Auditor-General Annual Report 2005/6; Budget & Strategic Plan 2007/10: review

STANDING COMMITTEE ON AUDITOR-GENERAL
21 September 2006
AUDITOR-GENERAL ANNUAL REPORT 2005/6; BUDGET & STRATEGIC PLAN 2007/10: REVIEW

Chairperson: Ms B Hogan (ANC)

Documents handed out:
Measurable Objectives and Medium-Term Output Targets
Discretionary Allowance, Bonuses, Surplus retention and Tariffs
Office of the Auditor General's Annual Report for 2005-06 [available at www.agsa.co.za]
Executive Summary of Budget and Strategic Plan 2007/10 (not distributed to public)
Budget and Strategic Plan 2007/10 (not distributed to public)

SUMMARY
It was the first review of the Office of the Auditor General's Annual Report for 2005-06 and Budget and Strategic Plan 2007/10 by this new standing parliamentary committee since the passing of the Public Audit Act. The requirement of the Public Audit Act is that the Committee should review the General Annual Report of the Auditor-General and within two months of receiving the Report, it should be tabled in Parliament. The Auditor General and the Deputy Auditor General answered questions on the budget put to them by the Committee. Specific attention was paid to the primary focus areas, the measurable objectives and medium-term output targets. There was much discussion around the concept of measuring quality. The tight time frames for reviewing the budget were noted which might have to lead to an amendment to the Act. Other areas dealt with in the discussion included the cost of audits, timeliness of information presented, and the engagement of the Auditor General with international audits.

MINUTES
Auditor-General Annual Report & Review of Budget and Strategic Plan 2007-2010
Ms B Hogan (ANC) gave background on the purpose of the meeting. She mentioned that it was a requirement of the Public Audit Act that the Committee should review the General Annual Report of the Auditor-General and within two months of receiving the report, it should be tabled in Parliament.

She pointed out that this was the first meeting with the Auditor General and that there was no formal structure in place as to how such meetings should be done. She suggested that instead of the Office of the Auditor General reading out the whole budget and report, the meeting would proceed in the order of the Measurable Objectives and Medium-Term Output Targets. Thus there would be no formal presentation and members would ask questions and comment on the budget as they were led through a review of the budget.

Mr Shauket Fakie (Auditor-General) noted that there had been a time pressure on everyone to review the budget and that perhaps there would probably be a need for amendments to the Act. The Deputy Auditor-General would elaborate on the principles and performance indicators.

Mr S Asiya (ANC) commented that the Committee had not been given enough time to internalise, analyse and make valuable inputs with respect to the budget. He also mentioned that there were not enough ANC members attending the meeting as they had other meeting engagements.

Ms Hogan said that the budget could still be tabled and that there was no problem about that. She noted that they were supposed to have been given the budget seven days before the meeting but that they had only received it on Tuesday 19 September and this had caused the time constraints. When the Committee had its strategic planning workshop this year, consideration would have to be given to setting annual time frames. She added that ANC members had been over-stretched and that if the Committee allowed her to, she would liaise with the heads of the different political parties to try and work out a plan for overcoming the time constraints with which committee members were faced.

Mr Terrence Nombembe (Deputy Auditor-General) explained that the structure of the budget was an Executive Summary and that they were talking to the high level outputs of the Office of the Auditor-General. The budget was divided into primary focus areas: Legislative framework, Auditing, Issues of transformation (including BEE and employment equity), Issues of leadership and Issues of reputation. The Committee were welcome to make suggestions or add to these primary focus areas. The document indicated the Measures and Targets that the Auditor-General commits to. The second part of the budget deals with focus areas that he referred to as "people issues" and processes needed to achieve business objectives. The schedules provided the Income Statement, the Balance Sheet and a Funding Statement. The financial measures were based on what had been achieved in the high-level financial statements of the previous year. The detailed budget was in the same format as that of previous year. The "critical things" were not in the Budget document but in the loose sheet titled Discretionary Allowance, Bonuses, Surplus Retention and Tariffs.

Ms Hogan asked whether the document was a summary.

Mr Nombembe responded that the whole report was an executive summary and that if the Committee needed further information on it, they would be able to provide it in terms of transparency towards the Committee.

