Auditor-General on AGSA Strategic Plan 2016-2019; AGSA Debtors; 2015 Audit Outcomes

Standing Committee on Auditor General

06 November 2015
Chairperson: Mr V Smith (ANC)
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Meeting Summary

The Auditor-General highlighted that there would be an escalation of debt owed to Auditor-General South Africa (AGSA), specifically by local government as well as increased competition for skilled labour in this period.

He went through the Strategic Plan. The targets for some of its objectives were:
• Demonstrate value-add auditing: It was 90%-100% completion of the actions for the 2016 to 2017 financial year and the measure would be the percentage closure of gaps identified through the stakeholder survey done in 2015.
• Ensure high quality of audits: It was 85%-90% of C1, C2 and C3 rating. The major initiatives here included improvement of the pre-issuance review process and the benchmarking of audit practices internationally.
• Increase operational efficiencies: They were to have 95%-100% achievement of deliverables in the project plan for 2016/17 and implementation of the support service delivery model. The major initiatives for these targets was to ensure completion and implementation of appropriate responsive audit software and develop, implement and continuously enhance an economic, efficient and effective operating model.
• Increase internal visibility: By conducting 90%-95 of strategic alignment sessions by top leadership as per stakeholder plan.
• Maintain financial, legal viability and independence: It was to maintain net surplus of 1%-2% and 70%-85% of the debt collected over 12 months. The major initiatives here focused on reviewing all initiatives to ensure alignment with cost containment and revenue enhancement and development and implementation of revenue optimisation strategy.
• Continue to be a transformational organisation: By intensifying the Enterprise and Supplier Development (ESD) programme and enhancing the work with institutions of higher learning. The entity was targeting to achieve level 2 of Broad-Based Black Economic Empowerment (BBBEE) by implementing approved transformation strategy and acceleration of enterprise development programme.
• Ensure clean administration: They were achieving a clean audit and the rate closure of 95%-100% of audit findings.

The Deputy Auditor-General said that audit income is expected to increase from R2 750 million in 2014/15 to R3 090 million in 2015/16. The direct costs of conducting auditing would increase from R1 840 million in 2014/15 to R2 115 million in 2016/17 and the gross profit for the entity was predicted to increase from R910 million in 2014/15 to R975 million in 2016/17. The audit income growth of 5% budget for 2015/16 to 2016/17 is below the Consumer Price Index (CPIX) forecast of 6%. The total outstanding debt as at 31 March 2015 was R709 million of which local government debtors amounted to R366 million or 52%. The local government debt continued to grow year on year and debtors’ days outstanding had increased from 265 days in 2013/14 to 292 days against a target of 90 days. The increase in debtors’ days is indicative of poor collection from this sphere which impacted negatively on the AGSA cash flow. The collection challenges are mainly concentrated in three regions: Eastern Cape, Northern Cape and North West which make up 67% of the local government debt.

Members highlighted that municipalities with poor performance and mismanagement of funds should not be rewarded by being audited at a reduced fee. There should be a model in place to assist those municipalities that had been struggling for cogent reasons. Was the retained surplus being used for specific projects within the AGSA? It was a concern that basic accounting prescripts were not adhered to by the auditees and this often led to the general problem of material misstatements. Members asked if AGSA had been actively engaging with National Treasury to ensure that the auditees had a programme in place to master basic accounting prescripts. Was this included in the Strategic Plan and budget for 2016-2019? Members asked if AGSA had conducted a cost-benefit analysis of the audits. It was noted that Treasury had not reimbursed R41.86 million to AGSA on the 1% principle in line with the Public Audit Act and the Committee needed to follow up on this. A Member commented that there is a general feeling that the work of the Office of the Auditor-General is mainly focused on “ticking the boxes” rather than helping the auditees to improve their performance.

Members asked for the rationale for AGSA offering the auditees a chance to fix their internal controls as this was a huge waste of money. Why was there a decrease of 35% in the money that had been approved and paid by Treasury on audit fees in 2013/14? The Committee requested data on the recurring problems of entities in their financial statements. Some Members felt the value-add of the internal audit and Audit Committees was in a poor state and this was because of lack of cooperation of Chief Financial Officers and Accounting Officers. Members suggested that AGSA should conduct a workshop with the MPs on the kind of work that was being done by the organisation and how they could engage with the information that is being produced.

The Committee had still to take a decision on approving the AGSA’s Strategic Plan 2016-2019.

