Auditor-General of South Africa 2009/10 Annual Report; Finalisation of Oversight Report

Standing Committee on Auditor General

16 September 2010
Chairperson: Adv M Masutha (ANC)
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Meeting Summary

The Committee continued discussions on the 2009/10 Annual Report of the Auditor-General.  Members asked questions about the 30% under-achievement of the performance target set in respect of the Municipal Finance Management Act; the interaction between the Office of the Auditor-General and the National Treasury; the creation of increased awareness about the activities of the Office of the Auditor-General; the training and retention of qualified personnel; the recovery of audit fees due from the audited entities; the limitation placed on income from international auditing functions and the expenditure on tickets to 2010 FIFA Soccer World Cup events.

The Committee noted an overall improvement in the performance of the Office of the Auditor-General in many key areas.

The Committee decided to finalise the draft Oversight Report during the forthcoming Parliamentary recess.

Meeting report

Finalisation and Adoption of Draft Oversight Report
The Chairperson advised that the Committee would submit a substantive report to the House, as opposed to the standard format used in the past.  The draft report had identified certain issues on which the Committee wished to express itself.  However, it was obvious that the report could not be finalised during the meeting, although the contents would be influenced by the follow-up discussions on the AGSA Annual Report.  He proposed that the draft report was finalised during the forthcoming Parliamentary recess.  He suggested that the example of other Committees was followed where the reports were merged with the strategic plans.

Discussion on the 2009/10 Annual Report of the Auditor-General of South Africa (AGSA)
Mr Kimi Makwetu, Deputy Auditor-General, invited the Committee to raise issues requiring the response of the Auditor-General.

At the request of the Chairperson, Mr Samuel Hlekiso, researcher for the Standing Committee on the Auditor-General, put forward a series of questions arising from the “Analysis of Annual Report for the Auditor-General for the year 2009/10” document produced by the research unit (see attached).

Mr Hlekiso referred to the measurement of performance against targets.  TheAuditor-General had been set targets of 100% implementation of the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA) for the 2009/10 financial year. The target was reached for the PFMA but only 70% of the MFMA target was achieved.  The 30% under-achievement resulted from certain municipalities either submitting their annual performance information late, or not reporting at all, as required by the Act.  He asked if the Auditor-General had informed the Speaker. the National Treasury and the provincial MEC’s for Local Government and Finance of the failure by certain municipalities to submit financial statements and if measures had been put in place to ensure full compliance in future.

Mr Terence Nombembe, Auditor-General, assured the Committee that there was ongoing engagement with all the relevant authorities.  The main problem areas were the North West and the Northern Cape provinces and the problems were often the result of the extensive dependence placed on consultants, whose capacity was over-stretched. Certain municipalities requested additional time in order to finalise their asset records.  He felt that matters could be improved if there was greater co-ordination between municipalities and the Provincial Government.

Mr M Steele (DA) asked if it would be fair to conclude from the comments of the Auditor-General that the majority of municipalities that had failed to meet the MFMA requirements were located in the Northern Cape and North West provinces and that the problems identified related to a lack of capacity within municipalities as well as a lack of co-ordination between the municipalities, the province authorities and the National Treasury.  If the conclusion was correct, this should be included in the report. 

Mr Nombembe said that he agreed with Mr Steele.

The Chairperson said the Committee had observed that there was a high staff turnover rate amongst senior managers in municipalities which had received disclaimers from the Auditor-General.  The Committee would include the observation in its oversight report.  The Committee found that minicipal officials were very appreciative of the training and guidance that was provided and which would increase capacity over time.  However, when municipalities had to take action against instances of corruption and incompetence, the result was a high staff turnover, which required more capacity building.  He asked to what extent this issue was a problem.

Mr Nombembe acknowledged that the problem of high staff turnover rates was prevalent in minicipalities but felt that the frequency of the intervention by the Department tended to neutralise the impact.  The forthcoming municipal elections might result in changes in leadership at municipalities but the orderly process of engagement would continue.  The Provincial Governments were well aware of what was required and the structures currently in place were adequate.

