Auditor-General Strategic Plan and Budget 2005; Alleged Interference by Auditor-General in Draft Arms Deal Report

MINUTES
Introduction by Chairperson
The Chair welcomed Mr Terence Nombembe, Deputy Auditor-General and CEO of the Auditor-General’s Office, and stated that she had received an official apology from Mr Shauket Fakie, the Auditor-General, explaining that he was currently attending the 19^th Commonwealth Auditor-General’s Conference in New Zealand.

Committee Report on Auditor-General Annual Report 2004
The Chair noted that the Committee agreed to the Report, with technical amendments.

Strategic Plan of Auditor-General 2005/6
The Chair thanked the Office of the Auditor-General for the substantial and detailed information provided in the Budget (document attached). She proposed that the Committee first consider the main dynamics in the budget of the Office of the Auditor-General, and it would then engage in a detailed discussion of the budget items.

Broad Overview of Strategic Plan
Mr E Trent (DA) sought clarity from Mr Nombembe on the themes and audit focus areas listed at the beginning of the document, and from whom these funds would be recovered.

The Chair asked Mr Nombembe to explain how the five specific themes were selected.

Mr Nombembe replied to these two questions by stating that these additional themes were not going to be performed free of charge. However, they would be provided without charging an extra fee to the auditee due to the savings made by the Office of the Auditor-General in the structuring of the office and in the span of control of the Office. Thus each audit performed was charged and recoverable from the auditee.

The themes were primarily as a result of the senior management workshop that had taken place in which the strategies were discussed, and these specific areas of importance were identified due to the vast amount of spending that was occurring around these areas.

Mr Trent stated that provincial Social Development, Health and Housing departments were allocating approximately 80% of their budgets to conditional grants, yet the Office of the Auditor-General consistently reports that those departments were not complying with the Division of Revenue Act (DORA). The allocation of these funds by the departments was not monitored.

The Chair commented that she was aware that the allocation of municipal grants would be monitored.

Mr Nombembe responded that the issue with the DORA was part of the emphasis of the Office of the Auditor-General’s regularity audit, especially the transfer payments. The Office of the Auditor-General ensures that it audits the extent to which the transferring department was monitoring the usage of the funds, as well as the extent to which the receiving department managed the spending of the funds that were allocated to it.

The Chair asked whether Members were satisfied that the evaluation of the monitoring would form part of the Office of the Auditor-General’s regularity audit.

Mr Nombembe replied that the 2005/6 budget was based on the assumption that all financial management and expenditure and revenue items would be audited thoroughly through the regularity audit. The only additional issues included in the budget assumption were the additional performance-related issues referred to earlier by Mr Trent, which the Office of the Auditor-General was beginning to place more emphasis on. The funding provided in this budget for financial management auditing was adequate to cover all risks associated with income and expenditure of government.

Dr G Woods (IFP) stated that there appeared to be some overlapping between the mandate of this Committee and that of Parliament’s Standing Committee on Public Accounts (SCOPA).

The Chair stated that this was a difficult issue as the role of SCOPA, the oversight mechanism and the audit Committee was not clear. She suggested that this Committee was not mandated to change the audit focus of the Office of the Auditor-General, but would instead ask for recommendations from SCOPA or Parliament on certain matters and take those into consideration.

Mr S Asiya (ANC) agreed that matters discussed by SCOPA should not be brought into this Committee, unless it regarded a substantial issue.

Mr D Gumede (ANC) stated that conditional grants were very specific to the financial position and circumstances of a government department, and as such discussions regarding conditional grants were best placed with SCOPA and not this Committee.

The Chair stated that it must then be taken in good faith, as explained by Mr Nombembe, that the regularity audits would follow both through the sending and receiving departments and that these matters would be reported to SCOPA.

Mr Trent questioned whether this Committee’s mandate was to influence the manner in which the Office of the Auditor-General, an independent constitutional institution, allocated its budget. He suggested that the mandate of this Committee was solely to discuss the budget and come to a conclusion, and it would thus be inappropriate for Parliament to dictate to the Office of the Auditor-General how it should spend its funds.

The Chair stated that these were the very issues that needed to be teased out when the oversight mechanism was established. At the moment the Committee’s mandate was solely to review and consider its budget. It was thus perfectly clear from the resolution that this Committee would have the power to recommend a change in the budget of the Office of the Auditor-General. However the Committee would have to be sensitive to the constitutional independence of the Office of the Auditor-General, and that there were other stakeholders that would have to be consulted before a decision was made. At the moment however this Committee should refrain from effecting major amendments to the proposals before it.

Mr M Johnson (ANC) sought clarity on the policies used in determining the Office of the Auditor-General’s subsistence and travelling (S&T) costs, and whether the Automobile Association (AA) rates were used.

Mr Nombembe replied that these were the costs incurred in travelling to and from auditees, and the Office of the Auditor-General ensured that these costs did not escalate unnecessarily. Efforts were made over the past years to contain those costs to more or less R39m.