Minutes

Meeting report

Briefing by Auditor-General of South Africa (AGSA)
Mr Thembekile Makwethu, Auditor-General (AG), indicated that there was awareness in the Strategic Plan and budget for 2016 to 2019 that there will be a rigorous engagement by various stakeholders on the audit outcomes as low economic growth which would lead to shortage of cash in the system. There is also a realisation that there will be an escalation of debt owed to the AGSA, specifically by the local government and an increased competition for skilled labour and insufficient quality of school education. He noted AGSA’s targets for each of its Objectives:
• Demonstrate value-add auditing: It was 90%-100% completion of the actions for the 2016 to 2017 financial year and the measure would be the percentage closure of gaps identified through the stakeholder survey done in 2015.
• Ensure high quality of audits: It was 85%-90% of C1, C2 and C3 rating. The major initiatives here included improvement of the pre-issuance review process and the benchmarking of audit practices internationally.
• Increase operational efficiencies: They were to have 95%-100% achievement of deliverables in the project plan for 2016/17 and implementation of the support service delivery model. The major initiatives for these targets was to ensure completion and implementation of appropriate responsive audit software and develop, implement and continuously enhance an economic, efficient and effective operating model.
• Achieve impact through visibility: It was 70%-75% achievement of deliverables and the measure was on high quality focused on external stakeholder interactions. The major initiatives here included the evaluation of the resources (people and tools) required for effective, economic and efficient interaction programmes.
• Increase internal visibility: By conducting 90%-95% of strategic alignment sessions by top leadership as per stakeholder plan. The major initiatives will focus on pursuing strong strategic engagement, using proven methods and continuously new ways of involving staff in the running of the organisation and internal visibility programmes that are driven by the top leadership.
• Engage actively with citizens: It was 95%-100% achievement of deliverables in the engagement plan for the 2016-17 and the major initiatives here would focus on the implementation of the provincial and national media engagement plans to reach citizens. There would also be a focus on the formulisation of the use of social media to reach a wider spectrum of the society.
• Maintain financial, legal viability and independence: It was to maintain net surplus of 1%-2% and 70%-85% of the debt collected over 12 months. The major initiatives here focused on reviewing all initiatives to ensure alignment with cost containment and revenue enhancement and development and implementation of revenue optimisation strategy.
• Enable the concept of sustainability: By completing an environmental awareness programme and implement an environmental management accounting mechanism.
• Continue to be a transformational organisation: By intensifying the Enterprise and Supplier Development (ESD) programme and enhancing the work with institutions of higher learning. The entity was targeting to achieve level 2 of Broad-Based Black Economic Empowerment (BBBEE) by implementing approved transformation strategy and acceleration of enterprise development programme.
• Ensure clean administration: They were achieving a clean audit and the rate closure of 95%-100% of audit findings.

Ms Tsakani Ratsela, Deputy Auditor-General, indicated that the audit income is expected to increase from R2 750 million in 2014/15 to R3 090 million in 2016/15. The direct costs of conducting auditing will increase from R1 840 million in 2014/15 to R2 115 million in 2016/17 and the gross profit for the entity was predicted to increase from R910 million in 2014/15 to R975 million in 2016/17. The audit income growth of 5% budget for 2015/16 to 2016/17 is below the Consumer Price Index (CPIX) forecast of 6%. The increase in the audit income over the three year period is mainly driven by new audits from South African Post Office (SAPO), Airports Companies of South Africa (ACSA) and Further Education and Training (FET) colleges. The other reasons for increase in audit income included increasing in risk and scope; take back of audit work from private audit firms and also inefficiencies. The information that was initially produced by government departments was below standard, but they were given an opportunity to correction those misrepresentations and the information was fairly improved.  

The quality of annual financial statements for 2013/14 showed 57% of the government departments had material misstatements while only 43% had no material misstatements. The outcomes after corrections showed 80% had no material misstatements while only 20% had material misstatements. The total outstanding debt as at 31 March 2015 was R709 million of which local government debtors amounted to R366 million or 52%. The local government debt continues to grow year on year and debtors’ days outstanding increased from 265 days in 2013/14 to 292 days against a target of 90 days. The increase in debtors’ days is indicative of poor collection from this sphere which impacts negatively on AGSA cash flow. The collection challenges are mainly concentrated in three regions: Eastern Cape, Northern Cape and North West which make makes up 67% of the local government debt. The total debt provision has slightly increased to 25% of the total debt; however, as percentage of audit income, the provision is maintained at 6% year on year. The three regions with the most collection challenges contribute 76% to the total provision.