Mr Steele asked how it was possible for a municipality such as Sol Plaatje in the Northern Cape, which had a high level of capacity, to receive a disclaimer.  This must have been a “nasty shock” (to quote the term used by the Auditor-General).  He asked if the standard of accounting in the muncipality was inadequate.

The Chairperson said coordination was necessary to ensure that such “nasty shocks” were dealt with effectively.  The term “disclaimer” covered a lot of possibilities, including outright criminality, and this needed to be stamped out.  He wanted to know who was responsible for ensuring that remedial action took place and that criminal charges were laid.

Mr Nombembe replied that the “nasty shocks” could be uncovered only during the monitoring process and could not be foreseen.  The mayors in all the provinces had committed themselves to taking responsibility for the financial management of their municipalities, although some were not yet carrying it out.  It was expected that the political leadership would be held accountable for any problems identified during the quarterly audit assessments.

The Chairperson referred to AGSA’s collaboration with the National Treasury at the municipal level and suggested that if AGSA was to maintain the role of a watchdog, there had to be a degree of separation from the Treasury’s role as a capacitator in place.  He asked how AGSA managed to perform a balancing act in this situation.

Mr Nombembe said that the engagement with the National Treasury was in the form of monitoring information contained in the regular reports submitted by municipalities to the Treasury, the provision of training through the Chief Financial Officer (CFO) forums and the allocation of grants to attract interns.  These activities were outside the scope of the Office of the Aufitor-General but the two organisations met on a quarterly basis to share experiences.  The engagement between the two entities enabled them to reinforce their separate strategies.  He described their interaction as a “structured approach.”  AGSA had compiled an audit check list, which was modelled on a municipality that had received a qualified audit report.  The format of the checklist was intended to provide guidance to other municipalities.

The Chairperson asked for a copy of the check list to be made available to the Committee so that it could be included in the Committee Report.  He asked AGSA to explain why a survey aimed at measuring compliance with the targets set for communication, stakeholders’ relationship management and branding had been deferred.  The targets were set in 2009/10 as part of the commitment to improve the visibility of AGSA be means of clear communication of the championing of the implementation of audit recommendations.  The actual performance could not be determined as the survey would only be conducted in the 2010/11 fiscal year.

Mr Makwetu replied that AGSA had been heavily involved in the “door-to-door” campaign and the interaction with stakeholders had gathered momentum to such an extent that it was considered to be a waste of resources to measure performance a year after it had been started.  In future, a survey would be conducted every two to three years, as an annual survey provided insufficient time to respond to the feedback received.

The Chairperson asked why AGSA had not measured the output concerning the office environment branding requirements.

Mr Makwetu replied that this aspect had not attracted much attention because of budget constraints.  He pointed out that whereas commercial banks aimed for a standard “look” with signage and furniture in all their premises, the AGSA operation was basically a back office environment.  AGSA had considered the issue from a cost-benefit point of view and had decided that the effort and expense outweighed the benefit.

The Chairperson said that while office location and visibility were physical aspects, he considered the creation of public awareness and confidence in the role of AGSA to be more important than branding. 

Mr Makwetu believed that awareness and confidence were being created through interactions with the stakeholders at roadshows and by means of the physical presence in the provinces.

The Chairperson asked AGSA to consider making use of the media to publicise visits to municipalities to conduct audits as a means of increasing awareness. 

Mr Steele remarked that the public hated waste and loved to see where money was saved.  A clean audit that indicated how waste had been eliminated and where money was saved was something that AGSA could “sell” to newspapers.

Mr Nombembe noted the suggestion and said that AGSA accepted the responsibility to communicate with the public in a meaningful manner.

Ms L Mashiane (COPE) asked if AGSA had ever received requests for the annual reports of the institutions on which it had performed audits.

Mr Nombembe replied that the reports were available to the public on the AGSA web site.

A Member of the Committee asked what language was used by AGSA in communication with the public.

Mr Nombembe replied that all official publications were in English.  Because of the cost implications, it was left to the media to do translations in areas where different languages were needed to get the message across.

The Chairperson suggested that because the auditees had a responsibility to provide access to the reports on their performance to their constituents, they should pay for translating the reports in another language.  The audited entities were after all marketing their financial performance to their constituents and increasing the level of the confidence of the community.