Mr Johnson referred to Document 6 in the Budget document entitled "Suggested tariffs for audits", as these were the South African Institute of Chartered Accountants (SAICA) tariffs used by the Office of the Auditor-General in deciding on its S&T policy.

Mr Nombembe responded that the main driver of S&T was accommodation of staff and the travelling either by air or road. The basic rate for accommodation was three stars, and the economic class ticket was the basic standard for air travel. Fixed rates below the AA rates were used for the Office of the Auditor-General’s road travels which was currently R2,50 per km, irrespective of the size of car used. This fee was revised when the petrol price figures changed, which was approximately every two years, but it always fell below the AA rates.

Mr Asiya sought clarity on the "irrecoverable" S&T costs referred to under this item.

Mr Nombembe replied that irrecoverable S&T referred to S&T that was not related to performing audits but rather referred to the costs inherent in running the audit office, such as his costs incurred in attending today’s meeting. Much of the irrecoverable costs would thus relate to people who were not part of the audit pool, such as the travelling of support staff in supporting the business of the Office of the Auditor-General. Recoverable S&T was however S&T incurred in the direct activity of conducting an audit, such as travelling to and from the audit site. This was the primary distinction.

Ms J Fubbs (ANC) sought clarity on the policy on the rates of hired cars used by the Office of the Auditor-General.

Mr Nombembe responded in the affirmative, and stated that Group A and Group B cars were used. The distinction between the two groups depended on the nature of the distance travelled. Group A cars were allocated for short trips, and Group B cars were reserved for longer distances and trying weather conditions.

Dr Woods asked whether daily allowances were also allocated to officials of the Office of the Auditor-General.

Mr Nombembe answered in the affirmative, but it was not a major element of the S&T cost. The major element was the direct costs incurred..

The Chair asked whether the increase in rates referred to under "projected funding requirements" referred to the 4% increase in tariffs.

Mr Nombembe answered in the affirmative. However, based on the discussion that took place on the Office of the Auditor-General’s Annual Report and the levels of reserve needed to be maintained by the Office of the Auditor-General, the document also includes other scenarios in which the tariff increase was less than 4% and what the impact of this alteration would be on the surplus as well as the reserves retained.

The Chair asked whether National Treasury has approved the retention of the surplus by the Office of the Auditor-General for 2004.

Mr Nombembe replied that National Treasury has not yet approved the retention, as this discussion was yet to take place.

The Chair asked whether the budget presented to this Committee presupposes that the Office of the Auditor-General would be entitled to retain the surplus.

Mr Nombembe answered in the affirmative.

The Chair stated that in the Office of the Auditor-General’s argument for a 4% increase in tariffs it has projected a 3 year programme for the Office of the Auditor-General, and that it would no longer be requiring a surplus after those three years.

Mr Nombembe responded that the Office of the Auditor-General’s strategy was to progressively build up its surplus to meet its funding requirements. The analysis indicated that, although the balance sheet might look good, the funding requirements for the Office of the Auditor-General do suggest that it might have a shortfall in its cash requirements. It was for this reason that it was not looking solely at the balance sheet, but rather at the balance sheet as it projects forward over the three year period.

The Chair stated that the Office of the Auditor-General has projected a 2,4% deficit on its funding requirement, even based on the 4% increase in tariffs. The Office of the Auditor-General was thus still battling with its funding requirements, even based on the 4% increase.

Mr Nombembe answered in the affirmative.

The Chair stated that the 4% increase was an important issue as it affected the cost paid by government departments for audit fees. She requested the Office of the Auditor-General to explain the statement in the document that audit fees were pretty contained.

Mr Nombembe replied that the cost composition of the Office of the Auditor-General was focused on, and 70-80% of the costs of the budget related to the direct costs related to the performing of the audit. These related to staff, recoverable S&T as well as fees paid to the audit firms for work done on behalf of the Office of the Auditor-General. This aspect needed to be managed very efficiently if the Office of the Auditor-General wanted to perform efficient audits, hence the ‘span of control’. Audits of government departments could be performed less expensively if the Office of the Auditor-General used "less expensive people to do the audits". It was for this reason that the Office of the Auditor-General has embarked on a drive to bring in trainee accountants. The 2005/6 budget indicates an improvement in that regard, even though it has not yet achieved its optimal level of number of trainee accountants. The Office of the Auditor-General thus believes that the current inefficiencies could be corrected by improving the number of trainee accountants.

The budget indicates that the Office of the Auditor-General is able to perform government department audits cheaper in 2005 on a rate per person basis average compared to the rate used last year, and the Office of the Auditor-General must demonstrate that it can perform the additional audits without necessarily having to charge an additional audit fee to government.

The other area of saving would have to be on the remaining costs of running the Office of the Auditor-General, even though these might not be of a significant amount. The fourth major costs here included the running of technology and computer equipment and facilities, as well as accommodation, development of staff and the costs of staff employed within the support business units. It was for this reason that the Office of the Auditor-General was currently restructuring that unit. The cost of this exercise could cause a spike in the budget for 2006, but the Office of the Auditor-General expects that to subside in future years.