Ms Ratsela concluded that R30 million of the interest in the old debt that accumulated up to 31 March 2016 will be written off. The municipalities with the oldest debts will be given higher discounts and this was to be used as an incentive for the payment of outstanding debts. AGSA will as of 1 April 2016 onwards set the audit fee for small entities such as museums, trusts and boards. Municipalities that are classified as low capacity and low revenue entities will be audited at a nominal/affordable fee. The National Treasury should honour to pay the 1% auditees in line with the Public Audit Act.

Discussion
Mr N Singh (IFP) commended the fact that the debt owed by municipalities for audit fees had been significantly reduced. It was also pleasing to hear that the Committee would be briefed on the strategy in place to assist other municipalities in dealing with the reduction of their debts. The municipalities with poor performance and mismanagement of funds should not be rewarded by being audited at an affordable fee and there should be a model in place to assist those municipalities that are really struggling for cogent reasons. The Committee would have to see if the retained surplus was being used for specific projects within the broad AGSA. It had already been noted that there is a general improvement in the audit outcomes across auditees. However, the biggest concern is that the basic accounting prescripts are not adhered to and this often led to the general problem of material misstatements. He asked if AGSA was actively engaging with Treasury to ensure that auditees had a programme in place to master the basic accounting prescripts. Was this included in the Strategic Plan and budget for 2016-2019?

He asked when the focus for most government departments would shift from financial audits to performance audits as financial audits in other countries like New Zealand were a thing of the past. The people in the country were more desperate for service delivery and this was what the audit of the government departments should ultimately seek to achieve. It was important for the Committee to be provided with the extent to which the outcome of the stakeholder survey conducted in 2015, influenced the Strategic Plan. He suggested that AGSA should conduct the stakeholder survey more regularly than once every three years. It was commendable to see that there had been in a decrease in the utilisation of consultancy and contract work. However, it was important to know the impact of reduction of tariffs in getting the consultancies doing work for AGSA.

Mr Singh asked if AGSA had conducted a cost-to-benefit ratio of the audits  conducted on government entities. It had been noted that Treasury had not reimbursed AGSA with the R41.86 million according to the 1% principle in line with the Public Audit Act and this was a matter the Committee needed to follow up on. There is a general feeling that the work of the Office of the Auditor-General is mainly focused on “ticking the boxes” as there are instances where a government entity would receive an unqualified audit opinion in one week and then a week later it would be riddled with scandals of corruption and financial mismanagement.

Mr Makwethu responded that it was important to have stabilised financial controls so as to ensure that there is transparency in order to enhance the quality of financial reporting and performance audits should not wait for all the financial management disciplines to be correct before acting. The performance audit was very attractive in terms of dealing with accountability and responsible management of public funds. AGSA was cautious of not committing too many resources trying to do different streams of auditing but ultimately hitting the same bottleneck. On the external stakeholder survey and its influence on the Strategic Plan, the survey was done with a view to scrutinise some of the matters that may not have been considered and there are certain elements that may have been incorporated to the Strategic Plan. However, there is also reluctance in going back to the survey mode frequently, especially when doing significant levels of implementation. The benefit of the external stakeholder survey was undertaken after there had been significant public engagements on audit outcomes over the last 5 to 7 years and it was proper to undertake it now as different stakeholders would have had some significant experience on what had come in during the past couple of years.

Mr Makwethu replied that the tariffs paid out to the private audit firms are normally lower than that of AGSA and there is always sensitivity when it comes to looking at the tariffs being charged. The work that is often done by the consultancy is basically to fill in the overhead gap on their side and this is often very helpful. The organisation was currently looking at ways to strengthen the internal deficiencies especially in vacant posts. The benefits that come from the rigorous internal control environment are often felt down the line. The measurement would always be on the experience in terms of flow of resources and going to a place where they were intended, which is basically about transparency and this was probably the intangible benefit. The immediate benefit in the conducting of an audit of government departments and entities was the deterrent effect in a number of places, especially to ensure that there is accountability in the management of public funds. There is also a systematic reduction in terms of financial misconduct and irregular expenditure. The organisation has played an important role in the reduction of the utilisation of consultancies by a number of entities and these were improvements that were hard to be measured collectively.