The Chairperson asked about the strategy to retain qualified auditors over the following three years.  The target was to reduce the number of unqualified staff by 5% from the baseline of 287, but only 93 had qualified as auditors during the same period, i.e. a performance of 32.4%.

Mr Makwetu replied that the target had been set at a low level because the persons entering the Trainee Auditor Scheme signed up for a period of three years, similar to other apprentice schemes.  A great deal of effort was necessary to retain the trained personnel.  AGSA experienced a labour turnover rate of 6.6% as compared to the industry norm of 8.2%, which was a reflection of the situation in the labour market where there were not too many alternative options available.  AGSA had retained all the trainee auditors who had passed the Chartered Accountant (CA) examinations or qualified as Registered Government Auditors (RGA).  AGSA was encouraging trainees by showing them that there was a career path open to them in the Office of the Auditor-General.  It was in AGSA’s interests to build human capital to the level where personnel could be promoted to positions as chief financial officers (CFOs) in other Government departments.  Efforts to retain staff was it as it was expensive to recruit new staff.

AGSA was asked to explain the importance of the culture index in the organisation with regard to strengthening human resources.

Mr Nombembe said that the issue of organisational culture had been given serious consideration by AGSA.  A leadership team had been tasked to develop a programme that reflected the right culture for the organisation, with a view to members of staff displaying consistent behaviour both internally and externally in their dealings with other institutions.  Another layer to the programme was leadership development, so that frontline managers could “walk the talk” of the organisation’s culture.

Mr Makwetu said that AGSA operated in a sensitive environment and staff were encouraged not to “racialise” reports and to focus on facts rather than extraneous factors.  Its business was to obtain answers or evidence, which required remaining “cold and clinical” during the audit process.

The Committee drew attention to the delays in the payment of audit fees by auditees.  The target for provincial Governments to pay the fees was 30 days but the actual average number was 59 days.  For local Government authorities, the target was 90 days, but fees were paid after 162 days.  AGSA was asked if it was practical to take legal steps to recover the fees due from auditees.

The Chairperson pointed out that the provisions of the Constitution regarding corporate governance stated that the option of the various entities within Government suing each other should be a last resort. 

Mr Makwetu replied that AGSA had always adopted that approach and had rather sought to persuade auditees to settle the outstanding debts.  There were certain specific instances where AGSA would be taking legal action because the commitments made had not been met.  Certain instances concerned debts that were outstanding from the 2005/06 financial year.

The Chairperson understood that the National Treasury had made audit fees an integral part of the allocations to Government entities.  If this was the case and the provision for audit fees were spent on something else, would this not be categorised as unauthorised expenditure for which penalties could be imposed?

Mr Makwetu replied that when budgets were submitted for approval, audit fees were a line item and if the fees were used for any other purpose, it would be considered to be unauthorised expenditure.  He asked if the respective Parliamentary Committees held those officials responsible for making unauthorised expenditure payments to account.  He said that something needed to be drawn up and tested with the Committee on holding financial officers to account, particularly in the municipalities.

The Committee asked what factors had influenced AGSA in setting a limit of 5% on income from the participation in international audits.

Mr Makwetu replied that AGSA was currently in a tripartite relationship with China and France and there were many encouraging signs of satisfaction from the United Nations agencies.  A lot of field work was done in peace-keeping zones, which were not conventional auditing environments.  South African auditors were well regarded but the exposure of AGSA staff to international auditing had to be restricted because of the local responsibility.  A limit of 5% in income generated from international auditing activities was considered appropriate.

The Committee queried the expenditure of R771,000 incurred by AGSA for 50 Soccer World Cup tickets.

Mr Makwetu said that AGSA had been transparent over its involvement.  The Auditor-General had invited other Auditors-General, mainly from the African continent, to encourage exposure to the country prior to the hosting of the XX International Conference of Supreme Audit Institutions (INCOSAI) in South Africa in November 2010.

The Chairperson noted that there had been a general improvement in AGSA’s overal performance in a number of strategic areas, which was commendable.  He said that the sentiments of the Committee would be captured in its report, which would be completed during the Parliamentary recess.

The meeting was adjourned.


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