Strategic Plan and Budget of Office of Auditor-General

Meeting report

AUDITOR-GENERAL AD HOC COMMITTEE
29 November 2005
STRATEGIC PLAN AND BUDGET OF OFFICE OF AUDITOR-GENERAL

Chairperson: Ms B Hogan (ANC)

Documents handed out
Budget and Strategic Plan of the Auditor General for 2006/07 (not yet a public document)

Office of the Auditor General website: http://www.agsa.co.za/

SUMMARY
The Committee was briefed on the Strategic Plan and budget of the Office of the Auditor General. These documents reflected its commitment to improving the quality of service, becoming even more cost-effective and increasing the focus on service delivery through the use of performance audits. The implementation of the Public Audit Act had provided a new strategic direction and focus. The Office had already made good progress in reviewing policies and guidelines relating to the requirements of the Act and envisaged being ready to fully implement the Act by the end of March 2006.

The Auditor General would continue to focus on doing specific performance audits. It had committed 7% of its resources to performance audits. It had had identified three performance themes for the 2006-07 financial year: allocation of low cost housing projects to contractors and the control over these projects, investment in infrastructure and transfer payments.

The Auditor General utilised the services of private audit firms to supplement its resources during peak periods. These private audit firms would continue to be used in specialised areas where the Office might require additional experience or skills to conduct specific types of audits. It would only contract out work in cases where objectivity or independence to ensure credibility, was needed, or in cases where there was a need for highly specialised skills that did not exist in the Office of the Auditor General.

MINUTES
The Office of the Auditor General was represented by Mr S Fakie (Auditor General) and Mr T Nombembe (Deputy Auditor General). The Auditor General (AG) said that the Strategic Plan and the budget of his office reflected the commitment to improving the quality of service, becoming even more cost-effective and increasing the AG's focus on service delivery through the use of performance audits. The implementation of the Public Audit Act had provided a new strategic direction and focus to the AG. The Office had already made good progress in reviewing policies and guidelines relating to the requirements of the Act and had envisaged being ready to fully implement the Act by the end of March 2006.

In line with the government's drive towards implementation and service delivery, the AG would continue to focus on doing specific performance audits, in order to support this drive. It had committed 7% of its resources to performance audits. The AG was focusing in the medium and long term to implement performance audits on a structured and incremental basis. It had had identified three performance themes for the 2006-07 financial year: allocation of low cost housing projects to contractors and the control over these projects, investment in infrastructure and transfer payments. Housing was a major service delivery imperative for government.

He said that regularity audits were given prominence in the 2005-06 audit period. Because of their significance as the biggest expenditure areas for government, asset management, personnel expenditure and transfer payment would continue to receive extensive audit coverage in the 2006-07 audit period. A value adding audit methodology had been developed by the AG that would integrate elements of performance auditing with regularity auditing. It was a cost-effective approach to bring another level of expertise and audit focus to the regularity audit. During 2005-06, three audit themes (human resource management, supply chain management and investment in public infrastructure) were identified for coverage as part of the regularity audit process. These were confirmed as necessary to be carried forward as audit themes into the 2006-07 budget period for all tiers of government as well. The audit focus on HIV/AIDS that had been piloted in some provincial health Departments during 2005-06 and the audit of government spending on subsistence and travelling would be additional identified focus areas for the next financial year.

The AG was satisfied that the budget being submitted for 2006/07 was a fair reflection of the resources that the Office would require to deliver on its mandate. The budget represented a 30% expenditure increase compared to last year and a 23% increase in the income budget.

Mr Nombembe continued with the presentation. He said that the AG utilised the services of private audit firms to supplement its resources during peak periods. The peak periods were largely influenced by the legislative deadlines contained in the Public Finance Management Act and the Municipal Finance Management Act. The AG would continue to use private audit firms in specialised areas where the Office might require additional experience or skills to conduct specific types of audits. For the utilisation of this resource to remain mutually beneficial, a minimum of 20% of audit work conducted by the AG would be set aside for the firms. The AG would only contract work out in cases where, for reasons of objectivity or independence to ensure credibility, works needed to be contracted out or in cases where there was a need for a highly specialised skills that did not exist in the OAG. In addition to the norm of 20%, an amount of R58, 3 million had been set aside to accommodate 10% employee vacancy. This vacancy level had been experienced industry wide due to staff turnover and insufficient supply of qualified candidates in a highly competitive market.

The Chairperson asked for the objectives of the corporate services restructuring.