He stated that the Office of the Auditor-General expected specific approval of the Committee with regard to the "performance bonus" and "discretionary personnel expenditure allowances" referred to in the Strategic Plan contained in the document. This related to the bonus system employed in the Office of the Auditor-General.

The Chair requested Mr Nombembe to explain further the "Overview of the medium-term budget and funding requirements" of the Office of the Auditor-General, as outlined in its Strategic Plan.

Mr Nombembe responded that Document 5 entitled "Proposed internal rates for 2005/6" was merely a price list of the fees and tariffs charged to auditees. These tariffs were then used by the Office of the Auditor-General and applied to the hours spent in conducting the audits, depending on the salary earned by the respective auditor. This document was based on the total costs of running the Office, and the amount charged by each of the levels of employees within the Office in order to recover the costs and still have a surplus on its income statement was then calculated.

He stated that Document 6 related to the tariffs charged by the audit firms when they conduct audits on behalf of the Office of the Auditor-General, which were based on the discussions held with SAICA on an annual basis. The SAICA tariffs were slightly higher than the tariffs charged within the Office of the Auditor-General. The Auditor-General has been very mindful of monitoring the gap between the SAICA tariffs and the tariffs used within the Office.

Dr Woods sought clarity on the percentage difference between current SAICA rates and those charged by the Office of the Auditor-General.

Mr Nombembe replied that this averaged at approximately 20%, but the exact differential could be provided to Members. The gap was beginning to close gradually because the Office of the Auditor-General’s tariffs were beginning to become aligned with those charged by the audit firms.

Dr Woods asked whether the current profit margins of the Top 5 auditing firms in South Africa exceeded the 20% differential, as an indirect effect on the Office of the Auditor-General’s cost efficiency.

Mr Nombembe responded that he was not sure what their profitability was. The more junior people they used in conducting the audit the greater the margin of profit, and vice versa. This factor was however difficult to determine.

The Chair stated that she understood that tariff structures were discussed within the audit commission in the past, and asked whether it was referred to the audit committee or a specific sub committee established to deal with tariff agreements.

Mr Nombembe replied that the Auditor-General discusses tariffs with SAICA and that agreement would then be brought to the audit commission for approval. The tariffs contained in Document 6 are those agreed to with SAICA.

Ms Fubbs asked Mr Nombembe to explain how the figure of 62.40 in the second last column in Document 6 entitled "tariff per hour @ 2.7" was arrived at.

Mr Nombembe responded that it referred to R62.40 per hour for a person earning R30 000 per annum.

The Chair asked Mr Nombembe to explain what the "2.7" referred to.

Mr Nombembe replied that it referred to a factor which was determined by a specific formula, which was based on the hours used to do the work and the total costs which was projected to all the various levels to ensure that an equitable rate for each level was arrived at. The primary issue in arriving at the tariffs was to ensure that the Office of the Auditor-General covered all its costs associated with a person earning at that level. Some of it was based on the historical basis and the incremental factors such as inflation had to be added. The inflation factor built in with SAICA was based on the Office of the Auditor-General’s own inflation figure of 4%. However based on the discussion held with SAICA 2 years ago it was decided that its tariffs increase substantially, and an 8% increase in the Office of the Auditor-General’s tariffs over and above its normal increase was decided upon, which would be spread over two years with a 4% increase in each year. He stated that 2005 marked the last year of the 4% increase.

Ms Fubbs asked Mr Nombembe to provide Members with the formula in writing at a later date.

Mr Trent stated that, because audit firms rates for their different levels of auditors were much higher than those of the Office of the Auditor-General, it would be very difficult to assess the costs of those from the audit firms on an hourly basis if one did not even know the composition of their audit team. He questioned whether a tender process was not preferable, so that the precise tariff structure could be examined.

Mr Nombembe responded that the Office of the Auditor-General did have control over this. Regardless of the number of people used by the audit firm to conduct the task, the cost of the audit should not exceed 10% of the cost of the same audit in the previous year. This was the reasonableness test used. Once that 10% barrier was reached the Office of the Auditor-General would begin to ask questions. If however there was a good reason for exceeding the 10% barrier the Office of the Auditor-General would approve the cost.

Ms Fubbs stated that the principle here was to both raise the tariff but also to reduce the cost to government by the combination of different levels of auditing staff. The danger was however that the number of hours used by the audit firms to then perform the audit could increase if more inexperienced junior auditors were used.

Mr Nombembe replied that this could very well materialise, but the cost of the audit may not necessarily be in excess of the 10% threshold which the Office of the Auditor-General deemed tolerable. Furthermore the time taken to perform the audit might not necessarily increase, because the work could be the kind of work done by either a junior or senior auditor. However, no person at a manager level would do the work of a trainee accountant.

