AGSA Strategic Plan and Budget 2014 to 2018: Auditor-General briefing

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Meeting Summary

The Auditor-General (AG) was asked, prior to presenting the Strategic Plan of the Auditor-General South Africa (AGSA) for 2014-18, to try to deal with some of the questions asked at a previous meeting, incorporating the explanations into the presentation, and Members asked some further questions arising from the previous presentations, in relation to the surplus reflected on its books, despite the fact that it also noted that it was owed substantial debt, particularly by municipalities, and whether the surplus was reflective of the allegedly high audit fees, and whether AGSA charged interest on debts owed to it. Members also asked whether AGSA did any forensic auditing, suggested that it would be useful for AGSA's Internal Audit Unit to brief the Committee, wondered if there was any tension in the reporting lines, since audit units were often reporting to those more senior than themselves, and asked about the selection process of undergraduate students for training and scholarships, the length of time for which external auditors were contracted, and more detail on the adoption of schools and whether programmes should not be targeted for the lower grades also. They asked about AGSA's promise to pay its creditors within 30 days, how it ensured compliance with black economic empowerment principles, and more detail on the appointment of its own auditors.

The Auditor-General (AG) presented the draft Strategic Plan and Budget, for 2014-2018, of the Auditor-General South Africa (AGSA), the supreme audit institution of South Africa. He noted that  AGSA aspired to ensure a public service that was characterised by robust financial and performance management systems, good oversight and accountability, commitment and ethical behaviour by all, and a competent and value-adding AG. He explained how this had been planned over the next ten years and how the values were reflected in the National Development Plan and medium term plans. The business model of AGSA was explained, including a list of the mandatory audits, and its spread across the nine provinces, as well as the functions that its staff performed and their spread of expertise. It was noted that AGSA had a robust costing exercise to determine how long an audit should take, that the nature and extent of work was agreed upon with the auditee and invoices raised, which were recorded in the books as a "request to pay", and which essentially made up the surplus, although if it was not paid, this would then be reflected as a debt. The nature of its investigations was explained, and it was stressed that AGSA did not usually investigate criminal activity, although it would assess fraud-related risk. Its strategies for staff were outlined. Particular challenges in this year included the new Parliament and leadership, the fact that a more active citizenry was less tolerant of mismanagement by public entities, and the multitude of information systems. AGSA was engaged in assessing the environment to prepare its future working strategies. Particular points in the Strategic Plan were highlighted, which included the concept of value-add auditing, to ensure that public funding was used as intended, visibility for impact, the possibility of coming up with clearer terms to explain categories of spending, viability of AGSA, the need for AGSA to be vision and values-driven and lead by example. 20% of its budget would be set aside to contract work out, and it was coming up with audit strategies to enable it to achieve greater efficiencies. The Chairperson stated that some of the issues would stand over to be discussed by Members at another meeting, and specifically highlighted that this would include the position of municipalities, although their position, the fact that AGSA was obliged to charge interest but was trying to get municipalities to ring-fence and better manage their funding for obligations was also addressed. The question of how the surplus and debt were reflected in the financial statements was also addressed in greater detail. AGSA responded to questions on the schools and visits, its own auditors, who were appointed for a three-year term, the assessments on whether audits were satisfactory, the criteria when allocating contracts for auditing, the value, trends and insurance in relation to laptops that had gone missing, and more detail on bursaries and other assistance to universities. Members also asked what criteria would be used when assessing how the audit must be done, how depreciation was calculated, and whether the budget was sufficient. Questions that would be answered in writing included the composition of AGSA in terms of qualifications of staff, and more details of debt owed by municipalities. The Chairperson noted that the issues raised in a letter from the Minister had been noted prior to meetings between the Auditor-General and Accountant-General and the Committee believed that they were being addressed, and there was no need for a three-way meeting. The Committee would be discussing, at a future meeting, how it viewed the "surplus" and whether AGSA would be required to repay to National Treasury.

