Auditor-General SA Annual Report 2011/12: briefing by Deputy Auditor-General

Standing Committee on Auditor General

14 September 2012
Chairperson: Adv MT Masutha (ANC)
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Meeting Summary

The Audit Committee commented on the Annual Report of the Auditor-General South Africa, saying it was the fifth time that it was reporting to the Committee that in its opinion, the Office of the Auditor-General was well run and, during the year under review, there was nothing significant that came to the attention of the Audit Committee. In its opinion, the Office of the Auditor-General was a going concern and the financial statements presented fairly the affairs of the Office. The one area of risk it had identified was the need to resolve the issue of remuneration for the Auditor-General as succession would need to be looked at very shortly.

Members asked questions about the remuneration of the Auditor-General and the fees on internal audits and consultants paid by the Office of the Auditor General.

The Deputy Auditor General focused on the highlights of the 2011/12 Annual Report and the achieving of Auditor-General South Africa’s commitments, its sustainability performance and an outline of the expected decisions from the Standing Committee on Auditor-General. The report on progress in achieving Auditor General South Africa’s commitments included details on clarity and relevance of messages; visibility of leadership, strengthening human resources, leading by example and funding.

In the discussion that followed, Members looked at huge outstanding debt owed to the Office of the Auditor-General by government departments and especially municipalities. The Chairperson asked if the Committee could play a role in terms of receiving audit reports as part of improving the progress in elevating the focus of the work of the AGSA. Questions were also asked about the Thuthuka Bursary Fund; the turnover rate at the AGSA; and what was the AGSA doing about its trainee accountants’ pass rate as it was as low as 11.8%.

Meeting report

Introduction by Chairperson
The Chairperson said the focus of the meeting was the presentation of the Auditor-General’s Annual Report which included the report of the Audit Committee which was going to indicate the outcome of the Audit performed on the Auditor-General South Africa (AGSA). The Auditor-General would join the meeting at a later stage as he was having a teleconference with his Chinese counterpart.

Auditor-General of South Africa Annual Report 2011/12: comments by Audit Committee
The Audit Committee delegation was led by its Chairperson, Mr Peter Moyo, and accompanied by Ms Nomvula Thombeni and John Beesman-Simmons. During the year under review, the Audit Committee had four members but at a later stage, one of the members took an appointment out of the country. There were now only three members but a process was ongoing to nominate and appoint a new member by November 2012. The Audit Committee was totally independent of the AGSA and the government of South Africa. The members were not employed by the government. The Audit Committee took measures to remain independent.

Mr Moyo told the Committee that the report from the Audit Committee was contained in the Annual Report of the AGSA on page 121. The Audit Committee wanted to raise a few observations and this was the fifth time that the Audit Committee was reporting to the Committee that in their opinion, the Office of the Auditor-General was well run and controlled effectively. More importantly, the officials of AGSA took control consciousness seriously even on minor issues.

During the year under review, there was nothing significant that came to the attention of the Audit Committee. The Audit Committee even went to the extent of requesting that minor housekeeping issues should be reported to them and it was pleasing to state that the AGSA took even the minor issues seriously. In saying that there was improvement, the Audit Committee assured the Committee that the amount of work that the Audit Committee had been putting into Office work was not diminished and it was still vigilant. For the democracy of the nation, it was important to ensure that the AGSA functioned very well and remained an example to every institution. In handling the minor issues which came to the attention of the Audit Committee, detail attention was given and the issues dealt with thoroughly.

The Audit Committee oversaw the newly integrated Annual Report which had increased transparency and the report which was being presented to the Standing Committee was an integrated report covering what had been done in the past. The Audit Committee reviewed and recommended to the Committee the retention of Kwinana Equifin Incorporated as external auditors. The appointment of the external auditors to the Office of the AG was a function of the Standing Committee and the Audit Committee merely made recommendations.

The Audit Committee also considered whether the annual financial statements reflected the financial position of the Office of the AG as at the end of the financial year. The Audit Committee considered whether the organisation was a going concern. In the opinion of the Audit Committee, the Office of the AG was a going concern and the financial statements presented fairly the affairs of the Office. The Audit Committee spent a lot of time looking at the reports of the internal and external auditors on the systems of internal controls, the effectiveness thereof and the adequacy of corrective action. The Office was working very well but there were very minor issues which needed to be attended to and monitored. The attitude of the Office of the AG in dealing with the minor issues was impressive.