Dr Woods stated that the Office of the Auditor-General forecast for the current year favours contract work over own hours, which means that the tariffs established based on the Office of the Auditor-General’s earned hours indicate that less was now recovered. He asked Mr Nombembe to indicate whether the Office of the Auditor-General was confident with regard to the proposed mix for 2005/6 contract earned hours.

Mr Nombembe responded that the figure was based on the assumption that the Office of the Auditor-General will fill all the posts that were vacant at the time that it compiled the budget. This will not be an easy task. The Office of the Auditor-General has to date filled 80% of the vacancies in the trainee accountant positions, and was now looking at filling the remaining 20%. This would be difficult because the Office of the Auditor-General has exhausted its list of preferred candidates for those positions, and would now have to look at alternative candidates such as graduates or perhaps retaining some of the trainees that were not making progress academically. The Office of the Auditor-General still had 3 months to achieve a full staff complement and, if it fails to do so, it will provide a report to the Committee on the financial impact of such failure.

Dr Woods stated that the Committee would have to take Mr Nombembe up on this because it was a very important issue.

The Chair suggested that the Office of the Auditor-General had engaged in a major recruitment drive in December 2004 and January 2005.

Mr Nombembe replied that that exercise had yielded the 80% occupancy rate referred to earlier. He added that this dilemma was not unique to the Office of the Auditor-General as all the major firms involved jointly in that recruitment drive were all experiencing an 80% occupancy because of the shortage of supply from the universities. The Office of the Auditor-General would thus have to explore alternative means, and would advise the Committee on the progress made.

Dr Woods asked whether a break even analysis was done on the Office of the Auditor-General’s contracted out and own hours to establish whether it was indeed optimising its fixed costs.

Mr Nombembe responded that it was the optimal use of the Office of the Auditor-General’s resources to recovery its fixed costs, especially as its budget was a break even budget in any event. The margin realised on these figures was very small, between 5& and 6%. No comparative scientific study has yet been done with regard to contract and own hours and, as stated earlier, the Office of the Auditor-General maintains a 20% differential in tariffs to keep the audit firms interested in contracting with the Office of the Auditor-General. Experience indicated that this was an optimal number.

The Chair stated that an important issue for a future Committee would be to interrogate this 20% figure.

Dr Woods agreed, as the answer provided by Mr Nombembe was too vague and unquantifiable.

Mr Trent stated that the audits done by audit firms merely evaluate the financial position of the auditee and they do not delve into matters such as compliance and emphasis of matter, as was done by the Office of the Auditor-General. Secondly, he asked whether the audit form would perform the entire audit by itself, or whether it would merely assist the Office of the Auditor-General with certain aspects but the final report was then signed off by the Office of the Auditor-General. In the latter situation they would probably provide a much more detailed audit, such as the one ordinarily performed by the Office of the Auditor-General.

Mr Nombembe replied that the Office of the Auditor-General’s working relationship with the audit firms was that when they conducted an audit on behalf of the Office of the Auditor-General, they used the programmes and standards employed by the Office of the Auditor-General in order to sign the particular audit report. There was thus no doubt that they did comply fully with the Office of the Auditor-General’s standards. When however the conducted work not related to the Office of the Auditor-General, such as the auditing of public entities, there were instances in which the audit firms only reported on the financial statements.

Mr Nombembe stated that, with regard to the Office of the Auditor-General’s medium-term budget and funding requirements, regardless of the scenario used there will still be a shortfall in 2006 in the Office of the Auditor-General’s funding requirements. Yet the second and third year of the medium-term period would be much better.

The Chair asked Mr Nombembe to explain why the Office of the Auditor-General was budgeting for a deficit of a funding requirement of 2%. Was it because the Office of the Auditor-General expected savings or to break even, or was it because the Office of the Auditor-General felt it could not move beyond the 4% increase.

Mr Nombembe responded that the Office of the Auditor-General believed that the 4% increase would be adequate. The Office of the Auditor-General has been able to operate in the past with shortfalls, because it was allowed to retain the surpluses it had made. The Office of the Auditor-General would thus be able to survive if National Treasury allows it to retain the surplus, but if it were required to surrender the surplus to Treasury the Office of the Auditor-General would have a problem. It was because of these funding requirements that the Office of the Auditor-General has never before surrendered its surpluses back to government.

Dr Woods stated that each year the Office of the Auditor-General requests the retention of its surplus, arguing that it would run into a shortfall. Yet, each year this shortfall never materialises and it again reports a huge surplus. Furthermore, the tens of millions of Rands in the Public Investment Corporation (PIC) is never touched.

Mr Nombembe replied that this was a very important point. It was true that the Office of the Auditor-General had huge sums of money in its PIC account, yet those funds not belong to the Office of the Auditor-General but instead belong to the liabilities outlined in the schedule. For that reason it was not wise to read the balance sheet in isolation as it did not reflect all the requirements of the Office of the Auditor-General.

Mr Asiya asked whether the tariffs for the international work done by the Office of the Auditor-General were the same as the domestic tariffs.

