Auditor-General South Africa Annual Report 2010/11: First briefing

Standing Committee on Auditor General

08 September 2011
Chairperson: Adv T Masutha (ANC)
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Meeting Summary

The Auditor-General, Deputy Auditor-General and Chairperson of the Audit Committee of Auditor-General South Africa (AGSA) gave the first briefing to the Committee on the AGSA Annual Report. The Audit Committee consisted of four independent, non-executive members, none of whom were employed by organs of the state. Particular attention was paid to reviewing levels of independence, and there was a strict requirement that no auditor selected to perform the audit function on AGSA should derive more than 10% of its income from audits done for AGSA. Kwinana and Associates were the external auditors. They were satisfied with the controls in place in the AGSA office that allowed it to produce reliable financial statements. The report set out the outcomes of the objectives set out in the Strategic Plan and budget for 2010 to 2013. AGSA had a primary commitment to making a positive impact on public sector accountability, and must therefore deliver audit reports that clearly established the state of financial and performance management in public institutions and entities. It had performed 400 assignments in respect of the Public Finance Management Act and Municipal Finance Management Act. It aimed to increase implementation of audit recommendations, and in order to do this, leadership of AGSA maintained a high-visibility programme and ran annual roadshows. AGSA had been awarded the prestigious Jörg Kandutsch Award in recognition of its exceptional implementation of INCOSAI goals, both regionally and globally. It aimed to strengthen its human resources by motivating staff and developing a highly-skilled, highly-performing and diverse workforce.  It had streamlined its executive performance management, and had filled 89% of posts.

AGSA continued to monitor the revised funding model implemented in the 2009/10 financial year, closely monitored its margins, effectively managed its working capital and currently had a healthy cash flow. Audit income had amounted to R1.85 billion, a slight improvement on the budgeted R1.836 billion. It constantly reviewed its funding model, and had exceeded its net surplus target by increasing audit process efficiencies. It had maintained its margins at 30%, and operating expenses accounted for a slightly lower percentage of revenue than in the previous year. Its hours-revenue had increased by 15%.  It still experienced challenges with debt collection, particularly recovery of audit fees from municipalities, and was currently owed R167 million in this regard, and debtors days outstanding was at 204 days. In the following year, AGSA would again focus on monitoring its margins and working capital, including debt collection and the optimisation of contract work, to ensure that gains achieved in the previous year were sustained. It would increase its efforts to engage with stakeholders to encourage clean administration.

Members congratulated AGSA on the report and on its work and high reputation. Questions were raised on debt collection, and AGSA was asked to give a breakdown per province, and to indicate whether National Treasury was consulted about budget constraints in municipalities. Members asked why AGSA did not purchase its own offices, questioned the reasons why it had not always managed to meet the timelines for investigation reports, and asked for more clarity on the high credit control figures. They were concerned that AGSA might be under financial pressure, and asked about the margins and tariff structure. Members also asked whether staff were required to enter into performance contracts, and whether they had completed financial disclosure forms. They enquired whether there had been surveys on satisfaction levels of auditees, the framework adopted, and what could be done to assist entities that were not able to produce proper financial statements.

The Committee adopted minutes of meetings on 2, 9 and 30 June 2011.

Meeting report

The Chairperson welcomed the Auditor-General (AG) and the representatives from the Audit Committee of Auditor General South Africa (AGSA). He noted that the meeting would discuss the AGSA Annual Report and hear about the functioning of the audit institutions.

Mr Terence Nombembe, Auditor-General, gave a brief introduction to what would be covered, and noted that in this meeting the Committee would be briefed on methodology, whereas more detailed debate and deliberation would be handled at the meeting in the following week.

Mr Timi Makwetu, Deputy Auditor General,  commented that the representatives from the Audit Committee would not be attending the second meeting, so they would address the Committee at this meeting.

Mr Peter Moyo, Chairperson: Audit Committee, AGSA, expressed his thanks to the Auditor-General for his dedication and high work ethic. Mr Moyo explained that the Audit Committee consisted of four independent, non-executive members, none of whom were employed by organs of the state. Mr Moyo assured the Committee that the report was both clear and concise.