Mr Nombembe said that the restructuring of corporate services had reached its final stage. He believed that the budget was a true reflection of the ideal cost of corporate services. The main purposes of restructuring were to ensure that efficient and cost effective capacity was in place, ensuring a responsive output-based capability and streamlining and enhancing processes. The new corporate services consisted of five business units: Strategy, Governance, Special and Strategic Projects, Operational and Transactional Management and the Reputation and Stakeholder Management Units.

Ms Hogan understood corporate services to include issues around finance and human resources. The remodeling of corporate services in the office of the AG would be process based as opposed to being based on function lines. It would be preferable for the Committee to have an understanding of what the difference(s) would mean.

Mr Nombembe replied that the Executive Committee had looked at how to bring about efficiencies in corporate services. It identified certain functions that were critical to prevail within the office in order to relieve the burden that the Executive Committee had. The Committee had been doing certain kind of work that it should not have been doing as Executives and this had led to some inefficiency. The Committee was too much focus on details as opposed to strategy. The next step was to identify a model that would accommodate the identified functions. The options were either to maintain the traditional functional business lines or going to a totally different model that was process based. The OAG was aware that the process would not be easy. It would require certain changes on the part of management because it would introduce a new culture within the Office.


The Governance unit would focus on ensuring compliance will good governance practices, particularly in the areas of risk management, internal controls and legislation. It would also focus on enabling quality decision making by providing an effective corporate secretariat function. The quality control unit of the Office would also fall under this unit because it was key to making sure that all governance and accountability issues were taking seriously. The legal components used to be scattered all over the place and would now fall under this unit. The risk management component would also be under this unit. The previous arrangement made it difficult for the Office to co-ordinate its activities.

The Special and Strategic Projects Unit was essential a research unit. Research was important for audit and non-audit activities. The unit would be responsible for providing detailed and cross-functional research for all service lines. It would also provide full programme management support, ranging from piloting and training to change management, to ensure a high level of acceptance by users. The Reputation and Stakeholder Management unit would focus on managing the auditing stakeholders. This would entail structuring the relationship with the various spheres of government and legislatures. The unit would monitor and coordinate reputation and stakeholder satisfaction requirements and projects.

Discussion
Mr E Trent (DA) noted functions were scattered all over the OAG and that the restructuring process had pulled them together. He asked if there would be any cost benefit arising from the restructuring.

Ms J Fubbs (ANC) said that there was a different system in place four years ago and the AG was now moving to a new system. The system that was in place had its own cost. She asked for a comparison between the two systems in terms of the costs involved. She wondered how long the restructuring process would take and if the process would lead to an acceleration or deceleration in costs annually.

Mr L Zita (ANC) asked what was the initial timeframes for evaluating the impact of the restructuring process.

Mr Nombembe replied that said that there were three timeframes. The first period was for ensuring that the AG had the placement process was process. The Office would struggle to achieve its goals should it not have the placement process in order. The Committee had done a lot with regard to the placement of people in their jobs. The business executive positions had all been placed. There was a particular philosophy that had been introduced within corporate services to ensure that there were opportunities for career progression. The second phase had the time line of March-April 2006. The Office was expecting to receive feedback on the development elements of the transitional plan from corporate services during this phase. The AG should be able to know what the impact of the process had been by March 2006. The transitional plan had been set over 18 months from December 2005.

Ms S Rajbally (MF) asked if the OAG had in-house training or if it outsourced the training of staff.

Mr Nombembe replied that there was an almost equal split between internal and external training. Trainee accountants received a lot of external training instead of going out and acquiring tax and accounting experience. The bulk of the training of management took place in-house. There was a management development programme in place.

Ms Rajbally asked what were the costs for both external and internal training.

Mr Nombembe replied that external non-audit training cost about R2.2 million. Audit related training cost about R1.3 million. The reason for this was that the bulk of the audit related training, with the exception of trainee accountants, happened in-house. The ATCOR courses for trainee accountants cost R3.8 million. The induction aspect was small and cost R850 thousand. In addition to the ATCOR courses for trainee accountants, there was an increased emphasis on external training to provide continuing professional development programmes for an extended number of employees in both audit and non-audit disciplines. This was in keeping with the AG's strategic focus to promote full compliance with the minimum qualification framework requirements.

The AG said that the non-audit training was not necessarily for corporate services. It meant that the Office had to develop its own its auditors on soft skills like leadership and people management.

