AGSA Strategic Plan and Budget briefing; Auditor-General salary update; Committee Legacy report adoption

Standing Committee on Auditor General

07 March 2014
Chairperson: Mr K Moloto (ANC)
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Meeting Summary

The Auditor-General South Africa (AGSA) tabled a draft strategic plan and budget for 2014 to 2017 and noted that the draft would be formally presented also to the Fifth Parliament as a final document, when the Auditor-General, Mr Makwetu, would be present. The new anchor strategy for AGSA was in the process of being formulated. It was noted that for some time AGSA was enhancing its auditing processes in line with international standards and quality control. It was particularly focusing on improving the identification of root causes of problems, the quality of recommendations that it provided, engagement with stakeholders to try to achieve clean administration on their part, and improve its own organisational environment and staff morale, focus and work. Simplicity, clarity and relevance of messages were another key focus area because AGSA wanted to ensure that it got its message across to entities being audited in a way that would ensure their improvement. Visibility of leadership was also important, and it was emphasised throughout the presentation that AGSA did not merely visit and audit once a year, but actually tried to build up relationships with the auditees, through at least quarterly engagements and would help them to identify and correct problems proactively. This relationship was also having positive effects in persuading the auditees to prioritise payment of the AGSA accounts, because they understood the value of its services. AGSA  tried to execute its own mandate in an economical, efficient and effective manner. The targets for debt collection were high to try to maintain its profitability and sustainability, although there was a high debtor's book, at R500 million, of which around half was owed by local government. It tried to hire and keep a motivated, high performing and diverse workforce. Above all, AGSA tried to lead by example, in a manner consistent with a model institution. It also sought to ensure environmental sustainability.

Presenting the budget overview, it was summarised that AGSA had a 1% surplus in the 2012/13 financial year and had budgeted for another in this year. The total income was based on total numbers of “own hours” work, and AGSA explained what this comprised. It was trying to take back as much as possible of the work that it outsourced, but would do so on the basis of careful assessments of strategic audits. The budget tried to ensure that the best possible people were hired, and it was consistent with excellent operation methods built up over the last few years.

Members asked how this plan differed from the previous ones. Most of the questions put to the AGSA concerned the debt owed auditees, particularly the municipalities, and what AGSA had done to try to address this, with some suggestions finally being made that perhaps the Ministries of Finance, Cooperative Governance and AGSA needed to meet to work out a method to ensure that debts were recovered. AGSA explained that it ring-fenced some debt and focused on what it would most likely recover. It charged standardised rates, which depended upon the number of hours for audit, but it was aware that some municipalities were financially stretched and could not afford to pay, in which case it was prepared to enter into payment arrangements, with consent from National Treasury. One of the problems was highlighted as the fact that many municipalities did not have their books in order, which extended the process. Other questions asked related to the percentages of debt from the other spheres, whether it received support from other bodies, how it tried to increase capacity in audit committees in state institutions, and whether it offered courses.

Members adopted the 2014 Audit Directive. They also adopted the Committee's Legacy Report. Finally, it was noted that the Committee had communicated with the Auditor-General on his remuneration package and a letter confirming the terms would be signed by him, then sent to the Speaker and the President to ensure that he would be paid.

Meeting report

Auditor-General South Africa (AGSA) Draft Strategic Plan and Budget (see document) 
Ms Tsakane Ratsela-Maluleke, National Leader, Auditor-General South Africa, noted that the Auditor-General, Mr Kimi Makwetu, was unable to attend the meting as he was presently travelling in relation to the international responsibilities of the Auditor-General South Africa (AGSA).

She took the Committee through the plan and budget report. The strategic plan AGSA was presenting had been based on its former strategic direction, and it had finalised the document around November-December 2013. However, the newly-appointed Auditor-General (AG) was busy preparing his anchor strategy for AGSA, which would inform AGSA's plans and operations  from April 2014 . That strategy would be presented to the Fifth Parliament. The strategy before the Committee had no important changes, but merely set out initiatives to strengthen on AGSA's work over the last few years. The key commitments that informed AGSA's strategic initiatives were the five key goals, which simply were the translation of its mandate. 

Focus areas
Ms Ratsela-Maluleke then moved on to describe the focus areas in the strategic plan. She noted that the integration of AGSA's various types of audits saw it enhancing the nature of the root causes that it diagnosed, and enhancing the quality of the recommendations that it provided. AGSA also wanted to continue engaging with its stakeholders on how it realised the ambitions of clean administration. AGSA's executive team spent time looking at what the external developments were that could impact upon its ability to realise its projected organisational goals. It looked at the environmental context in a manner that allowed it to identify key strategic risks, and then developed initiatives that would mitigate those risks.