Mr Nombembe answered in the afiirmative.

Mr Asiya asked whether the Office of the Auditor-General was confident that National Treasury would in fact grant the surplus.

Mr Nombembe replied that tha Office of the Auditor-General has not experienced any difficulty in justifying the retention of the surplus in previous years, because National Treasury has understood the Office of the Auditor-General’s submission and requirements for the funding of the Office. The only year in which the Office of the Auditor-General experienced trouble was when it requested the retention of the surplus but did not play its part in the collection of fees from its debtors. As a result of this the cash drive of the Office has improved significantly, and it is for this reason that the current numbers are presenting themselves.

The Chair stated that it would be the function of a future Committee to consider the retention of any surplus, as this matter currently went beyond the insight and expertise of this Committee.

Mr Trent agreed with the Chair. He stated that it was logical for the Office of the Auditor-General to have reserves, but the crucial factor was how they were used to benefit the country as a whole.

Mr Gumede asked whether the implications of the Municipal Finance Management Act (MFMA) were taken account of in compiling the budget of the Office of the Auditor-General.

Mr Nombembe answered in the affirmative. The documentation indicates that the MFMA was one of the reasons for the increase in the audit fee charged by the Office of the Auditor-General.

He stated that anything less than a 4% increase in the Office of the Auditor-General’s tariffs would not be possible, but could be comfortable in future years.

The Chair stated that the Committee would grant the Office of the Auditor-General the 4% increase, because it did fall within the inflationary projections. It was however dependent on the retention of the surplus.

Dr Woods agreed with the Chair. He asked Mr Nombembe to indicate how exactly the audit committee in the past used its discretion in awarding the personnel expenditure allowance.

Mr Nombembe responded that in the past the discretionary personnel allowance was used in some years but not in others. It was used the most 3 years ago, when the Office of the Auditor-General experienced a major adjustment in staff salaries to bring them in line with market salaries. There was no reason for the awarding of the allowance over the last 2 years, but the Office of the Auditor-General might need to make use of the allowance in future years because of the conscious decision of the Office to do an intensive deep-level survey of salary trends in the market for the purpose of staff retention and to ensure that the Office’s compensation levels were not out of line with those paid by its competitors. The survey would also subject each employee to a market-positioning exercise which compares the person’s level of performance with the salary offered by the market, and to then make an adjustment every June or July. However the exact extent of the adjustment cannot be stated with any certainty at the moment.

He stated that the financial impact of the discretionary personnel expenditure allowance amounted to R5m further impact on the surplus, based on the assumption that the 4% increase in staff salaries would then ultimately have an effect on the auditees themselves. There would however be a R2,3m impact on non-audit staff, R8,5m further income on audit staff and a once-off discretionary allowance of approximately R11,5m for the spike in the restructuring of corporate services. This would have a net effect of approximately R5m. It was for this reason that some of these unknowns were made allowance for in requesting the retention of a larger surplus because, if the Office of the Auditor-General’s tariffs were too low, it could in fact run low on its funding.

Ms Fubbs stated that the detailed budget document indicated that the Office of the Auditor-General would be implementing an across the board increase of 7.5%.

Mr Nombembe replied that the overall increase would be 7.5%, 4% of which related to the salary adjustments and the 3.5% related to the once-off adjustment of funding that the Office might require for corporate services efficiencies.

The Chair stated that this Committee would have to approve the 7.5% increase, but the discretionary spending was another matter for a future oversight Committee to look into.

Mr Nombembe informed Members that the performance bonus was driven largely by the variable pay policy employed by the Office of the Auditor-General, which assumes that it does not budget for bonuses but instead pays them out of the surplus generated and the effort that the staff places in performing their respective tasks. The Office of the Auditor-General’s executive Committee met in December 2004 to calculate the likely impact of performance bonuses and proceeded from the eligibility percentage that about 20% of staff qualifying for the performance bonus. This was not outside the norm, although the Office of the Auditor-General would have preferred more staff to be eligible for the performance bonuses. Based on this it was also assumed that an average of 20% bonus would be paid to those who were eligible, but this would clearly vary based on the levels of performance. The overall financial impact would be R11m approximately, which would be paid directly from the surplus.

Dr Woods stated the Office of the Auditor-General’s budget was not a fully costed budget and was largely historic, and there was thus always a temptation for the Office of the Auditor-General "to build in a bit of fat" from which to generate savings from which they get a nice performance bonus. There was thus no way to ascertain whether those funds were genuine savings or whether they were amounts built in to yield performance bonuses.

Mr Nombembe responded that it was a zero-based budget and was based on the Office of the Auditor-General’s best attempt to minimize any "fat" on the budget. This was one of the areas in which the Auditor-General was uncertain and thus requested a broad principle within which to allow it to spend the extra funds as and when needed.

Mr Gumede disagreed with Dr Woods that there was no way to gauge the credibility of the bonuses, as the ‘set targets’ referred to in the document indicate that there were definite benchmarks in place.