Ms Fubbs said that the restructuring process would necessitate that training be provided to staff. She asked what would be the total cost of the training.

Mr Nombembe replied that the cost of employment covered in the document referred to salary costs only. The only element that was included was the cost of a specific unit within corporate services that was responsible for training in the form of developing training material and conducting the actual training for people within the office. The real costs of training were included in the professional assistance costs that included the costs of training auditors and other staff within the office.

The AG said that the numbers reflected in the document showed an increase in the number of people required for corporate services. A number of senior people were required and this had the effect of increasing the costs. The level of training that would be required for senior people would be less because they were expected to come with the necessary skills to perform their functions. The kind of training that would be provided to them would be more focussed on orientation to ensure that they understood the operations of the office.

Mr Trent said that it appeared that the OAG had increased the cost of corporate services. There had to be a reason for this. He asked if there would some savings somewhere down the line.

Mr Fakie replied that the additional cost covered three different elements. Resources were needed for the Office to meet the changing auditing requirements and demands placed on the auditing profession. The restructuring process would result in a better quality service. It would free auditors to pay more attention to quality control aspects. Auditors were getting too involved in administration issues due to lack of efficiency within corporate services. There would be cost reduction somewhere down the line.

Mr Nombembe said that the answer given by the AG also answered the question raised by Ms Fubbs on the acceleration or deceleration of costs.

Mr Trent said that the AG's main function was to secure better governance and get value for money for taxpayers. Efficiencies within the Office should lead to value for money and this was a benefit one could not easily quantify.

Mr Nombembe said that in the past a significant of amount of money had been spent of contracting work out due to the shortfalls in corporate services. With the full capacitation of corporate services, it was assumed that there would be no outsourcing of work that could be done internally. The only outsourcing that would happen would be due to the lack of skills within the Office or activities that the AG could not due for reasons of objectivity or independence.

He said that there would be improved employee competency, process efficiency and product quality following the restructuring process.

Mr Trent asked why there was a drop in the number of audits compared to last year.

Mr Nombembe replied that there was no reduction in the number of audits. The OAG had only reduced the amount of resources to be used in conducting audits.

Mr Trent asked if the document only reflected the number of audits that would be done by the AG himself and not necessarily the number of audits that the AG would sign off. The number of public entities to be audited had dropped.

Mr Nombembe replied that the main issue was the reclassification of audits. The OAG was engaged in a process of cleaning its database. There were a lot of redundant debtors in the system. There had also been a consolidation of some public entities.

Mr Trent said that the Schedule to the Public Finance Management Act had not been updated since 2000. A lot of institutions listed therein where no longer in existence. He was delighted that the AG cleaning up it system.

Ms Hogan said that there was an updated list on the National Treasury's website. The list was not in the PFMA because putting it there would have required legislative changes. She suggested that in future the AG should indicate which entities they would not audit for a particular year.

Mr Trent that there were entities that were of the opinion that they did not have to submit their accounts to Parliament the minute they were exempted from provisions of the PFMA. They would argue that they were companies and could not divulge their trade secrets. It was important for the Committee to keep a watchful eye on them.

Mr Zita said that it seemed like there was a huge demand for further training. He wondered if this meant that academic institutions were not doing enough in terms of training students. He asked if the AG was wit the kind of training that students were getting and if there was any interaction between the AG and institutions of higher education and training to ensure that the required training took place.

Mr Fakie replied that the Office had a fairly well established performance audit unit. There were some fairly skilled people in the Office and the Office was leading in the area of performance audit. The AG did not contract out too much of the performance audit. In most cases it had to give training to audit firms if it contracted out performance auditing to them. Performance audits required very specialised skills that did not exist in many audit firms. The AG also engaged with other Auditor Generals who had far more sophisticated performance units. The AG was largely focused on financial audits and it was intending to shift that focus.

Ms S Asiya (ANC) said that it was important to have a monitoring mechanism so that the Committee could keep track of all developments.

The Chairperson said that the annual report usually contained a progress report on the measurable objectives.

The AG agreed that the Office would reflect on its achievement in the annual report.

Mr L Johnson (ANC) said that the Public Audit Act provided that people had the right to forward complaints to the AG. One of the main frustrations was the connection between people and institutions of government. The issue was whether the AG had been able to reach out to the people and make them aware of their rights and responsibilities.

The Chairperson said that some people were not aware that they could directly approach the AG if they had a complaint.

