2010.
Mr Moyo concluded the presentation by stating that the Audit Committee currently comprised of three independent members but would be increased to four members later this year.
Mr N Singh (IFP) asked why the terminology of “unmodified” was used instead of “unqualified”. There was need for consistency in the use of terminology.
Mr Moyo replied that the terminology within the audit profession was frequently changing, and the technical term being used at present was “unmodified” which was the same as the previous “unqualified”.
Mr Singh stated that there was a need to build capacity for internal audit. He asked if it was specified that the audit needed to be externally done.
Mr Moyo replied that the Audit Committee had engaged with the Auditor-General on several occasions on whether the internal audit function should be internally or externally performed. The opinion of both parties was that it was more cost-effective to have an external firm performing this function, as this would cost below R3 million, in comparison to the higher costs to maintain an office internally for this function.
Mr Singh asked if there were some contractual obligation that was breached by Moore Stephens when it had merged with BDO.
Mr Moyo replied that there were no contractual obligations that were breached. Moore Stephens had conducted itself professionally, and had informed the Audit Committee of the possibility of the merger from inception of discussions with BDO.
Mr Singh stated that the Audit Committee needed to provide motivation as to why it wished to increase to four members.
Mr Moyo replied that this was so that it could still meet the quorum requirements, should a given member be absent. In addition, the Audit Committee also wanted to groom individuals who could possibly take over from the longer-standing members in time.
Mr M Steele (DA) asked whether the use of the term “housekeeping”, as applied in the Audit report, had any special connotation in audit circles.
Mr Moyo replied that the term was normally applied to refer to small issues that needed to be taken care of.
Ms S Tsebe (ANC) asked what ‘small issues’ were raised in the Audit Report.
Mr Moyo replied that these were not issues that were of any real concern to the Audit Committee, as they had already been dealt with.
Ms Tsebe asked whether it was the norm for the Audit Committee to submit only one short-listed candidate for the job of external auditor for consideration by the Standing Committee.
Mr Moyo replied that the norm was that the Audit Committee recommended one name and the Standing Committee on Auditor-General approved.
Ms Tsebe asked why the criterion was limited to firms from Gauteng only, when there were firms in other provinces.
Mr Moyo replied that this decision was taken to allow for expediency in providing the Auditor-General with a service, as the external firm would be called in from time to time through the year. It was also more cost effective to have a firm based in Gauteng, as the Office of the Auditor-General was also there.
Ms F Tlake (ANC) asked if Deloitte and Touche had served for ten years, prior to Gobodo being appointed to replace them.
Mr Moyo replied that Deloitte had served for about seven years as internal auditors, but it was good practice to review the appointments.
Ms Tlake asked why BDO could not continue to serve as external auditors after their merger with Moore Stephens, because they had not served for ten years.
Mr Moyo replied that the merger was only effected after the completion of the audit.
Mr Singh asked whether the term “unmodified” would be used in future in all the reports.
Mr Moyo replied that the use of the term “unmodified” was just the heading to alert the reader to the contents of the report. The actual report did not use this term in the main body. Of greater importance than the heading was the wording used in the report.
Mr Singh stated that he had noted the response around the cost benefit of appointing external auditors rather than building internal capacity. Such information equipped the Committee to interact better with other entities that appeared before the Committee.
Mr Moyo replied that the point was well taken, as most State Owned Enterprises (SOE) had resorted to appointing external auditors, which was part of professionalism.
Ms Tlake asked if the appointment of Gobodo had not brought about a conflict of interest, as the Auditor-General had worked for Gobodo.
Mr Moyo replied that there was no influence from the Auditor-General in the appointment of Gobodo. He had left Gobodo ten years ago, and in no way did he stand to benefit materially from their appointment.
Ms Tsebe asked what would happen if the Committee did not approve of the name being submitted, seeing that the Audit Committee was only submitting one short listed candidate for appointment as external auditor.