Meeting report

Chairperson's introductory remarks

The Chairperson reminded the Committee of the questions asked during the previous day's meeting , but asked that, rather than taking up too much time by answering the questions specifically now, the Auditor-General (AG), Mr Kimi Makwetu, should rather try to answer the points raised as he proceeded to present the Strategic Plan of the Auditor-General South Africa (AGSA). Any questions that had not been addressed could be raised again.

Questions arising from presentation on 23 October
The Chairperson gave Members the opportunity to raise a second round of questions relating to the presentation on the previous day.

Mr A McLoughlin (DA) asked why the AGSA had a huge surplus, yet there was still so much debt owed to it, and wondered if the one amount should not be set off against the other. He also asked whether forensic auditing was done to establish any ongoing criminal activity.

The Chairperson noted that there had been comments that the audit fees were high and asked whether, if this was true, there was a link to the surplus. He said that Members would need to consider whether the surplus would need to be returned to National Treasury (NT) or whether it could be retained.

Mr M Ntombela (ANC) noted the point about municipalities in distress who were unable to pay the audit fees to AGSA, and asked if the AGSA would keep adding interest to their fees, and thus add to their problems.

Mr Ntombela also suggested that the Internal Audit unit was very important for the outcomes of the AGSA, and thus suggested that this unit be invited to the Committee. He also pointed out that the Head of Internal Unit was expected to report to management of AGSA, but he wondered if there was not a contradiction and if this created tension, since that Head was expected to make recommendations to a person more senior than himself, and how this affected the Head's independence. Perhaps there was a need to consider the reporting chain.

Mr Ntombela then followed up on this point, by saying that if there were recommendations made by an internal auditor but there was reluctance to implement them, the Heads of Department should be included, to try to persuade them strongly to implement the recommendations.

Mr Ntombela (ANC) asked for clarity on the selection of undergraduate students for training and scholarship, and asked if it was a once-off assistance that was offered.

Mr Ntombela said that the continued use of external auditors who were being contracted to audit municipalities had to be addressed, as it created problems if new auditors were to be appointed each year.

Mr Ntombela commended the AGSA on its achievements with the rural schools, noting that the report stated that 156 schools had been adopted, but noted also that the focus was given to grade 10-12, and he wondered if this should not begin earlier, at grade 8.

Ms P Bhengu (ANC) noted that the AG strove to lead by example, and had stated that organs of state needed to pay their creditors in 45 days. AGSA had been paying its creditors in 30 to 35 days. She wondered what impact this had on the AGSA.

Ms NP Khounou (ANC) asked if there were measures in place to ensure that procurement was in line with the public procurement legislation and the Public Finance Management Act (PFMA).

The Chairperson noted that the AGSA contracted in other audit firms and stated that this presented an opportunity for black economic empowerment (BEE) and wanted to know if the contract decisions were based on BEE considerations, to assist small and emerging black audit firms.

The Chairperson noted that the AGSA had resolved the matter raised by the Minister and reminded the Committee that it would today need to resolve the question of what should be done with the surplus. 

The Chairperson also felt that the Committee should deliberate on the question of municipalities who owed AGSA money.

AGSA Strategic Plan and Budget 2014 to 2018: Auditor-General briefing
Mr Kimi Makwetu, Auditor-General, thanked the Committee Members for their questions and explained the purpose of the AGSA, which included oversight in the public sector. He explained the business model of the AGSA, including a list of its mandatory audits: its reports on national, provincial and municipal offices. The AGSA had offices in all nine provinces and a head office in Pretoria. The Deputy AG, the accounting officer, was responsible for oversight and headed the administration of the offices. The national leader and other corporate executives looked after various departments and on average oversaw two provinces each.