Mr Trent said that it was important for the Committee to have an idea on how special investigations impact on the AG's budget because they cost a lot of money. He referred to an instance wherein the AG was requested to do an investigation relating to the South African Defence systems deal. He wondered how much it cost to conduct the investigation.

The AG agreed that special investigations impacted on the budget. There was a need to educate the public on issues that they could bring before the AG. The issue had to be dealt with carefully because there were other pieces of legislation that dealt whistle blowing. The public could refer their complaints to a number of institutions and the AG was just one of them. There was a lot of duplication in the system and a complaint could be referred to different institutions (Public Protector, AG and Public Service Commission) at the same time leading to waste of time and scarce resources. It was important for the different institutions to talk to each other or else they would be diverted from their core functions by complaints that could have been easily dealt with by another institution. The Public Service Commission (PSC) had established a hotline through which any complain by the public had to go through. The PSC would then decide which institution was best suited to deal with the matter. The AG was the ideal agency to deal which financial issues. There was an overlap in the mandates of the different institutions.

Mr Nombembe continued to take the Committee through the presentation. In addition to the normal employee salaries, the AG made provision for an annual performance bonus that was variable by nature and payable to employees who had demonstrated extraordinary performance during the year. A discretionary allowance was granted by Parliament at a level of 4% of the normal staff costs. This was done in recognition that the budgeted personnel expenditure provision might no be adequate to sustain the payment of appropriate market related remuneration for a specific budget period. The AG had accepted the nomination to host the 11^th General Assembly of the African Organisation of Supreme Audit Institutions in South Africa in 2008. The estimated cost for this event was R800 000.

With regard to the statement of projected income, he said that the most important things was the effect of the business activities on the net surplus of the OAG. The surplus had reduced quite significantly for next year and not projected to grow substantially in the next two years. The main reason was that the AG had taken into consideration the 10% vacancy rate assumption for audit staff.

Ms Hogan asked if the salary expenditure inflationary increase of 5.5% referred to the projected salary increase or only the inflationary component of the increased. The 5.5% increase would not be what the AG had budgeted for salary increase in general.

Mr Nombembe replied that the percentage excluded the discretionary amount that the AG might have to use in the event of the market repositioning of salaries. The AG was budgeting for a 5.5% increase.

Mr Zita asked how competitive was the assumption that the OAG was working on and if it was market related.

Mr Nombembe replied that the assumption was in line with market trends. The trend had been between 4% and 6% over the past year.

Ms Rajbally asked what was meant by "own hours".

Mr Nombembe replied that the income of the AG was made up of income generated by work done by staff and income generated by audit firms. "Own hours" was revenue generated by the staff of the AG.

Ms Fubbs said that the document that was presented last year had indicated contract work that was irrecoverable. The document under discussion did not deal with irrecoverable contract work.

Mr Nombembe said that irrecoverable contract work was part of other overhead expenditure. He continued to deal with the funding requirements of the OAG. An amount of R5.3 million had bee set aside to cater for any special investigation for which there was no immediate funding. The practice was to first make every attempt to recover the money from the audited entity.

Ms Fubbs said that the OAG had bought a number of computer notebooks last year. The finance charges had decreased and she asked if this meant that the AG had negotiated a better deal. She also asked if the AG would be replacing notebooks in the 2006/07 financial year due to their limited life span.

Mr Nombembe replied that the notebooks would be replaced but the number of replacements would not be large. The notebooks were acquired in bulk and the numbers had increased as more staff was employed.

Ms Fubbs said that it appeared that some people had been using the same computer for three years and that this was a cause for concern.

The AG said that the policy in the Office was that a notebook had to last for three years before it could be renewed. A number of new recruits had joined the AG and new computers had to be acquired for them. Some people had since left the Office and the arrangement was that they could pay a certain amount of money and take the computers with them. People who had left had taken their computers with them.

Ms Hogan said that the AG had put a lot of resources in recruitment and was using a number of recruitment agencies.

Mr Nombembe replied that the focus of Career Junction was for people who were easily available in the market. The AG would not use agencies for such people. It would subscribe to the Career Junction and use it to the full extent. The AG would engage agencies in the acquisition of people who were scarce in the market. It was envisage that there would be some kind of a recruitment partnership with agencies so that the AG would not wait until there was a crisis before it could approach agencies for scarce skills. The partnership would allow the AG to do forward planning in terms of who it would want in terms of succession planning practices. There was a need to focus on African women chartered accountants.

The meeting was adjourned.