Ms Fubbs asked whether the 20% referred to by Mr Nombembe referred to 20% of the pay of the staff member, or whether it related to 20% of the net surplus.

Mr Nombembe replied that it referred to 20% of the salary cost, which amounted to about R11m. The Office of the Auditor-General was thus requesting that the Committee allow it to set aside this R11m for bonuses.

The Chair agreed with Mr Gumede, and stated that a future Committee must look at the goals and targets on which the awarding of the performance bonuses are based. The Committee would have to approve the Office of the Auditor-General’s performance bonus request.

Mr Asiya asked whether the Office of the Auditor-General still had staff members who were accumulating leave.

The Chair informed Mr Asiya that the Report indicated that no new staff were allowed to accumulate leave liability.

Mr Nombembe agreed with the Chair. Most of the leave liability referred to by Mr Asiya related to staff that joined the Office of the Auditor-General from government departments. The Office of the Auditor-General would have to live with this until they retire from the Office.

The Chair stated that Members would now consider the detailed budget of the Office of the Auditor-General on a page-by-page basis.

Detailed Budget of the Auditor-General 2005/6
Direct Audit Cost: S&T Recoverable
The Chair sought clarity on the 61% increase in S&T irrecoverables.

Mr Nombembe responded that the main reason for this increase was that the item was substantially reduced by approximately R2.5m in 2004 because of the Office of the Auditor-General’s investment in the video-conferencing facility. The paying back of that facility would take the Office of the Auditor-General longer than originally anticipated, and it has thus toned down on the expected pay back period of that facility.

The Chair stated that, in fact, the budget for this year as opposed to the projected outcomes for 2004 were actually 11% less than the Office of the Auditor-General’s forecast for 2004. It was thus not a great increase on what it achieved for 2004.

Insurance and legal fees: Legal costs
Dr Woods requested a breakdown of the R543m spend on legal costs, as it was a substantial amount.

Mr Nombembe replied that the Office of the Auditor-General could provide the details to Members at a later date. He stated that by and large they were set aside for all legal support required by the Office. These ranged from issues such as the collection of debts, the Arms Deal issue and others. These were figures that may or may not occur, but the request was based on historical experience.

Dr Woods requested a detailed breakdown of the estimates for legal fees in the current year, as well as for 2006.

Mr Nombembe replied that this was not a problem. He stated that the figure was less than R1m and, as such, it was insignificant to explain. If the Office of the Auditor-General had to explain each and every figure on the budget, including the minor items, it would consume unnecessary profitable time for the Office.

The Chair informed Mr Nombembe that this Committee was entitled to any information it sought, but the Committee was sensitive to requesting information on significant amounts.

Dr Woods stated that one was aware that the Office of the Auditor-General had spent much funds on legal fees regarding his protection of information on the Arms Deal. This was an issue in this specific expenditure item, and this Committee should keep a constant oversight eye over this matter.

The Chair stated that there was no harm in requesting a breakdown of the legal costs and accountability from the Office of the Auditor-General was needed on this matter. The Committee could request information on any issue, but encouraged Members to limit their questions to issues of material effect.

Capital: Computer equipment
Dr Woods sought clarity on the sizable amount of R21m spent on the purchase of computer equipment.

Mr Nombembe responded that this coincided with the expiration of the contracts the Office of the Auditor-General entered into with suppliers for the first batch of laptop computers purchased 3 years ago. These computers were replaced every three years. In an effort to encourage staff computer literacy, they were allowed to own the computers after the three year period if they have contributed something towards it over the three years.

Dr Woods stated that it was a huge acquisition as the figures suggested that each member of the Office of the Auditor-General would receive a new computer and printer every three years. He suggested that the Office of the Auditor-General should stagger the purchase of new computers beyond the three year cycle.

The Chair informed Dr Woods that the figure did not refer solely to the individual computer and printer, but instead related to the networks, IT support etc.

Mr Nombembe replied that the detailed budget document indicated that the major contributor here was computer equipment of which the bulk was the notebook and desktop computers. He stated that the finance deal the Office of the Auditor-General entered into with suppliers did allow it to stagger its purchases. The Office of the Auditor-General was not paying cash for the computers but was instead paying for them over a three-year period on a finance lease basis. Thus even though it was a major acquisition, the Office’s expenditure was spread over the three year period.

The Chair stated that this lead to the problem that the Office of the Auditor-General did not have a medium-term expenditure plan budget, and thus this kind of capital expenditure for the next two years was not evident. The Office needs to establish a medium-term budget.

Mr Nombembe responded that this information could be provided to Members.

Motor vehicles
Ms Fubbs questioned whether the Office of the Auditor-General’s policy on insuring its motor vehicles should not be reviewed, if the current position yielded such a high differential. There was such a huge difference between the market value of the vehicle and its replacement value that the Office of the Auditor-General was sitting with a shortfall.