The Audit Committee reviewed the AG’s risk management, governance and processes as outlined in the Risk Management Framework and, in line with the Audit Committee’s activities and based on internal combined assurance framework, the Audit Committee formed the opinion that the controls within the AG’s Office were adequate and effective to manage the risk. Following the review of the AG’s financial statements by the Audit Committee, the Audit Committee was of the view that in all material respects, the financial statements complied with all provisions of the Public Audit Act and fairly presented the financial position, state of affairs and financial operations of the Office.

The Audit Committee felt that the Standing Committee needed to deal with a major issue which was a risk. This was the issue relating to the finalization of the remuneration of the AG. It was a risk because it was so important that the Office was able to attract and retain high calibre people and if the situation was not dealt with, it was going to be difficult for the Office to attract people of the desired calibre. The matter was actually starting to pose a big risk and the Audit Committee urged the Standing Committee to attend to the matter urgently. The reason why the Office was still holding its top officials was because these officials were dedicated to the nation. The AG himself was not requesting a raise in his remuneration but the Audit Committee felt that the matter had to be addressed.

Ten years ago, the Office of the AG had only about 12 Chartered Accountants but today there were over 300 Chartered Accountants in the Office of the AG. It was important to prevent the loss of these officials.

Recommendations
Mr Moyo said that the Audit Committee recommended that the Standing Committee commence oversight on improving internal controls, governance and processes. The Audit Committee also recommended that the Standing Committee should note the report on the financial statements of the Office of the AG. The Audit Committee recommended that Kwinana Equifin Incorporated should be retained as the external auditors for the coming financial year from 1 April 2012 to 31 March 2013.

Mr John Beesman-Simmons, a member of the Audit Committee, said it was worth noting that the Office of the AG elected to be rated and get external assurance on the Global Reporting Initiative guidelines in terms of sustainability reporting. AGSA needed to be commended for that. There were a number of listed companies on the Johannesburg Stock Exchange that did not even go for this level of assurance. The AGSA was a trailblazer and it was a good thing.

The Chairperson asked Mr Beesman-Simmons to elaborate on the Global Reporting Initiative.

Mr Beesman-Simmons replied that the Initiative was about getting external auditors to give an opinion that the claims made in the Annual Report on sustainability were in fact valid and not exaggerated.

Mr Moyo said that the issue was that the reporting standards had moved to looking at issues of sustainability unlike audits which only looked at financial reporting. The sustainability reporting had to do with the treatment of people, stakeholder engagement and a level of assurance that the assertions made were valid.

Discussion
The Chairperson said that on the issue of the remuneration of the AG, the Standing Committee had been engaged on the issue for over a year with Alexander Forbes and following which recommendations were made to the President – conveyed through the Speaker of the Assembly. In terms of the law, the matter was now in the hands of the Presidency for decision. It had been some time and the Committee had been making follow-ups with the Presidency on progress. The Committee was also concerned that the matter be resolved urgently as it was left only about a year before the incumbent tenure came to an end and already there was the need to start thinking about the succession of the position of AG. Matter such as the remuneration could hinder the process.

Mr N Koornhof (COPE) asked why was it necessary to have consultant fees on the high side as indicated in the Annual Report. Why was there a drastic drop in the internal audit fees? The provisions for impairment were quite high and what was the reason for that. Where could members see the details of the fees owed to the AG? What was meant by ‘recoverable amounts’?

Mr Moyo replied about ‘recoverable amounts’, saying there was some work which the AG outsourced to audit firms so when these firms did the work, there was a claim from the Office of the AG. ‘Impairments’ were about the level of potential debts which were coming through as some of the municipalities were unable to pay the debts owed to the AGSA. The internal audit fees were usually reviewed and the drastic drop was just a matter of the timing.

Mr Beesman-Simmons said that on the provisions for impairments of R28 million, the trade receivables were broken down in the balance sheet in the Annual Report. This amount was largely due to the high outstanding balance on municipal audits.

The Deputy Auditor-General, Mr Kimi Makwetu said that the presentation on the Annual Report was going to cover the details of the position of the debtors, the associated explanations and the yearly movements of the items of expenditure which had been identified. On the consultants fees, the large amount was combined with the Information Technology services and consultants used to deliver audits on behalf of the AGSA.