Ms Hogan further asked Mr Nombembe to make the thick explanation document available electronically so that the Committee could see if the information contained in the document could be more helpful than the executive summary document.

Mr Nombembe went on to talk about the Legislative Mandate saying that Office of the Auditor General was subject to the Constitution and the PAA. He mentioned that the Office consisted of an Advisory Board, Audit Committee, Executive Committee [day-to-day operations of the Office under leadership of the Deputy Auditor General (made up of five corporate executives in office)], and Remuneration Committee - due to complexity of remuneration issues (This committee had not yet met but would meet for the first time in November as they were busy finalising one member).

Mr Nombembe said the most important primary focus area was auditing as that was the reason for the existence of the Office. One of the most important responsibilities to do with auditing, was Quality Assurance. This focused on what had been introduced in the Office as a Quality Controls strategy based on Auditing Standards which in turn referred to the International Standards on Auditing (ISA). An external member did an independent review of the financial statements before the AG signed an audit report. That was a requirement of the International Federation of Accountants (IFAC).

Ms Hogan said she understood that the 'quality' of an audit report was the core business of the Office. The measurement of the output that the Office puts to 'quality' was of importance to the Committee. In which Auditing Standard was 'quality' stipulated and what were the instruments used for measurement. In the report there had been a significant increase in quality control. What tool was used to measure that increase?

Mr M Johnson (ANC) mentioned that there were municipalities that continued to struggle. She gave the example of Coega which had not been able to get its books ready. He said it could be a National Treasury problem but asked for a comment on the possibility of it being an issue of Quality Assurance.

Dr G Woods (NDC) asked what the measurement objectives were and whether they were stipulated in the Auditing Standards. He asked how the Office had come to a figure of 72% increase.

Mr D Gumede (ANC) asked whether the Office had international arrangements insofar as auditing was concerned.

Dr Woods asked whether Quality Controls were the Office’s own work or whether it was outsourced work.

Mr Nombembe responded to the questions as follows:
- Measurements were based on an independent review of the Independent Regularity Board for Auditors (IRBA). Review work was done by looking at the file that had the opinion of the audit report and then working backwards in tracing how the opinion was devised. He said the standards were ISO equivalent but those of the IRBA were applicable to auditing.

- In the Office, Quality Assurance process files were selected on a sample basis without prior notification of other parties. The working papers and relevant documentation were submitted to the IRBA and then go to the Quality Review Committee which consists of a chairperson and a number of external people. The results of the review were categorised as follows:
C2 – Entity complied but should be reviewed again in two year’s time
R1 – Quality control people must select that business unit when they come again next year
R2 – Failed dismally

- They would add a column in the Performance Measurement section of the budget called “Measurement Process” for further clarification on this process.

Ms Hogan asked where stakeholder satisfaction fitted in as it was no longer a specific goal. She also asked what the impact on the IRBA assessment was when the audit team presented a robust case of not being fairly audited and had problems about the opinion.

Mr Nombembe replied that that was part of the process of arriving at the conclusion. The Audit Steering Committee deals with appeals and all of this is put in the audit files and the Public Audit Act gives guidelines on how to handle appeals/complaints by auditors or stakeholders.

Mr Fakie added that when appeals are made, the Office does not call upon the IRBA immediately. Instead, if it is a technical problem, the Office has a technical team that handles such complaints as part of an internal process.

Dr Woods said that the Committee needed to explore in its workshop the issues of Quality Control as stated in the Act in Sections 10 and 13.

Mr Nombembe's response to the question about struggling municipalities:
The Office of the Auditor General (OAG) has some involvement in municipalities with respect to the submission of financial statements and that the problem that most municipalities experienced was a capacity and skills shortage. As a result of this, the quality of financial statements from municipalities was not up to standard. The OAG had interaction with National Treasury although it was still not formalised. He emphasized that the OAG does not get involved in solving the problem but rather highlights it to the relevant people who then work at solving the problem.

Mr Nombembe noted that in terms of the cost of audits, work done by auditing firms were done at a higher cost because they had a profit motive as opposed to work done at the OAG that was charged at close to break-even cost. The rates depended on the overhead costs which are reflected in the trading section of the Annual Report. Gross profit could increase or decrease depending on the pyramid structure and amount of work done by the OAG and by private firms.