Mr Makwethu responded that there is a standard interaction with Treasury on an ongoing basis starting from the technical people and this was to pick up the arising issues from both sides and whatever AGSA was required to pronounce on when it comes to audits had to be based on the accounting framework that is prescribed by Treasury through the Office of the Accountant General. There has been an additional effort to build capabilities to be able to engage with Treasury on a quarterly basis on the subject of key controls. One of the things that are often looked at by auditors is the status of accounting records and this should be looked at prior to the commencement of the audit to check on what had been achieved from Q1 to Q4 in terms of producing reliable accounting records.

AGSA was proactive about the identification of the internal control deficiencies that are likely to trip the government entities when reporting on their finances. It was indeed true that most of the challenges of government entities are often picked up after the submission of their financial statements and this was an area that the Committee could assist AGSA. The bulk of the resources from the surplus of the organisation would be used to build capacity that would add in improving the audit outcomes. There is recognition that there are certain inherent limitations in the performance of an audit and that was one of the reasons for having internal controls that would attempt to go further than those limitations.

Ms D Carter (COPE) asked if it was possible for the Committee to be provided with the list of all municipalities that still owed AGSA and those that had already paid on summons. There is a noticeable trend in competition within government for skilled labour and this was something that needed to be addressed. She asked for the rationale for AGSA to offer the auditees a chance to fix their internal controls as this was a huge waste of money. It was important to know why there was a 53% increase in the funding that is allocated for audit fees in 2011/12. The Committee should also be provided with the data on the recurring problems of most of the entities in the processing of their submitted financial statements.

Mr Makwethu promised that AGSA would provide all the information in writing that had been requested by Members, including the list of municipalities that still owed AGSA and those that had already paid on summons. AGSA was encouraging some of the municipalities to recruit skilled labour from within its organisation and this was good for the public sector in terms of providing training, capacity and skills in financial management. AGSA does not have a “cooling period” for its staff members that resign in order to take up positions in other government departments or entities. It must be highlighted that the financial statements are the responsibility of management and the responsibility of AGSA was essentially to express an opinion.

The withdrawal of the submitted financial statements was when the auditees were given an opportunity to fix all the material misstatements that had been flagged. There is a regulation that says the auditees could not withdraw their submitted financial statements but there is also an auditing standard that says auditees should be given an opportunity to fix all the material misstatements. There is an annexure in the general report of AGSA where there is a list of all the auditees’ outcomes and this also highlights areas where there are still concerns with some of the auditees and this information could also be accessed on the AGSA website.

Ms Ratsela responded that AGSA was aware that there was an increase of funding for audit fees in 2011/12 and this was because of the cost of audits that had been increasing, lack of skilled labour in small auditees such as museums, trusts and boards.

The Chairperson asked for a sense of what was regarded as a “surplus” as there are cases where the categorisation of surplus would be money that was not even in the bank as yet. There is a general concern about the age analysis of the outstanding debts still to be paid by municipalities as this was reflecting negatively on AGSA. The Committee was in support of the principle of rewarding municipalities that are classified as low capacity and low revenue entities to be audited at an affordable rate, but warned that this should not be done to those with poor performance and financial mismanagement. There is a need to deal with those municipalities that had been failing to pay audit fees but still under-spending on some of their key projects. It must be commended that AGSA had refused a bribe from one of the government departments and this principled stance should be given the highest praise.

The Chairperson indicated that the value-add of internal audit and Audit Committees was in a poor state and this was because of the lack of cooperation of Chief Financial Officers and Accounting Officers and this was matter that had been picked up in Standing Committee Public Accounts (SCOPA). He asked if the Committee could be given the latest assessment that had been conducted by the Independent Regulatory Board (IRB) on the internal controls within the AG office. AGSA would need to conduct a workshop with all the MPs on the kind of work that was being done by the organisation and how they could engage with the information that is being produced. AGSA planned to have an occupancy rate of 89%-91% - was this implying that the organisation planned to have a 9% vacancy rate? It was indeed true that affording the auditees to correct their financial statements had generally led to an improvement in the overall audit outcomes but this should be tied to a penalty to discourage this trend. Were the debt collection challenges in North West, Eastern Cape and Northern Cape linked to poor audit outcomes in those provinces?