Mr Nombembe replied that this must be considered. He stated that the Office of the Auditor-General was about to introduce the car insurance policy for the entire office.

Number of staff: Business executives
Mr Asiya asked whether Office of the Auditor-General centres would be created in all 9 provinces due to an increase in MFMA work.

Mr Nombembe responded that it would be established in all provinces if those provinces could show the additional work they would be conducting that would justify the costs incurred in establishing the new centres. The centres were created in provinces that had a very good span of control.

S&T recoverable and Surplus on foreign contract
Ms Fubbs asked Mr Nombembe to explain the statement in the detailed budget document that with the strengthening of the exchange rate the surplus was not expected to materialise in the 2005/6 budget period, as the exchange rate could in fact fluctuate.

Mr Nombembe replied that the result of a material fluctuation in the exchange rate would be reflected n the revised estimates. A major figure was however not expected.

Contract work: Irrecoverable
Ms Fubbs asked Mr Nombembe to explain what was meant by ‘irrecoverables’.

Mr Nombembe responded that this referred to monies paid by the Office of the Auditor-General to experts for the completion of tasks or research requiring skills which the Office of the Auditor-General did not have, such as human resource and IT matters.

The Chair asked Mr Nombembe to explain how this differed from professional fees.

Mr Nombembe replied that it was probably the same thing, and was really a matter of choice of terminology used.

Mr Trent sought clarity on the statement in the document that R1,41m would be ringfenced pending restructuring.

Mr Nombembe responded that the Office of the Auditor-General used the term ‘ringfenced’ to ensure that it paid special attention to the matter. It referred here to a once-off amount to be paid to outside experts for corporate services rendered. The amount was related to work associated with the restructuring of corporate services.

Regional congresses
Mr Johnson asked Mr Nombembe to explain what this referred to.

Mr Nombembe replied that this was another term used by the Office of the Auditor-General to denote its staff sessions to align staff to the strategy of the Office of the Auditor-General.

Computer hardware: Storage
The Chair stated that she understood that no provision was made for a storage device as the Office of the Auditor-General was making provision for an off-site storage device.

Mr Nombembe answered in the affirmative. He stated that the Office of the Auditor-General was close to approving the supplier of the off-site storage. It formed part of the security costs listed.

Ms Fubbs asked whether the Office of the Auditor-General ensured that it received the best interest rate from its bank.

Mr Nombembe responded in the affirmative. He stated that the Office of the Auditor-General used only the PIC which charged a favourable rate of 9,5%. It did not pay too much attention to the rate on the current account, because a limit was in place for the extent of funds contained in the current account.

The Chair noted that the Committee granted provisional approval to the budget of the Office of the Auditor-General for 2005/6, but the final report of the Committee would be adopted next week.

Letter regarding alleged interference by Auditor-General in Draft Arms Deal Report
The Chair stated that Mr Trent has requested that a process be decided on to deal with the allegations of interference by the Auditor-General in the Draft Arms Deal Report, that had now come into the public domain.

Mr Trent stated that his letter was self explanatory. It contained a summary of all the allegations levelled against Mr Fakie in the press regarding the Draft Arms Deal Report. He stated that he has had sight of the documents in the possession of Mr Richard Young, the defence contractor. He stated that his main concern was that the allegations that Mr Fakie has acted improperly could unfairly discredit the Auditor-General, because he was not being given the opportunity to publicly deal with these matters. It would be a disservice to the Office of the Auditor-General not to afford him that opportunity. He stated that he was not passing judgement on Mr Fakie.

He stated that Mr Fakie has created a positive image, if one looks at his image in the international arena, and it would be remiss of Parliament to leave the matter as it currently stood. The danger was that perceptions would be created in the public eye and there was nothing more damning than an allegation.

Mr Trent stated that he decided against addressing this letter to SCOPA because it enjoyed a cordial and close working relationship with the Office of the Auditor-General, and would as such not be the appropriate body to deal with the matter. It was for this reason that he decided to address the letter to the Chairperson of this Committee. He stated that he had also written to the President requesting that a judicial commission perhaps be constituted to deal with this matter, but that would deal more generally with the Arms Deal issue.

The Chair reminded Members of Rule 66 which stipulated that:

"no Member shall reflect upon the competence or honour of a judge of a superior court or of the holder of an office whose removal from such office is dependent on a decision of this House, except upon a substantive motion of this House alleging facts which if true would, in the opinion of the Speaker, prima facie warrant such a decision"

She stated, according to that Rule, Mr Trent was thus absolutely correct as he has not been trying to comment on or reflect on the substance of the allegations levelled against Mr Fakie. Instead he was simply drawing Parliament’s attention to the fact that these allegations have been levelled in the public domain. She stated that Members should not enter into discussions on the allegations per se, as this could only be done as the result of a substantial resolution of the House. Several matters arise:

Firstly, the letter had brought into debate the roles of the various Committees. This Committee was an Ad Hoc Committee and it was anticipated that a formal oversight Committee would be established once Parliament was up and running, now that the Public Audit Act had been passed. However the terms of reference of this Committee were extended via a resolution of the House that now requires it to perform an oversight function.