Simplicity, clarity and relevance of messages
AGSA's key performance measures focused on the clarity of its communication, the relevance of its root causes and the recommendations that objective 1 provided, looking to whether those recommendations added value to the system. The rating was given by the AG, based on what he experienced in consultation with key stakeholders and what he observed when he looked at key reports that AGSA had developed as an organisation. AGSA also subjected its internal audit product to similar scrutiny.

She noted that for a long time, AGSA had driven the process of enhancing how it audited in a way consistent with international standards and quality control. It had done well in this area and wanted to continue to do so, because this formed an essential element in the relevance of its message and its ability to lead by example as a supreme audit institution. AGSA subjected its procedures to review by the Independent Regulatory Board of Auditors (IRBA), to ensure that it upheld policies and procedures in line with international auditing standards.
Visibility of leadership
Within this goal AGSA focused on assessing how stakeholders perceived it, and also assessed the understanding of its work by external auditors, and also the ability to supply the recommendations that it provided.

Execute the AGSA mandate economically, efficiently and effectively
Ms Ratsela-Maluleke said that the surplus, as a funding measure, allowed AGSA to monitor effectively its income statement, profitability and to ensure that it built capacity to fund its own operational needs in a sustainable way. She pointed out that the targets for debt collection were very high, and this resulted from the fact that AGSA focused on collecting as much as it could from debtors. However, the Committee must also be aware that there was a high debtors' book. At the end of 2013, its debt was R500 million, and half of this was owed by local government. AGSA accepted that local government auditees did sometimes have a declining ability to pay, but it still tried to ensure that it collected as much as was possible.

Motivated, high performance and diverse workforce
AGSA focused on capacitating and inspiring its people to contribute extensively to its goals. There were three indices around improving the environment within which people operated at AGSA. However, these were noted as organisational targets, instead of individual performance targets, because it was thought that this would help AGSA get better diagnoses about what it needed to manage as an organisation, to improve the environment in which its people worked.

Leading by example
AGSA still thought it was important for it to operate in a manner that was consistent with a model institution, demonstrating operational excellence and leading by example in areas of governance, accountability and transparency. Included in that was having broad based and excellent accounts. One of the initiatives was goal 5 (gradual implementation of new audit software), which would bode well for better quality messages, and opportunities for better on-the-job training for its trainees.

Sustainability considerations in relation to the AGSA environmental operations underpinned AGSA's strategy and initiatives. This had been tracked for some time and AGSA had focused, since 2012, on strengthening its reporting on this point. It assessed its carbon footprint, paper utility and integrated all of those activities in its own reporting and accountability.

Budget overview 2014/15
Ms Ratsela-Maluleke presented the budget overview and said that it was informed by the key strategic initiatives presented, and AGSA's own experience over the past two years. The surplus to which she had made reference earlier was one accrued in the 2012/13 financial year. The surplus had been just under 1% and it was working on the same target for the next year. T

The total income numbers, which then also informed the percentage of total overheads, were assessed by AGSA's “own hours” and she explained that this was calculated in cases where AGSA used its own internal staff to do the work. The head-court, the available hours and ability to engage maximum efficiency daily during the auditing tasks were all taken into account. Improvements could be shown if AGSA was able to take back some of the work that it had had to outsource. That meant that it had to get more people into its establishment who would strategically select audits for AGSA to do internally, to enhance the relevance of its message and its bottom line.

Income statement overview
The increase in AGSA's overhead expenditure was informed by its own strategic drive to find and fund people, within its establishment, who could offer better operational support. It was also necessary to have the kind of leadership to create the type of environment that could develop and grow people, and also enhance their ability to work.

Ms Ratsela-Maluleke said that that current draft plan and budget was consistent with AGSA's operational methods over the years. It sought to enhance what it had already, and to leverage the platform created by the former Auditor-General Mr Nombembe, to allow it to perform even better on its  auditing methods.  

Mr N Koornhof (COPE) said that he did not see anything much different in this draft plan, particularly noting that once again AGSA was not being paid by local government. He  suggested that AGSA flag that issue when it returned to present the final plan to the fifth Parliament.
Mr A Mokoena (ANC) noted that R540 million was reported as owed by AGSA by municipalities. He wondered if the AGSA reports were intelligible to municipalities, pointing out that if the rural municipalities lacked some sophistication, it might serve well – although he realised this was a tall order- for AGSA to translate its report into the official languages of each  province, to make its message and recommendations more accessible and this would also make it more accessible to the public.