Mr Moyo replied that the Audit Committee alongside the Office of the AG was looking into the matter of the fees owed to the AG, especially by municipalities.

The Chairperson said that the issue could be kept aside until the Annual Report was presented to the Committee.

Mr L Ndabandaba (ANC) congratulated the Audit Committee for the excellent job they were doing. As recommended by the Audit Committee, there was the need to finalize the matter of the remuneration for the AG so that the desired standards could be maintained.

Mr Moyo said that much of the credit for the excellent job should go the Management of the AGSA and the Deputy Auditor-General – as the Audit Committee was just an oversight mechanism – and the real work was done by the Office of the AG.

The Chairperson said that the Committee was going to at a later stage deal with the fees owed to the AG, especially at local government level, where there were huge amounts owed by municipalities. The Committee had to assist in finding a resolution to that challenge.

Presentation of the Integrated Annual Report by the Auditor-General South Africa
The presentation was done by the Deputy Auditor-General, Mr Kimi Makwetu. The briefing focused on the highlights of the 2011/12 Annual Report and on the outcomes of the predetermined objectives set out in the AGSA strategic plan and budget 2011- 2014. The briefing provided information to Parliament about the AGSA’s financial performance and achieving its commitments, its sustainability performance and an outline of the expected decisions from the Standing Committee on the Auditor-General.

The AGSA had submitted a strategic plan for the last financial year and the objectives of the AGSA were set out in the strategic plan. The Strategic Plan contained the mission of the AGSA. The AGSA was committed to communicating the root causes for poor fiscal and delivery performance and providing recommendations for improvement in a simple, clear and relevant way. Financial Management, service delivery reporting and compliance with laws and regulations were the specific areas of audit coverage on which the AGSA placed emphasis in its engagements and reporting.

The report on the progress of achieving the AGSA’s commitments included details on simplicity, clarity and relevance of messages; visibility of leadership, strengthening human resources, leading by example and funding.

Simplicity, Clarity and Relevance of Messages
During the period under review, the AGSA had succeeded in communicating clearly identified root causes for poor fiscal discipline and relevant actionable recommendations through its reports to government, oversight structures and the public. The AGSA had reported consistently on results against predetermined objectives and it had continued integrating the work of the specialized audit units into regularity audits to enhance the audit efficiency and effectiveness. The specialized audit units were: Performance Audit, Investigations, and Information Systems Auditing.

Between 2011 and 2012, the report on the infrastructure at provincial departments of Health and Education was tabled. The performance audit of the oversight and governance systems of the Department of Public Enterprises at its state-owned enterprises was completed and discussed with the department. The report on the use of consultants by government departments was going to be tabled in the current financial year.

Visibility of Leadership
Mr Makwetu said the AGSA was committed to encourage the implementation of audit recommendations through intensive leadership visibility programmes. In outlining the achievements with regards to visibility of leadership, Mr Makwetu said that the AGSA continued to share audit outcomes through the AG’s PFMA and MFMA annual roadshows. The AG had visited 61 municipalities in KwaZulu Natal and was consistently engaging with authorities on their prior commitments. The AG held strategic sessions with Municipal Public Accounts Committees (MPACs) and was fostering closer working relationships with public sector regulators and standard authors. The AGSA played a leading role in the international engagement programme and there had been increased media coverage. The AGSA had intensified internal stakeholder interactions to ensure strategic alignment and understanding of audit outcomes.

Strengthening Human Resources
The AGSA aimed to strengthen its human capital by cultivating a high performance culture, motivating staff and developing competent leaders. The successful implementation of the AGSA’s strategy and the achievement of its mandate were solely dependent on skilled and motivated employees. The AGSA had achieved good occupancy levels for two consecutive years. Staff turnover increased from 6.6% in 2010 to 15% in 2012 but it remained below the industry average of 17%. The Committee was presented with the highlights relating enhancing the effectiveness of the AGSA’s leaders, employee wellness, talent management, recruitment and retention. The AGSA had improved its partnerships with other stakeholders and there was continual learning and development. The Committee was updated on the Trainee Auditor Scheme.