In answering the questions raised yesterday and today, Mr Makwetu stated that the AGSA had support functions, its staff included researchers for expertise on issues of disputes, interpretation or accounting matters, accounting framework  and so on. The issue that the Minister of Finance raised in his letter to the Committee was an example of one function that was covered by the AG. There were quarterly key interactions for continuous and regular auditing on entities, and through these AGSA was able to put together the general report.

AGSA had a robust costing exercise and designed a programme that determined how long an audit would take, and then a rate per hour would be determined, based on the nature and extent of work. Income was generated by an agreement between the entity and AGSA. An invoice would be raised before the AGSA received any money, and so until it had actually been paid it remained as a "request to pay". This explained why the financial statements indicated a surplus, because the unpaid invoice was reflected as income. If AGSA did not in fact get paid, it would then be seen as a debt on the financial statements.

The investigations function was largely reactive, because the mandate of the AGSA was primarily auditing and reporting. He drew the distinction that AGSA was not the first place that entities would visit when there was a need to investigate criminal activity. Other organisations primary focused on investigating and therefore AGSA had only a small investigations unit. Most of the staff were focused on looking into any deviations from prescribed rules in Supply Chain Management (SCM) so their level of capability was of a forensic nature, because they focused on tracking transactions. He explained that the audit procedures involved an examination of fraud-related risk, and AGSA thus made sure that auditors were able to respond to risks of fraud and error. Whilst it did also sometimes investigate deviations from regulation, it did not have sufficient staff with the requisite skills to take this on regularly.

He noted that all staff were issued with laptops connected to main servers so information could be kept and retrieved when necessary.

Mr Makwetu moved on to questions that had been raised around the human capital and the AGSA retention strategy. AGSA was continuously reviewing its pay and benefits to be in line with the market and to benchmark against other organisations. Staff were also given extended study leave opportunities, particularly those who had not yet completed post graduate studies. AGSA had also introduced an in-house group retirement fund, particularly geared to new graduates, which encouraged staff to save. There was also an employee wellness programme, which offered support services to staff, as well as a Talent Management System for internal mobility and development. He stated that overall, the workforce was becoming younger with professional qualifications, and there e was also a significant growth in number of Chartered Accountants (CAs) at the AGSA. He discussed the internal organisation trends and presented a breakdown of the workforce, both in terms of race and qualification.

Mr Makwetu noted that in this year, one of the challenges facing AGSA included the fact of the new Parliament and leadership, and noted that a more active citizenry meant an increasing lack of tolerance for mismanagement. There was also a trend of auditees having more advance information systems and a multitude of information systems. The AGSA was also involved in an environment assessment, to gauge what issues it wanted to be involved with in the future.

Mr Makwetu explained that AGSA aspired to see a public service that was characterised by the following:

•Robust financial and performance management systems.

•Oversight and accountability.

•Commitment and ethical behaviour by all.

•A competent and value adding Auditor-General.

He described these as the vision of the AGSA, and explained what each of these entailed for the next ten years in AGSA. He believed that having a competent and value-adding AGSA was the best way that this entity could respond to the National Development Plan (NDP) but added that it would be included as a target in the medium-term development plans as well.

The long-term strategic goals for 2015 to 2024 were then outlined and explained, as follows:

- Value-add auditing was focused on auditing areas that mattered, and influencing all players in the public sector to utilise public funds as intended, for the benefit of the people of the country
- Visibility for impact meant that the focus of  engagement with stakeholders would be on enabling and compelling them to action. The required actions would be different, but all would have a goal of ensuring service delivery and holding government accountable. Mr Makwetu agreed with the sentiments raised by the Chairperson that the wording used in auditing was disturbing for some people, and suggested that perhaps government could think about what the key terms such as “irregular expenditure” meant, so people did not assume the worst
- Viability considerations would look, in an integrated manner, at all the elements that made the AGSA viable
- Vision and values driven meant that AGSA would be running its affairs appropriately, leading by example through high levels of accountability, effective governance, to ensure that it was deserving of its claim to independence.