The Chairperson agreed that this was an important point to consider, and he would like to see the local population being able to participate in the decision-making processes of local Government. For example. He would like to see how his local Aganang Municipality had spent the money allocated by conditional grant, to see how their spending had impacted on his life, and, if they had not spent, he would like to be able to know this and then, at community meetings, be empowered to  participate meaningfully and ask the relevant questions. The Chairperson said that he recalled that 50% of AGSA's debt related to municipalities, and asked what the other 50% comprised – and whether AGSA could indicate the percentage owed by provincial and national government.

The Chairperson asked if AGSA could give the possible direction of the discussions it had had with the National Treasury (NT), and what type of result it anticipated this might yield.

Ms A Mofolo (ANC) asked if AGSA had a plan to collect the R540 million it was owed by local Government.

Ms S Shope-Sithole (ANC) asked if AGSA was getting support from the State and the South African Institute of Chartered Accountants (SAICA) in growing the auditing capacity across the board. She was worried about the capacity of audit committees in local Government. She believed that unless the State developed strong internal audit structures in municipalities, government would not get anywhere in improving the quality of audits that were produced.
Ms Ratsela-Maluleke said that AGSA did enjoy the support of the IRBA around growth and transformation. It was part of the broader drive within SAICA to improve the access of black people, in particular, into auditing. AGSA's own trainee scheme brought in young people from university level, to train with its audit teams, whilst they attended to writing their examinations towards qualification as professional auditors and accountants. AGSA also enjoyed support from the Finance and Accounting Services Sector Education and Training Authority (FASSET). AGSA worked well with the South African Institute of Government Auditors (SAIGA) as well as the Association of Chartered Certified Accountants (ACCA).

She agreed with Ms Shope-Sithole that audit committees, and the ability of those Committees to support the drive towards clean administration throughout all spheres of government but particularly in municipalities, relied on AGSA's ability - as a profession and a State entity - to increase the number of professionals who understood and operated in the auditing sector to support AGSA's work. The work that AGSA did in contributing towards growth in numbers was part of that journey.

It also worked well with the Institute of Internal Auditors (IIA) as part of the public sector committee, and there were initiatives that sought to prepare members for participation in Audit Committees, and to find individuals who were keen to contribute.  AGSA's training opportunities were generally geared to boost its own capacity as well as for the public and private sector.

AGSA's focus over the last few years had been in equipping the heads of state institutions, such as mayors, municipal managers and Chief Financial Officers (CFOs) to use AGSA's reporting. The focus on the visibility of AGSA's leaders was starting to bear fruit. Those leaders of those institutions were starting to understand the AGSA message, because they were spending that much more time with AGSA. AGSA officials would not merely “come and audit and leave a report”, but would spend more time, at least quarterly, with individuals, talking about the issues that municipalities had to focus on, in order to drive improvement. That enhanced AGSA's ability to walk with municipalities and improved levels of governance.

Ms Ratsela-Maluleke pointed out that AGSA also tried to ensure that it had a diverse workforce. Auditors were drawn from all over the country, and this was in part to ensure that it could engage effectively with stakeholders. Its auditors were able to engage with the Municipal Management (MM) in any area, in the language that was appropriate in that region. It was also driving the simplification of its reports. A MM would receive a management report that was clearly and simply expressed, to allow the MM to understand and take the necessary action. The audit report itself may be more formulaic and difficult to translate, because of how it was driven, yet AGSA was finding more creative ways to reach its audience in a powerful way.

Ms Ratsela-Maluleke spoke to the debtors book, and explained that the total (as at March 2013) was R500 million, of which R263 million related to local Government, R92 million was provincial Government, R65 million was National Government, and R55 million was from the statutory bodies. AGSA's main focus was on the collection rate at local government, because of the size of the book. The targets for collection in the draft Strategic Plan were high, because it wanted to focus to ensure that it collected. Part of that focus was about leveraging on the relationships that it built when it went to municipalities every quarter, to talk about the environment, internal controls, and the improvements needed to track the implementation of the recommendations that AGSA made. That built very effective relationships that allowed municipalities not only to see the value of what AGSA did, but to persuade it to prioritise the payment of the AGSA's account. AGSA also ring fenced some of its debts, so that it opened the lines for its debtors to pay it on the more current book, whilst also dealing with some of the legacy issues. It had, in some instances where there were real pressures faced by municipalities in financial distress, entered into payment arrangements. AGSA tried to collect as much as it could, whilst accepting the reality of financial pressures, and in the latter instances it would include National Treasury in the discussion. She agreed that this was an area that needed dedicated time and attention with the Fifth Parliament, and AGSA would be ensuring that it followed through on that.