Mr Moyo added that his Audit Committee had executed its duties and responsibilities during the financial year in accordance with the terms of reference relating to the AGSA’s accounting, internal auditing, internal control and financial reporting practices. During this process the Audit Committee had worked hard to review levels of independence. It had ensured that the external auditor and internal auditors selected did not, in accordance with the practice, derive more than 10% of their income from audits performed for AGSA.  Kwinana & Associates had been nominated as the external auditors to SCoAG, and it was ensured that this appointment complied with all applicable legal and regulatory requirements. The Audit Committee had approved the external audit engagement letter, the plan and the budgeted audit fees payable to the external auditor.

Mr Moyo assured the Committee that the controls that were in place in the AGSA office were both adequate and effective, allowing it to produce reliable financial statements.

The Chairperson interjected to request that at this meeting, only compliance issues related to AGSA should be discussed, since broader concerns would be addressed in the next meeting.

Mr Makwetu explained that AGSA had submitted a strategic plan document in 2009, and that this report could be seen as a follow-up evaluation on how AGSA had performed since then. Mr Makwetu noted that AGSA was celebrating its centenary year and was also coming to the end of its term of providing professional expertise for the United Nations. He emphasized the importance of AGSA learning from experience, and then building on these strong foundations. This report would indicate the outcomes of the predetermined objectives set out in the AGSA Strategic Plan and Budget (2010-2013), and also to appraise Parliament of the AGSA’s financial performance for the year under review.

Mr Makwetu underscored that AGSA remained committed to making a positive impact on public sector accountability. He emphasised that in order to build public confidence, AGSA must ensure it delivered audit reports that clearly established the state of the financial and performance management in the public institutions and entities, and correctly diagnose the root causes contributing to the audit results. Part of the integrated approach encompassed the provision of information systems (IS) audit support to regularity audits. IS Audit coverage in respect of the Public Finance Management Act (PFMA), had increased by 8.5%, and coverage in respect of the Municipal Financial Management Act (MFMA) increased by 32%. In total, 400 assignments were completed throughout the PFMA and MFMA cycles.

Mr Makwetu also noted the AGSA wished to encourage the implementation of the audit recommendations, through its intensive leadership’s visibility programme to audited institutions (auditees), staff and oversight authorities. He considered this essential as the AGSA leadership was multi-directional and impacted on a variety of stakeholders, both internally and externally. The audit outcomes, both of the PFMA and MFMA, would be discussed during the annual roadshows conducted by the Auditor-General, with both the legislative and executive arms of the government, as well as other non-governmental structures.

He was pleased to announce that AGSA had been awarded the prestigious Jörg Kandutsch Award during the XXth Conference of the International Organisation of Supreme Audit institutions (INCOSAI), in recognition of its exceptional implementation of INCOSAI goals, both regionally and globally.

He also noted that AGSA wished to strengthen its human resources by creating a high-performance culture, motivating staff and developing competent leaders in AGSA. The key goal of the AGSA’s human resources strategy was to build a skilled, motivated, highly-performing and diverse workforce that would enable AGSA to deliver on its mandate. AGSA had made significant progress in streamlining the executive performance management, through the improvement of performance contracting and reviewing processes at Executive Leadership level. AGSA had filled 89% of posts, as compared to its target of 80%, and had established a Recruitment Centre of Excellence to deal with skills scarcity, trainee auditor retention strategy and comprehensive salary benchmarking. AGSA leadership were encouraged to continue adapting their skills to meet the evolving requirements, and ensure an appropriate leadership culture. In order to ensure business continuity, attention was paid to building an Executive “pipeline”. AGSA planned to ensure its financial sustainability and also to lead by example, delivering audit products of a consistently high standard and timeliness. At the international level, the successful hosting of the XXth INCOSAI enabled the AGSA to position itself, both globally and in Africa, as a supreme audit institution that  meticulously implemented its Constitutional mandate.

