Auditor General of South Africa on its Annual Report for 2012/13 3/2014: Audit Committee Report

Meeting report

Election of Chairperson

Mr K Moloto (ANC) was elected as the new chairperson of the Committee.

Chairperson’s opening remarks
The Chairperson said the focus of the meeting was the presentation of the 2012/13 Annual Report for the Auditor-General South Africa (AGSA), and this would include the presentation of the Audit Committee indicating the outcome of the audit that had been performed on that entity.

Report of the Audit Committee on the audit of the Office of the Auditor-General South Africa
The Audit Committee representative reported that AGSA should be commended for the standard of work done in the 2012/13 financial year. The Audit Committee oversaw the integrated Annual Report process. It reviewed and recommended the retention of KwinanaEquifin Inc. as the external auditors of AGSA, for a period of three years. The Audit Committee was satisfied that the financial statements fairly represented the state of the organisation, and that AGSA was a going concern. The Audit Committee had considered the reports of the internal auditor, in conjunction with the reports of the external auditor, and had reviewed the adequacy of corrective action taken by AGSA. There was a low level of items requiring action, and AGSA, with the utmost seriousness, tracked any audit issues which had been identified. The AGSA risk management processes and the actions taken to mitigate risk were reviewed. Internal controls were operating adequately and effectively. The financial statements complied with the Public Audit Act (PAA) and fairly represented the financial position. Overall, the Audit Committee commended AGSA on improving the internal control environment and its governance and risk management.

The Chairperson asked the Audit Committee whether they were comfortable that no familiarity had developed between the external auditors and AGSA.

The Audit Committee said it was difficult to give an answer to that, as the Audit Committee only met three or four times a year, but that KwinanaEquifin were very professional and the Audit Committee did not believe there was over-familiarity between the two entities.

Dr D George (DA) asked what process was followed to reach the decision to employ KwinanaEquifin.

The Audit Committee said a thorough process was followed, starting with the publication of a “Request for Proposals”. Only two firms had responded, as many were disqualified by the stringent requirements. The Audit Committee had not been satisfied with the initial responses, and republished the request. KwinanaEquifin, meanwhile, had taken steps to address issues which the Audit Committee had raised as being of concern. In the absence of significant underperformance or overruns on budget, AGSA would remain with the existing auditors, as changing audit firms was disruptive and took up a lot of management’s time. The Audit Committee was recommending the appointment of KwinanaEquifin for three years, subject to an annual review.

Mr Kimi Makwetu, Deputy Auditor-General, said AGSA had satisfied itself that KwinanaEquifin was eligible to be reappointed. KwinanaEquifin’s partners and staff did annual conflict-of-interest declarations. Mr Makwetu also explained that most audit firms were disqualified from being auditors because they did work for AGSA leaving only three or four firms eligible. It was a condition of the bid proposal that the auditors of AGSA could not do contract work for AGSA.

The Audit Committee said that, in regard to assessing the King III code of corporate governance, the Audit Committee met with internal and external auditors, without management being present. The auditors were asked whether they wanted to raise any issues, such as undue pressure being put on them to suppress any findings.

The Chairperson asked what the policy on non-audit services was.

The Audit Committee said there were guidelines regarding this, but it did not believe there were non audit services in the year under review.

Mr Makwetu said that if AGSA supported a proposal by the external auditor to do non audit services, but such services would require the approval of the Audit Committee.

Integrated Annual Report of AGSA
Mr Makwetu said the current (but outgoing) Auditor-General, Mr Terence Nombembe, would have been happy to be present as it was the culmination of his seven year journey with AGSA. The Annual Report was effectively about strengthening democracy through auditing, by enabling accountability and oversight by government and the public sector.

He said an important event had occurred in the previous week. It was the handing over of the three year presidency of the International Organisation of Supreme Audit Institutions (INTOSAI) to China which had hosted the congress in Beijing.