Ms Mofolo did not think that her question had been fully answered and asked again if AGSA had a plan to collect the R540 million it was owed by local Government.

Ms Ratsela-Maluleke confirmed again that there were collection problems, particularly in municipalities. AGSA focused, as an organisation, on driving those collections, through targets that it cascaded down to the people who interacted with the auditees, and asked them to leverage on the relationship that they were building with the clients in a frequent and structured manner. It would also enter into payment arrangements in specific cases, or ring fencing arrangements in other cases, which was showing results. That was the case with many of the debts comprising the total municipal debt. However, there were municipalities that faced real constraints in paying, which was known also from an analysis that AGSA and National Treasury had done around the financial health of Municipalities. AGSA's own efforts had improved monitoring and incentivisation through targets. However, it was accepted that AGSA could only do so much. There was need for more conversation with the Fifth Parliament on how to address the issues in a more sustainable way.

The Chairperson asked whether NT had any proposals on how it could also remedy the situation, and maybe develop a mechanism for paying on behalf of those struggling municipalities.

Mr Mokoena asked if AGSA had differential rates of charging, for the different types of district, local or metro municipalities, and whether there was there any type of “amnesty” that might apply so that, for instance, after trying to collect from a particular municipality for a certain period, the debt could be written off.

Mr G Ndabandaba (ANC) asked if AGSA outsourced its research capacity, or whether this was it in-house.

Ms Ratsela-Maluleke said that the performance audit research was done in-house, as it was its own analysis of the environment, done to pro-actively identify areas that warranted further focus. That research incorporated the diagnoses done through its normal regularity audits and the regular root cause analyses . That also included the national priorities stipulated by Government. It was further informed by AGSA's quest to discover why some things did not work.

She added that AGSA had no shortage of staff or capacity in collections, because its staff were actively engaged in the work of collecting. She repeated, however, that AGSA was fully aware that some municipalities faced legacy problems. When interacting with those municipalities,  but it was aware that some municipalities had legacy issues that they were unable to deal with. In AGSA's interaction with those particular municipalities, it had entered into ring fencing arrangements. She said that this might, for instance, accept that a five-year old could not be addressed, but AGSA would rather then concentrate on the current debt. It would not merely write off, but would focus on those fees it could collect, in a way that incentivised the debtors to prioritise AGSA.

Mr Mokoena asked to what extent those ring fenced debts contributed to the R500 million, because not writing them off meant that the debt remained on the list and even expanded it.

Ms Ratsela-Maluleke replied that this was so, but the ring-fencing allowed AGSA to focus on current issues so that at least it did get paid something, and the R500 million did not grow exponentially.

She also clarified that AGSA did not have different rates for any sphere of Government and it simply allocated staff according to the requirements of an audit project. There were standard rates for each level of staff, and the number of hours that people spent on audits was really determined by the nature and scope of that particular audit, as informed by the International Auditing Standards (IAS) and its risk management processes. AGSA was always looking for more efficient ways to audit every auditee. One of the challenges around auditing in the municipal space was that the nature of their record-keeping did not always allow the books simply to be audited. She noted that most of the auditees that received disclaimer audit opinions did so because of the nature of record keeping, or the completeness of the accounts that were submitted to audit. That created inherent inefficiencies. AGSA would perhaps start auditing but the financial statements would have to go back for corrections. If the State could reach the point where every single auditee submitted annual financial statements and performance information that did not require any corrections during the audit process, then it could get sustainable and serious results, without having to correct, wait or re-audit.

Ms Shope-Sithole recalled attending a workshop on record keeping by AGSA and said it could help if this could be rolled out further, and on a regular basis. She thought people had still not realised the importance of record keeping.
Ms Mofolo said that AGSA seemed to be generalising by saying municipalities were struggling to pay what they owed to AGSA and she was also not happy with the NT assertion that “municipalities are struggling”. She wanted more precise numbers. She would like to see more tangible and concrete plans – such as the workshops alluded by by Ms Shope-Sithole. She asked what AGSA had done to ensure that the issues it diagnosed were not repeated, and how it empowered communities to assist in the monitoring.