Leading by Example
Mr Makwetu said that the AGSA led by example by delivering audit products of a consistently high standard, maintaining effective internal controls and following its transformation agenda. The AGSA was one of the few Supreme Audit institutions that fully implemented the international standards of auditing.
Mr Makwetu looked at audit standards and methodology, auditing of predetermined objectives and audit services management information systems.

During the period under review, the AGSA experienced a drop in its quality score from 77% in 2010/11 to 70% in 2011/12. The reason for the drop in the quality score was due to the continued increase of audit scope in supporting its auditees and the reduction of the supervision and review time on various components of the audit.

The AGSA achieved a clean audit report and it launched some legacy projects during the celebration of its centenary year in 2011. The employment equity profile of the organisation with regards to workforce profile, gender distribution and ethnic group distribution was provided.

Sustainability Performance Review
The report which was being presented to the Committee was the first integrated report of the AGSA and the organisation acknowledged the importance of environmental and sustainable development issues.

On social and environmental achievements, the AGSA had implemented environmental initiatives for electricity and water initiatives, paper recycling and waste management. The AGSA had invested R369 million into small and medium sized firms and it had sponsored 119 bursaries for previously disadvantaged students. It had donated to the Thuthuka Bursary Fund for Chartered Accounting students in collaboration with Limpopo and Fort Hare University. The corporate social investment spending of the AGSA had increased from R0.6 million to R2 million.

Funding
The AGSA had the commitment to ensure its financial stability and sustainability and it was also committed to running the organisation economically and effectively. Audit income had increased by 12.06% and the AGSA had achieved a surplus of R99.30 million. The gross profit remained at a target of 30% and indirect overhead costs were 28.51% of audit income as against 27.58% in 2010/11. Cash balance increased from R352 million to R415 million and creditors payment days was at 31 days as against a target of 45 days. Total debtors increased from R399 million to R480 million. Local government debt collection remained a challenge and the debt owed by local government had increased from R170 million to R206 million. Local government debtors’ days outstanding increased from 204 to 233 days.

The Committee was presented with local debtors per province from 2010 to 2012. The local debtors balance had more than doubled over five years from R101 million to R206 million. The three major provinces which owed the AGSA were Eastern Cape, North West and the Northern Cape.

The AGSA had set a net surplus target of 2.07% which was an amount of R45.99 million for 2012/13 and it believed that the amount was going to be adequate for re-investment in the organisation through capital projects and human capital development. The AGSA had received 1% assistance from National Treasury towards debt payment of some of the low capacity municipalities. During 2011/12, the AGSA request to the National Treasury was for R87.4 million while the National Treasury allocated a budget of R30.2 million. Charging interest on overdue accounts improved debt collection in all debtor categories except in the local government category. Where AGSA had invested time in building relationships with its auditees, debt collection had proven to be more successful and this was the case in Gauteng, Western Cape, KZN, Free State and Mpumalanga. It was noticed that the collections increased after the quarterly visits by the AGSA leadership to the auditees where they engaged on the issue of non-payment. Sending reminders to the municipalities just before they received their equitable share had ensured that payment for audit was a priority.

Decisions to be made by the Standing Committee
Mr Makwetu said that the Committee had to make decisions on retaining the net surplus by the AGSA and confirm the appointment of external auditors as per Section 38(4) and 39(1), of the Public Audit Act. The Committee also had to initiate the process for the appointment of the next Auditor-General due to assume duties in November 2013.

The Chairperson asked if the Auditor-General was going to interact with the Committee in the next week.

The Auditor-General, Mr Terence Nombembe, replied that he was going to interact with the Committee again in the next week when the Committee was deliberating on the expanded version of the report. The presentation of the day was merely to highlight major issues and also giving pointers to the Committee on what was significant. What was of importance was what the role of the Committee was likely to be in considering the United Nations resolution which was about strengthening the independence of Supreme Audit institutions and how it had to be directed towards the National Assembly. The Director General of the Department of International Relations and Cooperation had indicated that he was willing to provide guidance on the process and the formalization within the National Assembly. The issue had been included in the Annual Report so as to improve awareness.