One of the major outcomes was the Beijing Declaration, which had relevance to the Annual Report. The Beijing declaration, by all the 192 Auditors-General, said supreme audit institutions could help by enhancing transparency and ensuring accountability by promoting performance and fighting corruption, thus improving national good governance and increasing fairness. The feedback on South Africa’s involvement internationally was that South Africa was in the forefront in regard to its audit capabilities. The Congress discussed the national audit as being an instrument for good national governance, and national governance was seen as a critical element in all the initiatives to attain the United Nations developmental goals after 2015.

Mr Makwetu noted that this presentation would cover the five key goals of AGSA. AGSA was also reporting on a new area in the Annual Report, being that of ssustainability of its performance, which looked at how economically resources had been procured, and how efficiently and effectively they were being used.

The five key goals of AGSA were as follows:
-commitments to simple, clear and relevant messages capable of being understood by all stakeholders
-visible leadership to encourage response and action by their stakeholders
-the development and strengthening of human resources to deliver on their mandate
-leading by example to demonstrate that clean and effective administration was possible and achievable
-using funding in a way that did not waste public resources, and executing operations in an economical, efficient and effective manner.

AGSA had tabled 20 general reports. It had piloted interim audits of annual performance plans to enable corrective actions earlier in the process, and had published the performance audit report on the use of consultants, which had generated significant interest and awareness.

Briefings to the Portfolio Committees had increased in number, and AGSA had held quarterly interactions with portfolio committee chairpersons. There was also an increased interest by the executive authority for key control visits. The AGSA also completed municipal visits in all nine provinces. It had participated in INTOSAI working mechanisms and it had hosted study tours from Libya, Kenya, Uganda, Bahrain, Namibia, China, Jordan, Ghana and Nigeria.

Audit income had increased by 6,75% to R2,214 million (m). Gross profit was R641m, while overheads had increased by 18% to R688m. Total debtors increased from R480m to R517m. In this regard, debt collection from local government remained a challenge, with the debt increasing from R206m to R262m. There was an increase in bad debt provision from R74m to R115m. The net cash inflow of R129.2m was used to fund acquisitions of assets to the value of R67.1m and to repay finance lease agreements of R13m. 

The number of newly qualified audit professionals increased by 36% from the previous year. The total expenditure on their study support and development was R65m. The registrations for the trainee auditor learnership programmes increased by 23%, from 2012. The pass rate for the external bursary holders increased to 68,6% from the previous year’s pass rate of 51,7%. The use of the fixed-term contract as a staffing model was abolished, and the ethics policies and procedures were revised to ensure they remained relevant and in line with best practice. AGSA introduced the public sector awareness programme, aimed at assisting AGSA to get a better understanding of the public sector auditing environment. Funding of R3m was given to the University of Fort Hare to maintain their SAICA accreditation, with a view to supporting the transformation of the accounting profession in the country.

AGSA had established policies and procedures designed to provide reasonable assurances that the system of quality control in AGSA was relevant, adequate, operating effectively. AGSA had strengthened the risk management processes. It had maintained its Broad Based Black Economic Empowerment (BBBEE) status level, with 87% of the Business Units being level 2 contributors. AGSA had committed itself to provide funds to prospective students in auditing and accounting, and 34 students would be offered the opportunity to pursue careers in accounting or auditing through the AGSA Centenary Scholarship Fund.

AGSA had implemented two new environmental initiatives: Waste minimisation and management, and Business Travel optimisation.

Discussion
Mr J Steenhuisen (DA) asked about the local government debt. He asked if there had been engagement with the Department of Cooperative Development and Traditional Affairs (COGTA) in redeeming the debt owed by local government and municipalities, as it was getting worse, with some of the debt reaching the point where it would have to be written off.

Dr George acknowledged the good work of the AGSA and said he had wanted to personally thank Mr Nombembe, the outgoing Auditor-General. He felt that perhaps the process of accountability needed more legislative teeth, pointing out that AGSA currently had no mandate to enforce the outcomes it reported. He wondered what the Committee could do to assist and ensure that the AG’s work did not become irrelevant. He asked for comment on the forensic investigation unit of AGSA.  He also asked if there had been engagement with Treasury on the funding model of AGSA, as it needed to be adequately funded.