Mr Makwethu appreciated the warm words that had been conveyed by the Chairperson and promised that these words would be shared with his colleagues in the organisation. The independence of any organisation is demonstrated by the principled stance that is embodied by everyone within the organisation. It must be clarified that the organisation had a surplus of R600 million but nothing in the bank and this surplus was based on the money that was still to be paid by the entities that had been invoiced. There is a belief that the internal audits and Audit Committee could do much better work in assisting the auditees but the internal audit is supposed to be a tool which the management is supposed to have at their disposal. It must be highlighted that this is a function that is budgeted for by the Accounting Officer, so the internal audit was not independent from the Accounting Officer. The Committee would be provided with the report on the latest assessment conducted by the IRB on the internal controls within the Office of the AG. The proposal to have a workshop with MPs on the kind of work that was done by the organisation was noted as this was an important platform to enhance accountability and was part and parcel of the Strategic Plan.

Mr Makwethu responded that AGSA came from a history where there were substantial levels of vacancies and the reason for having the target of an occupancy rate of 89%-91% was precisely because there are some vacancies that would not be filled deliberately. There is awareness that AGSA could not have a fully-fledged 100% occupancy rate as there are staff members that resign willingly or there is slow progress in the recruitment process. AGSA has never struggled to execute its necessary work with the current vacancy in some positions. There is no direct correlation between the long outstanding debts and audit outcomes but North West, Northern Cape and Eastern Cape had the worst audit outcomes. The Ventersdorp local municipality had a history as the slowest paying municipality and also the worst performing municipality in terms of audit outcomes.

Mr A McLoughlin (DA) said that the problem of competition for skilled labour and insufficient quality of school education seemed to be the problems that were found throughout the government departments and this often translated into lack of performance. It was important to know if AGSA was trying to solve these challenges through partnership with institutions of higher learning and Department of Basic Education (DBE). It was commendable to hear that AGSA had a high level of quality when compared with other Supreme Audit Institutions (SAIs). However, the Committee should be made aware whether AGSA was conducting comparative arrangement with SAIs of other countries on the same basis or parameters. He asked how it was possible for the organisation to request more funding from Treasury year on year while there is a retained surplus. There are lot of inefficiencies that are causing the perennial problem in the ability of most municipalities to honour their duties.

Mr Makwethu responded that AGSA was involved in school programmes, particularly in rural areas where the focus was on the exposing students to the kind of work that is done by the organisation. The learners are also given access to some of the documented materials that had been produced by the organisation in order to be familiar with the basic vision and mission of the Office of the AG. However, it must be stated that the engagement had not been taken to a level deeper where schools are requested to identify potential students that could be interested in venturing into the Office of the AG. There is a work that is being done by SAIs which is focused on peer review of certain elements of a particular audit office and the measurement is on issues of quality of and timely reporting and the independence of the audit institution. In relation to the question of retained surplus, it must be noted that one of the problem that was inherited when most of the municipalities were amalgamated was the inability to generate income. Therefore, Treasury had committed to assist some of the municipalities that were struggling to pay back their audit fees and this was not a funding that was given to the Office of the AG.

Ms P Bhengu (ANC) asked if AGSA had any instruments in place to enforce the auditees to comply with legislation and to be held accountable especially on the use of consultants and instability in key positions by the various departments as these were root causes for delays in the submission of financial statements and poor audit outcomes.

Mr Makwethu responded that AGSA had not been given many instruments to enforce accountability but there is always a style of doing “gentle persuasion” for most of the time so that the financial disciplines could be adhered to

Ms Carter stated that there were a total of 24 investigative reports published in 2013, nothing was published in 2014 and only a single report in 2015. Why were there so many investigative reports in 2013?

Mr Makwethu responded that AGSA came from an environment where the investigative reports used to be flooding all the time and this was at the time when the Special Investigating Unit (SIU) and Public Protector (PP) had not assumed public prominence in investigations. In essence, AGSA has decided to redirect its efforts and not focus so much on investigative reports as this was not its primary mandate anyway.

The Chairperson asked if the work of AGSA would be impacted negatively if the uncollected debts from the auditees, particularly municipalities, were to exceed R60 million. It was important for AGSA not to reach the stage where it would be impossible to execute its important tasks because some auditees had not “come to the party”. What was the contingency plan in the case such a disaster?

Mr Makwethu admitted that any increase in uncollected debts would negatively impact on how AGSA executes its work as the fixed cost of employment would also be impacted. The priority of AGSA was to meet the variable cost of employment, largely the people that had been employed excluding the utilisation of consultancies. There is an instrument in place to deal with the possibility of an increase in the uncollected debts from the auditees.

The Chairperson thanked everyone who was present in the meeting and indicated that the Committee was still to take a decision on whether to approve or reject the AGSA’s Strategic Plan and Budget 2016-2019.

The meeting was adjourned.

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