The Chairperson noted that time was short. He asked AGSA to remind the Committee of its audit directives.

Ms Ratsela-Maluleke said that the comment on generalisation was well taken, but AGSA had tried to summarise in which category of debtors there were significant collection challenges. She had not intended to say that every single municipality who owed AGSA would not pay. NT had done an analysis of those in distress, but AGSA also did that as part of its audits. AGSA was careful to “walk with” municipal leadership, addressing the underlying root causes that contributed to financial distress, which were poor record keeping, poor management of working capital and ineffective planning. All of those would be diagnosed and higlighted in the year-end audit report but also in its quarterly interaction with municipalities. It did a lot of work that contributed towards enhancing the ability of municipalities to address the barriers towards better governance, and achieve better operational efficiencies.

She confirmed that AGSA was currently running record keeping seminars. Its communication strategy currently took into account its ability to engage with citizens. For example, when AGSA launched its local Government outcomes it had spent a lot of airtime on radio just to talk about what those outcomes and reports meant.

She then informed Members that the Audit Directive for 2014 had no significant changes. She explained that it was a document that informed how AGSA's audits in the public sector were to be conducted by private sector entities, where they were used. Every year, AGSA would enhance this to ensure that the work AGSA did to enhance the relevance of its messages would be also done by anyone auditing in the public sector. The core areas were the way in which audits ran. The risk was identified in more detail. The root cause analysis must also support AGSA's work. Any amendments were intended to ensure that AGSA and its outsourced auditors did their work in the public sector in a standardised way.

Consideration and adoption of the Committee's Legacy report
After a short break to allow Members to go through the report, the Chairperson asked that Members should concentrate on the formulation of recommendations.

Mr Koornhof felt the content advisors should add something in around the questions he had raised.

Mr Mokoena added that the Fifth Parliament's committee should be asked to suggest that municipalities should transfer payments owing to AGSA immediately, to avoid the budget for audits perhaps being used for the municipalities' own operational costs. National Treasury should focus on the ring-fencing and ensure that the amounts were transferred directly to AGSA.

The Chairperson proposed a slightly amended formulation, saying that possibly the next Committee on the AG should engage with NT on that matter and try to find a solution, because the challenge of ring fencing, as already presented by AGSA, was worsened when municipalities were in financial distress.

Mr J Steenhuizen (DA) added still further to that, pointing out that it had been recommended in a previous meeting that meetings needed to involve two Ministries, with the AGSA. AGSA had also said it would explore another suggestion, which was top-slicing off one of the grants administered by the Committee for Cooperative Governance and Traditional Affairs (COGTA), to pay for the AGSA fees. That suggestion indeed needed the Ministries of Finance, Cooperative Governance and Traditional Affairs and AGSA to work together on a possible model for collection of payments, particularly for the municipalities who could afford to pay, but were not doing so.

The Chairperson said that the Committee seemed to agree on the principles, but it just needed the proper formulation.

Mr Mokoena said that this Committee had a challenge in meeting only infrequently, and he would like to see it having more meetings with the AG, to get interim reports to assist the Committee to gauge if there were any problems, and assist if there were.

Ms Shope-Sithole agreed that indeed the frequency of meetings needed to be increased, because the  once-off meetings limited the Committee in dealing effectively with issues.

The Chairperson asked for suggestions on better formulations for its recommendations.

Mr Steenhuizen suggested that the formulation might be “the Committee recommends that a meeting be convened between the Ministers of Finance and Cooperative Governance and Traditional Affairs, to discuss the outstanding debt owed to the AGSA from municipalities, and to jointly establish a mechanism to recoup that debt.

The Chairperson assumed that the Report could be accepted by Members.

Mr Mokoena asked that the Report be formally adopted following the correct procedure.

The Committee noted its agreement with the recommendations, and then formally adopted the Report.

Update on Auditor-General’s salary
The Chairperson reminded the Committee that a package had been distributed, giving some background on the fixing of the Auditor-General's salary. There had been communication with Mr Makwetu, who had written back to say that it should be incorporated into a formal contract, with terms and conditions, so he could sign his acceptance.

His office would thus now write to the Speaker, who would then write to the President, and Mr Makwetu would be paid with effect from 1 December.

Adoption of Audit Directive 2014
The Chairperson noted that the 2014 Audit Directive must  be formally adopted.

Members moved, seconded and adopted the Audit Directive for the coming year.

Consideration and adoption of Committee Minutes
Minutes of 1, 6 and 13 November 2013

The meeting was adjourned.


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