Dr Woods mentioned that when less work is done by the Office, the Office does not maximize fixed costs. He then asked what assumptions were made for the budget and how the Committee could rely on them.

Mr Nombembe replied that for 2006/7 an assumption was made of 100% staff occupancy level and if it had less, it had an effect on the bottom line. The assumption of 10% vacancy level decreased to 5% vacancy and as a result gross profit margin increased by 3%. The element of performance bonuses was there to incentivise staff and the 1% thereof came as a result of the decrease in vacancy levels. The bonus was not budgeted for but were provided for in the funding schedule.

Mr Nombembe explained that auditing was a cost to government as it is a customer of the OAG and its books have fees reflected there as they provide a service to government. They made assumptions on how the Office could be cost-effective in providing services to government. Currently the Office was striving towards having a surplus and that all depended on cost-efficiency. Therefore cost was an important efficiency indicator.

Dr Woods asked how efficient the Office was from a cost point of view and asked Mr Nombembe to make a comparison to the efficiency of the private sector.

Mr Fakie responded that he considered the Office to be quite efficient and that the margin of what the private sector and the Office charged was not that small being 28%.

Mr Asiya said that the assumption was that, after the Committee had dealt with the Report, it would become a public document. The document needed to be more reader-friendly as a person not present at this meeting would not be able to ask questions and get clarity on any matter stated in the Report.

Ms Hogan asked whether there were any other measures of looking at cost. She asked if the Committee could get the costs broken down into components in the performance report.

Mr Nombembe replied that they would certainly consider presenting the costs in a break-down format.

In reply to Dr Woods asking if the budgeting approach used by the OAG was zero-based budgeting, Mr Nombembe said that it was using this in the drawing up of the budget.

Mr Nombembe said that with respect to the timeliness factor, whatever the OAG delivers to Parliament had to be within the time frames. The Office finalised audit reports within prescribed deadlines for financial statements to be submitted on time.

Ms Hogan commented that the OAG and the Committee needed to start thinking about late submissions from auditees.

She asked what the predetermined audit-coverage milestones were and if this measure was a target because it was a percentage frequency. Further, what was the instrument for measurement?

Dr Woods said that it was too vague when one used a percentage for some internal indicators and the auditing of performance information needed to be clearer.

Mr Nombembe responded to Ms Hogan by saying that whatever was achievable or attainable was what the OAG would target as a milestone.

Mr Gumede proposed that primary focus areas needed be looked at in terms of figures.

Ms Hogan responded to Mr Gumede’s comment by saying that it would be difficult for comparison purposes to look at numbers as the primary focus areas had changed from 2005/06.

Mr Fakie made a suggestion that the Office consider auditing and reporting on performance measurement.

Ms Hogan said the Committee needed to know what milestone the Office was hoping to achieve in 2007 and that an annexure of this should be included in the report.

Dr Woods mentioned that the Office needed to be clearer as to what they meant by the word “focus” and asked why cost was considered to be a useful measure of performance.

Mr Nombembe replied that cost was an effective measure as all resources used were transferred into cost.

Ms Hogan asked if any quality reviews were done by the Office.

Mr Nombembe replied that quality review was incorporated in all the audits that the Office did.

Mr Asiya asked whether the Office had a procurement policy in place.

Mr Nombembe said that they did have a procurement policy and that it fell within the scope of the report that they would look at later.

Mr Fakie added that AG South Africa (SA) was part of a peer review grouping that consisted of between ten and fifteen other countries. He said that South Africa was scheduled for its quality control review in 2009 and that this system added a different dimension to quality controls.

Dr Woods asked how the measure on international audits was correlated to the goal. What was the relevance of the cost of international audits to the cost in the Office?

Mr Johnson asked if there was any reason for the OAG not proceeding with special investigations.

Mr Nombembe replied that special investigations only budgeted for what was in the pipeline and that the OAG did not make any predictions for this because such things were situational.

Ms Hogan asked whether the Office of the AG was doing any work in Africa and whether the limit of international audits would still remain within 5%.

Mr Fakie replied that they had done in the SADC region for a period of three years and that work consisted of a small subsidy. He said they were currently involved in doing work in Sierra Leone because they had been recommended by UK Financial Services Information Exchange (FSIE).

Ms Hogan closed the meeting noting that it would continue the following day.