Mr Makwetu stated that the key elements of the strategic plan would be bound to specific timelines. He noted that AGSA would have to be adaptable and flexible to a degree, but any changes would also reflect a pursuit of the same objectives as informed by the strategic plan.

He noted that AGSA wanted to set aside 20% of the budget for contract work, to meet all its deadlines. It had also developed the Auditing Efficiency Project in order to lower the cost of auditing, by more efficient work being able to reduce the number of hours taken on an audit, and thus reducing the fee also.

The Chairperson reminded Mr Makwetu that some of the questions raised on the previous day had not been addressed in this presentation. These included questions around:
- interest on outstanding debts owed by local government
- the internal audit unit reporting to the Committee
- the selection process of undergraduates
- the principle of selecting a new external auditing company each year
- the 30 day target to pay creditors
- AGSA's contribution to rural schools, and whether the school programmes were run ad-hoc, or planned
- the suggestion to directly brief the external auditors
- the consequences if any staff Notebook computers were lost
- insurance
- who audited the AGSA
- breakdown of contractors' BEE status

The Chairperson suggested that these be answered in writing, within the following seven days, if AGSA did not have the information to hand at the moment.

He stated that the Members would discuss other issues at another meeting. The Chairperson noted that the Committee was generally comfortable with the strategic plan, would write a report on it, debate it and would be presenting it to Parliament.

Mr S Boshielo (ANC) asked if he could get a response on the question of municipalities owing money to AGSA, who were mostly the rural municipalities.

The Chairperson responded that he had deliberately left that as an issue for internal discussion by the Committee Members.

Mr A McLoughlin (DA) thanked AGSA for the explanation on the surplus, but he asked if the surplus as set out in the presentation included the money owed to it by the municipalities.

Ms Tsakani Ratsela, Deputy Auditor General, addressed a question asked on the previous day, in relation to the school visits and said that these were introduced to introduce learners to and inspire them to join the auditing profession. For this reason, the visits were targeted to Grade 10 students, to enable them to select a subject choice geared toward this profession. AGSA did also  have a project geared to exposure to the workplace, at grade 8, and this included a day for girls, and a day for boys, at AGSA offices.

She noted that AGSA was currently being audited by Kwinana Equity. - exposure to the workplace project, this includes a day for boys and a day for girls at AGSA.

Kwinana Equity were the auditors who audited AGSA and it had just completed the first year of the three-year contract. This firm had been approved by the Standing Committee on the Auditor-General of the Fourth Parliament, and had recently also been reviewed by the Audit Committee, which looked into their independence and were satisfied on that point.

Ms Ratsela also explained how the 87% target for completion of satisfactory audits was judged. She noted that quality control took a random sample of audits and did a review of  selected files to look at quality of audits. This review was satisfied that the audit was of a proper quality.

She noted that when allocating a contract, the key elements to be looked at were transformation and quality. Each contractor must submit the relevant BEE scorecard that looked at all seven elements of BEE and transformation. There were minimum requirements that everyone must be a contributor to transformation. The AGSA was constantly analysing and looking at how it could deepen transformation, and at the moment one third of its work was going to small, black firms.

Mr Rajesh Mahabeer, Chief Financial Officer, AGSA, said that the actuarial gain reflected in the financial statement was the amount determined that needed to reflect on AGSA's books for the future medical aid benefit obligation it had to have for its retirees.

He referred to the item noting R119 000 value of "stolen laptops" and noted that this represented laptops lost. The nature of the job involved much travel to various workplaces and AGSA lost around 50 to 60 laptops per year.

The Chairperson asked if they were insured.

Mr Mahabeer responded that AGSA had computed the cost of insurance against the possibility of loss and the value of the laptops and had found that insurance would be very costly so AGSA took a business decision to self-insure.

Ms Ratsela addressed the issue of continuity in contractual audits, and stated that previously, annual contracts applied but now the auditors were contracted on a three-year basis to ensure more continuity.