Discussion
The Chairperson said that the Committee was going to have another meeting to receive the full report but the presentation was a pointer to major issues and to guide research in preparation for the development of recommendations to the House in consideration of the report. The issue of succession was an urgent matter and the Committee was going to find time to reflect on all the elements that needed to be taken care of in ensuring a smooth transition. Part of the complexity related to the legislation and whether, prior to the appointment of a new AG, there would be a need for the Committee to sponsor possible amendments to the Act that were pertinent to facilitating and streamlining transition. There were perceptions of an ambiguity in the Act with regards to the remuneration of the AG. There were also concerns about who should be dealing with the issue of remuneration for the AG. The Act provided that the Committee could make recommendations directly to the President without passing through the House but there were concerns on whether a Committee of Parliament could recommend directly to the President without passing through the House. Those were some of the perceived shortcomings in the Act. This was also one of the reasons the Committee was going to take a study tour so as to learn from international best practice.

The Chairperson asked if auditees had the capacity to facilitate the work of the AGSA so as to reduce audit fees. There was need to check if there could be interventions made in that regard. Municipalities had to improve their bookkeeping skills so as to reduce the hours spent by auditors and hence a reduction in audit fees. The National Treasury could help in this regard.

It was important to make clear who dealt with the general reports from the AG. The Committees in Parliament such as Finance, Cooperative Governance & Traditional Affairs, Appropriations and the Standing Committee on the Auditor-General had to start meeting jointly so as to look at the general reports and ensure that the issues raised in them were not lost and recommendations could be made.

The Chairperson asked if the Committee could play a role in terms of receiving audit reports as part of improving the progress in elevating the focus of the work of the AGSA. What were the medium to long term plans with regards to regularity, performance and compliance auditing? Was the handling of the turnover rate in the AGSA sustainable? The Trainee Accountants pass rate was of concern as it was as low as 11.8%. What was the actual situation and what was the AGSA doing about it?

Mr L Ndabandaba (ANC) asked why the donations to the Thuthuka Bursary Fund catered only for two universities. What were the chances of spreading the bursary to other disadvantaged universities?

Mr Makwetu replied that the Learning and Development Unit of the AGSA was a new unit charged with the identification and resolving of challenges of employees especially with academic progress. The AGSA was providing incentives to employees who were working. The AGSA was working with many institutions to ensure that those institutions could have the necessary accreditation. The AGSA did not work directly but it usually responded to the requirements of the Thuthuka programme. Support was given to academics and to the accounting and auditing fraternity of the university so that capacity could be improved. The academics were from various universities and not necessarily based at the particular institution.

Mr Makwetu said that the trainees were facing challenges in succeeding in the Board exam but AGSA was helping the trainees with interpretation and understanding of the subject matter. The trainees understood the technical work but they had issues with academic interpretation. The challenge was being handled.

Mr Ndabandaba asked if he could talk to the University of Zululand to get in touch with the AGSA so as to benefit from the Thuthuka fund.

The National Leader: Audit Services at the AGSA, Ms Tsakane Maluleke, replied that talks with the University of Zululand were in motion and the programme had been run in partnership with key stakeholders. The collaboration had worked effectively at the Fort Hare University and the next phase was with the University of Zululand.

Mr N Koornhof (COPE) asked what follow up and nurturing was done for those students who received the bursaries. With regards to audit debt, it was clear that some of the debt was bad debt because there was no means to pay AGSA. What was the AGSA thinking of doing about the situation because adding interests to the debt was just making a bad situation worse?

Mr Makwetu replied that AGSA had already identified actions to deal with bad debt and to facilitate recovery. Part of the reason for the large debt was the absence of adequately skilled financial officers. So instead of an audit being a confirmatory exercise, it became a long procedure which ended up being very costly.

Ms D Nxumalo (ANC) said that the information on local government debt was going to empower the Committee in effectively carrying out its oversight role of municipalities.

Ms Sithole congratulated the AGSA for the sterling work it was doing particularly on the international front as it was boosting the image of the country.

The Chairperson said that the detailed aspects of the questions would be responded to in next week’s meeting. He said that the Committee was going to attempt to get National Treasury and CoGTA to be part of the meeting so that they could provide guidance on areas within their competence.

Ms Sithole said that the investment in the training of auditees was a very good initiative which should be encouraged because it was going to improve the capacity and in the long run reduce audit costs. It was a big contribution to the state and the Committee should take out time to discuss the issue and ways of encouraging the initiative.

Update on International Study Tour
The Committee was told that the application for the study tour had been approved. The administrative issues were going to be announced during the week.

The meeting was adjourned.

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