Mr Makwetu moved on the funding issues. In the 2010/11 year, AGSA continued to monitor the revised funding model that had been implemented in 2009/10. AGSA should be run economically, efficiently and effectively, in order to maintain its financial stability. AGSA closely monitored its margins, effectively managed its working capital (including debt collection), and optimised its contract work mix. For the past two years AGSA had enjoyed a healthy cash flow position, allowing it to meet its ongoing financial obligations and improve the payment of its creditors. The audit income for 2010/11 amounted to R1.85 billion, compared to the budgeted R1.836 billion.

Mr Makwetu also stressed that AGSA constantly reviewed its funding model to ensure that its fees remained affordable to the public sector. He noted that AGSA had exceeded its net surplus target of 4% by achieving 7.2% (R133 million). A portion of these positive results could be attributed to increasing efficiencies in the audit processes. AGSA had maintained its margins at 30% (compared to the budgeted 32%). Mr Makwetu commented that revenue had increased 13% when compared to 2010. Operating expenses accounted for 27% of revenue, a decrease from the 28% of 2010. Mr Makwetu also noted that AGSA’s hours-revenue had increased by 15% due to the growth in number of audit heads

With regard to debt collection, AGSA continued to experience a decline in the collection of audit fees from local government. Local government debt increased from R140 million in the previous year to R167 million in the current year. The bulk of the local government debt arose in the Eastern Cape, Northern Cape, North West and Free State. Debtors’ days outstanding had exceeded the target of 90 days, being as high as 204 days. He stressed that the inability of some municipalities and entities to settle their accounts would require that AGSA take stringent action to ensure the recovery of outstanding fees.

In closing, Mr Makwetu noted that in the next financial year, AGSA would focus on closely monitoring its margins and working capital, including debt collection and the optimisation of contract work, to ensure that gains achieved in the previous year were sustained. Mr Makwetu assured SCoAG that AGSA would continue to be a model organisation, both locally and on the international level. In addition, AGSA would continue to increase its efforts to engage with stakeholders to encourage clean administration. AGSA had remained focused on contributing to the continuous transformation of South Africa. AGSA believed that, through its professional activities, it had contributed to the well-being of the citizens of South Africa.

The Chairperson introduced the new Member of the SCoAG Committee, Ms A Dreyer (DA).

Ms Dreyer thanked the presenters for their comprehensive report. Nonetheless, she expressed concern about the information given on debt collection. She asked if a debt breakdown per authority or province was available. She also asked to what extent National Treasury had been consulted regarding the budget constraints in the low-capacity municipalities.

Mr Makwetu assured the Committee that the information on local government debt, and more comprehensive provincial statistics, would be made available electronically by the next meeting on 16 September, as well as much more comprehensive provincial statistics, in the form of a pie-chart representation.

Mr Makwetu assured the Committee that AGSA had been in contact with National Treasury in regard to  budgetary issues. He reiterated that municipalities in several provinces had ongoing issues relating to auditing fees, as a result of their inefficient financial environments. National Treasury could assist with the costs, where the audit fee represented more than 1% of the revenue.

Ms Dreyer, and the Chairperson, asked why AGSA continued to lease its offices instead of purchasing its own building.

Mr Makwetu explained that there were two main reasons. Until recently, AGSA had operated under a deficit, so the capital to purchase property could not be made available. AGSA could do an assessment of the relative benefits of purchasing and renting. However, it was not in the business of acquiring property. In addition, it was more feasible for AGSA to rent in order to maintain its flexibility and to adapt to changing needs, which might require it to expand or contract its staff and space requirements.

Ms Dreyer was also concerned with the low performance level of 50% for meeting investigation report timelines.

Mr Makwetu noted that a number of small entities falling within the PFMA had not submitted their annual financial statements, and therefore had not been audited for many years. In some cases, the cost of compiling these statements and the cost of the audit fee made it simply not realistic to carry out a full audit, because where the financial accounts were not comprehensive, or their staff were not qualified, they were very difficult to audit.  He referred the Committee to Note 7, which contained an explanation. Those larger entities that were allocated money had been audited.