Mr N Koornhof agreed with his colleague’s point on debt and said the matter should be flagged for inclusion in the report for the new Committee and Parliament.  He noted that overheads had increased by 18% which was three times the inflation rate, and asked whether the overhead increase for the following year would be less. He asked what the percentage pass rate was for trainee chartered accountants, and how this compared to the national average. He also wanted to know why the schools program in the Eastern Cape, Limpopo and the Northern Cape was reflecting such low percentages.

Mr N Singh (IFP) wanted AGSA to give a report on how the public spat had occurred between the Chief Executive Officer of Passenger Rail Agency South Africa (PRASA) and the AGSA. Parliament must protect the integrity of the AG. He shared the sentiments of his colleagues regarding the debt issue. He wanted clarification on the special audit services reserve of AGSA of R4.9m. He asked for clarification on the major increase in legal costs from R378 000 to R1.462m. He finally asked if the students who benefited from funding by AGSA were honouring their commitment to serve AGSA after they graduated.

Ms S Shope-Sithole (ANC) thanked the AGSA for flying the South African flag high in the auditing world. She also thanked it for visiting municipalities.

The Chairperson said he agreed with Mr Singh on the need to protect the integrity of the AG’s office as well as on the level of indebtedness. He asked for clarification why the amortisation of software was so rapidly written down. 

Mr Makwetu replied that the Government Employee Pension Fund (GEPF) matter of R4.04m had been resolved.

Mr Makwetu noted that in regard to the local government debt, the matter had been raised with COGTA over the years, as the debt amount grew. Although it had not been raised with the current Minister, it had been raised with predecessors.

Mr Makwetu said he took note of the proposal of a hybrid combination of funding models for AGSA.

In regard to the role of AGSA, he said AGSA had a forensic investigation unit but that the landscape had shifted with the advent of the Special Investigating Unit (SIU), which was now doing a lot of the investigations which, in the past, the AGSA’s Forensic Investigation Unit (FIU) would have done. However, in addition to forensic investigations, the FIU did fraud risk assessment exercises. He said it was not a growth area for AGSA.

Mr Makwetu did not foresee significant growth in overheads, which should be less than 10% in the future.

Mr Makwetu confirmed that AGSA would provide a full written report on the PRASA matter.

Mr Makwetu explained that the special audit services reserve amount of R4.9m preceded his time in office of over seven years. The amount had been constant and was available for special assignments that were not normally budgeted for.

Mr Makwetu noted, in relation to the legal costs, that a municipality had been in a dispute on supply chain management with AGSA, and wanted to get access to AGSA’s work papers. AGSA normally put up a defence and engaged legal counsel in such instances.

In regard to the questions about the students, he noted that AGSA followed up students who had benefited from the bursaries and funds. Many were signed up on AGSA training programmes. In relation to the schools program, he explained that this was a programme where provincial offices would be asked to voluntarily embrace and nurture rural schools, and expose them to the different options in the accounting field.

He said that, in the past, two or three staff with AGSA had passed the Chartered Accountant exam. Currently 500 people were in the programme, and 160 people were sitting for their exams in November.

A member of the AGSA delegation said the amortisation of software was done because there had been a significant investment in servers, and new software had been required. The old software was thus de-recognised.

Ms Shope-Sithole said the Committee should meet with the Standing Committee on Public Accounts (SCOPA) on the PRASA matter.

Mr Singh said that SCOPA had resolved that PRASA and the AGSA must report back to SCOPA, and he said that they should be asked to report back to SCAG also.

Mr Makwetu said that the update for the strategic plan needed to take into account that AGSA was in the middle of a changeover of Auditor-General, and also that Parliamentary elections would be held in the coming year.

Mr Koornhof proposed that the recommendation to use the external auditors KwinanaEquifin Inc. be ratified.

The Committee agreed to this.

The Chairperson noted that the Committee’s report on the AGSA Annual Report would only be adopted later in the week.
 

The meeting was adjourned.