Mr Moyo replied that the Audit Committee would in such a case submit another name from its short list, or would re-advertise the process. The role of approval and recommender should not be confused. If more than one name was submitted, the role of approving would then shift to the Standing Committee.
Ms Tsebe asked that the criterion requiring the external auditing firm to be from Gauteng should be revisited, as only one province was benefiting.
Mr Moyo replied that the provincial units of the Auditor-General also applied a similar criterion. If the Auditor-General’s office in Kwa-Zulu Natal was contracting for services, there was a condition attached requiring the firm to be from that area. Therefore, benefits were evened out in the end.
Mr Steele stated that the capacity of small firms would be reduced, due to the proposed amendments to the Companies Act which would reduce the necessity for small firms to have external audits. Small firms would therefore place a heavy reliance on public audits. However, since they did not currently meet the criteria for doing AGSA audits, he questioned whether this was not likely to lead to a number of audits.
Mr Moyo replied that the Member was correct, as it was proving difficult to find a firm that could meet the criteria of auditing the Auditor-General.
Mr Singh asked that the Audit Committee revisit the criterion requiring external auditors to be based in Gauteng, as this was seen as a hurdle.
Mr Moyo replied that in future, perhaps the basing of a firm in Gauteng could be presented as an advantage, and not as a criterion for firms wishing to do external audits.
Auditor-General’s briefing on Annual Report 2010/11
Mr Terence Nombembe, Auditor-General, presented the first part of the Annual Report 2010/11. The Committee was informed that the Constitutional mandate of AGSA as the Supreme Audit Institution (SAI) of South Africa existed to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.
Mr Nombembe outlined that the AGSA goals included ensuring simplicity, clarity and relevance, which partly dealt with publishing general reports to trigger actions for migration towards clean audit administration and accountability in the public sector. Another goal was improving the visibility of AGSA’s leadership, through clear communication in championing the implementation of audit recommendations. In order to achieve this AGSA had instituted, among other things, quarterly visits to auditees to ensure implementation of key controls.
Mr Kimi Makwetu, Deputy Auditor-General, presented the second part of the Annual Report 2010/11. This included the funding model, an explanation of how AGSA would strengthen the human resources, and a section on leading by example. The funding model focused on stabilising AGSA’s margins and cash flow situation. The Committee was informed that the overall financial performance had improved from a deficit to a surplus, and the future focus was to sustain that improvement. The municipal debt collection was deteriorating, and of the total debt of R357 million, local government debt accounted for 39%, while debt by provinces amounted to R140 million.
Under the heading of “Strengthening the human resource” he informed the Committee that the emphasis of AGSA lay on the comprehensive trainee auditor scheme. Overall vacancies had decreased from 724 in 2007, to 383 in the current year, as a result of focused recruitment and retention initiatives. AGSA further achieved an annual labour turnover of 6.6%, compared to an industry average of 8.2%.
Mr Makwetu outlined the section on leading by example, which related to matters of risk management, internal controls, transformation, and quality and timeliness of AGSA’s products. The Committee was informed that improved quality of audits and streamlined engagement performance policies and procedures were achieved. Risk management and clean administration involved, among other things, a review of human resource, Information and Communication Technology (ICT) and finance policies procedures and processes, to improve AGSA administration.
Under the programme of transformation, the procurement spend on small audit firms had increased from R58 million to R81 million, with an additional R18.7 million being spent on Broad Based Black Economic Empowerment (BBBEE) compliant firms, for other goods and services.
Mr Makwetu concluded the report by presenting matters that would need to be considered by the Standing Committee, relating to the net surplus, appointment of auditors and the date of the Annual Report hearing.
The Chairperson thanked the Auditor-General and his team and the members of the Committee for their participation. The Committee would convene for the Annual Report in two weeks time, to allow the Committee Researcher and Members to go through the Report in detail.
The Chairperson noted that owing to the lack of a quorum, the adoption of Minutes and consideration of the Committee’s Draft Oversight Report would stand over to another meeting.
The meeting was adjourned.
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