Ms Ratsela confirmed that interest was charged on debts owed to AGSA and therefore interest was being charged to the debtor municipalities, in terms of the relevant law permitting this. However, AGSA was entering into ring-fencing agreements with the municipalities, to help them to manage their finances and ensure that they did address the debt. She stressed that the law required that AGSA should charge interest on outstanding amounts, as well as to strive to collect the debt.

Ms Ratsela spoke to questions about bursaries and noted that AGSA supported the Thuthuka bursary fund, which was run together with other organisations throughout the accounting profession. 40 students were funded through that fund, and AGSA did have access to hire the recipients once they had graduated. AGSA also has its own fund, which it set up as a once-off prize to mark its centenary and this award would be based on financial need and academic performance. This would sponsor the recipient for the full term of his/her studies and was offered at different universities.

The University of Fort Hare (UFH) was one of the first two universities to get funding from AGSA, together with the Association for the Advancement of Black Accountants, for improving the capacity of universities largely taking in black students, for teaching Accounting. This would help to ensure that South Africa boosted its capacity for training aspirant accountants. UFH approached AGSA asking for more assistance in creating sustainability. However, she added that AGSA worked closely with all universities, including giving other forms of support such as tutoring and mentoring, at the Universities of Limpopo, Western Cape, Walter Sisulu, and KwaZulu Natal.

Mr Mahabeer stated, in regard to the question on payments, that the AGSA created for itself a 30 days limit to pay its creditors, because it wanted to assist its creditors, including the emerging black firms, with their cash-flow. The 30-day period was considered reasonable also for AGSA in terms of managing its own cash-flow responsibly.

Mr Ntombela asked what determined the time allocated to audit a firm.

Mr Makwetu stated that there was a process for deciding how long an audit would take, and who would do the audit. The cost of the audit often depended on the seniority of the auditor. If the entities' processes and systems were basic, then the audit could be done by a junior auditor, and this kept the cost lower.

Mr McLoughlin asked if AGSA  just had Chartered Accountants as professionals.

Mr McLoughlin asked why the strategy of the AGSA stated that it audited in line with what mattered to the public, and wondered if this should not rather be in line with what is its Constitutional mandate.

Ms Ratsela explained that AGSA did indeed audit in terms of the mandate given to it by the Constitution, but the context for what was stated in the Strategic Plan was that the Annual Performance Plan that the auditee organisation published was essentially a public promise that it had made. The AGSA would be auditing its performance against that Plan and public expectation.

Mr McLoughlin asked if any of the municipalities who owed money to AGSA had managed to get clean audits.

Mr McLoughlin ) asked if the depreciation indicated in the financial statements was an "actual" amount or was weighted in such a way as to balance the books.

Mr Makwetu explained both the accrued amount as well as the depreciation. Included in his explanation, he also repeated that the surplus was reflected in the income statement, whilst the debt was in the balance sheet. The surplus was reduced to take into account debtors who did not, and would not be likely to pay AGSA, as debt that would need to be written off.

Ms Z Dlamini- Dubazana (ANC) noted that she had been impressed by the strategic plan, which set out the targets clearly and with measurable goals. She asked if the budget for AGSA would enable it to meet those goals.

Ms Ratsela stated that the budget was for the upcoming year and the AGSA believed it could work in that budget framework.

Mr Makwetu wanted to clarify that the letter from the Minister came ahead of a process with the Accountant-General and the process of the two working together, as they were, was triggered by the issues mentioned in the letter, as well as other issues with the PFMA.

The Chairperson noted that, and said that he understood that there was work in progress between the AGSA and Accountant-General, and that there did not appear to be a need for a three-way meeting. He thanked AGSA for its presentations. He repeated that any questions that could not be answered because of the time constraints should be answered in writing to the Committee.

The Committee would be dealing, on the following Wednesday, with the question of whether AGSA should be allowed to keep the surplus of R99 million.

The meeting was adjourned.

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