Secondly, the precise meaning of the term ‘oversight’ for this Committee must be properly interrogated once the formal oversight Committee was established. The Public Audit Act was very specific and Section 22 stipulated that the Committee must protect the independence of the Auditor-General. She stated that her concern was that a new oversight mechanism was being established and all care should be taken to ensure that the Committee functions solely within the mandate of the legislative framework in the Public Audit Act.

Thirdly, the relationship of this Committee and SCOPA must be clarified. She stated that she disagreed with Mr Trent’s reasons for not referring this matter to SCOPA and suggested instead that, because of SCOPA’s institutional history of the matter, it should be referred to that Committee rather than plunging a new Committee into the issue. All would agree that the relationship between SCOPA and the oversight mechanism must be very clearly understood, otherwise all kinds of complication would arise. Perhaps a conferring mechanism between the two Committees could be established to deal with matters of mutual interests, such as budgets.

Fourthly, the issue raised by Rule 66 was how exactly a matter that was in the public domain would come into the Parliamentary domain. Does it come via a substantial resolution to the House, or was it via the Auditor-General himself tabling a response as he did under the Special Investigative Report? She agreed that there were issues in the public domain but, as Mr Trent himself indicated, many things are said in the public domain.

The fifth issue was how substantial there issues were that entered the Parliamentary process. At the moment the Committee only had the benefit of press reports and Members were as yet unable to apply their minds to any of the issues. She proposed that the Committee make a special recommendation that Members of both SCOPA and this Committee be provided with both the Draft and Final Arms Deal Report of the Auditor-General. This would allow Parliament to apply its mind to the facts and so doing decide whether the issues in the public domain were of any substance.

The sixth issue was that the ANC has already expressed itself on various radio broadcasts via Mr Vincent Smith (MP) that it had no objection with the Auditor-General appearing before a Committee of Parliament to explain the allegations levelled against him. The critical issue was Mr Fakie’s view on the allegations and how matters in the public domain would enter the Parliamentary domain. Perhaps the Speaker’s views should be ascertained as to how to proceed with this matter.

The final issue was the question of court action. She stated that she was not sure what the status of hearings held in Parliament to get to the bottom of this would be, if there was a parallel court process.

She suggested that: firstly, the allegations made in the public domain were serious and both this Committee and SCOPA needed to have the relevant documentation before it in order for Members to apply their minds to the matter.

Secondly, the advice of Parliament’s Legal Office must be sought on the process to be followed in taking this matter forward, as well as the seven queries she had raised earlier. She stated that she hoped that the media present took into account the discussion which had taken place earlier, because she did not want the impression created that she was trying to forestall anything. Instead there were very substantial issues at play that required the route she has suggested. The Legal Office must also consult with the Auditor-General on the process to be followed in allowing a matter that was currently in the public domain to enter the parliamentary channels.

Mr Asiya proposed that the Committee first establish from the Legal Office whether it was entitled to gain access to the Draft Report.

The Chair agreed.

Dr Woods stated that this matter would be dealt with by Parliament at two substantive levels of oversight: firstly, whether the Report which SCOPA processed was changed in a material way by the Auditor-General, and this would involve an oversight role by SCOPA to ascertain whether the Report it received was accurate and complete. The second level of allegations regarded the conduct of the Auditor-General in executing his duties, and this was an oversight function that related more to he mandate of this Committee or the more permanent oversight mechanism yet to be established. The Committee would consider whether Mr Fakie has in any way harmed the esteemed status that the Constitution gave his Office, and which must be preserved.

The Chair stated that her understanding was that the Report of the Auditor-General was based on Chapters 11 and 12 of the Draft Report on the Arms Deal, whereas the issues listed in the letter went beyond Chapters 11 and 12. The scope of the matter was thus broader. She suggested that Parliament would probably have to establish something far more powerful than an oversight mechanism to make a final judgement on the second issue referred to by Dr Woods.

Mr Trent thanked the Chair for the manner in which she has applied her mind to the matter. Secondly, it was vitally important that the Committee first ascertain the direction to be taken and proper Parliamentary procedure to be followed in pursuing this matter. Thirdly, the allegations levelled against Mr Fakie by the Business Day were very serious, and the Committee should proceed with caution. Fourthly, Members need access to the documentation. Fifthly, the Auditor-General should be consulted on his personal opinion on the matter. He stated that he agreed with the process suggested by the Chair.

Mr Nombembe stated that he agreed with the process suggested by the Chair. He stated that the Auditor-General has very clear views on the matter and he was willing to deal with Parliament in terms of any information it may require on this matter.

The Chair stated that she would address a letter to Parliament’s Legal Office requesting the legal opinion on the matters she raised earlier. She would consult her pier in SCOPA regarding access to the documentation, and would speak to the Auditor-General on an informal basis regarding his views on the matter.

The meeting was adjourned.