An ANC Member also pointed to page 71 of the Annual Report and requested more details on the fraud issues.

Mr Makwetu responded that there was
synergy between the AGSA investigations and those of other agencies. Considerations set out in the International Standards of Account (ISA) 214 were taken into account. Investigations units would be used for the regularity audit, and he gave some examples of how this would be done. It was essential for AGSA to plan its audits using those with relevant expertise, as this ensured that AGSA’s operations remained efficient.

Professor L Ndabandaba (ANC) expressed his appreciation for the report and the commitment shown by AGSA, whose work was very broadly respected.

Dr D George (DA) echoed the sentiments of Professor Ndabandaba. He requested clarity on the large figures in respect of credit control, as reflected in the notes.

Mr Makwetu responded that AGSA had to make provision for credit control, because some of the debtors were
financially impaired. AGSA had identified illiquid debtors who owned about R36 million. This was not to say that the amounts were already written off, but they were accounted for.

Dr George also questioned the comment on page 117 about the National Treasury advances, noting that not the full amount requested had been granted. He was concerned that AGSA might be under financial pressure and asked for comment.

Ms Dreyer asked if all staff had performance contracts. She also asked if the financial interest declaration forms that were required of public servants were submitted on time. She stated that issues around performance agreements and ethics should be dealt with in the Committee’s Report.

Mr Makwetu responded that every level of staff in AGSA was required to enter into a contract in writing, and this included terms around
performance bonuses and commitments. The ISQC 214, of the Independent Regulatory Board for Auditors dealt with ethics, and there was an ethics unit to advocate ethics. In terms of this, an annual declaration of potential conflicts of interest must be made.

An ANC Member asked if there had been any surveys of the satisfaction levels of the auditees.

Mr Nombembe reported that surveys had been conducted about three or four years previously, and the results of those had been used to structure the AG’s interventions and approach, which in particular emphasised simplicity and visibility. AGSA felt that it would not be appropriate to conduct annual surveys, but would prefer to have more directed surveys on its response to identified concerns or issues. He thought that it would never be possible to achieve full satisfaction.

The Chairperson asked for more information on the determination of tariffs.

Mr Nombembe noted that AGSA set a fee structure that was below market rates. AGSA was not a profit-driven organisation, but it tried to maintain a margin of about 4%, to ensure that some funds could be set aside as a small surplus for when they were needed. He added that the tariffs were published annually by the South African Institute of Chartered Accountants (SAICA).

The Chairperson asked about the audit budget framework design, and issues that arose consistently during audits.

Mr Nombembe noted that AGSA had adopted an approach whereby all special audit units were integrated with the work of the regulatory audit units – for instance, supply chain management for horizontal audits. This was a specific and implementable approach to the audits.

The Chairperson also commented that the Researcher’s Report should be confirmed by AGSA.

The Chairperson commented that there seemed to be a need, in respect of the municipalities, to find a way to assist the Chief Financial Officers in doing their preparatory work properly, which would reduce the audit fee, without actually writing up the books for them.

Mr Nombembe noted that he could provide the Committee with an analysis of auditee inefficiencies that tended to raise the audit fee. If these inefficiencies could be reduced, then the audit fee could be reduced. However, the question was how to conscientise government about weeding out these inefficiencies.

It was agreed that the researcher would submit a list of written questions to the AGSA by Wednesday.

Other Committee Business
Chairperson raised the International Study Tour to Canada, and noted that this was chosen as Canada was an upcoming example of quality performance auditing. While South Africa was itself setting a great example, it could always learn from other international examples. Confirmation was awaited from the House Chair and he would follow up on this.

He noted that the RemCO issue had been raised with the Speaker, for referral to the President.

Adoption of Minutes
The Committee adopted the draft minutes of meetings on 2, 9 and 30 June 2011.

The meeting was adjourned.


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