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

Meeting report

STANDING COMMITTEE ON AUDITOR-GENERAL
22 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
The discussion focussed on audit tariffs and the reported net surplus. The concern with respect to tariffs and rates was the basis on which they were set and whether or not there was any regulation of this. It was explained that the South African Institute of Chartered Accountants (SAICA) published the rates to be used by registered auditors when performing work on behalf of the Auditor General. These are the results of consultation between Auditor General and SAICA. The Committee felt that 'net surplus' was a misleading term and it should have been referred to as the efficiency gain surplus. Overall, the Committee was satisfied with this first interface and agreed that regular liaison with the Office of the Auditor General would enable them to interrogate the Report and Budget in a more efficient way when they meet next time.

MINUTES
Annual Report & Review of Auditor-General Budget and Strategic Plan 2007-2010
The discussion of the Budget contniued from the previous day. Mr Nombembe spoke about the following:
▪ Recruitment Expenses – the Office wanted partners instead of ad hoc agencies. The Auditor-General specialised in auditing rather than recruitment and would thus prefer to outsource.
▪ Professional Assistance – training was done at the same levels as the previous year
▪ Technological Services – this refers to maintaining the current IT infrastructure and improvements thereon. There were not many changes in this respect.
▪ Legal fees – are a contingency.
▪ Auxiliary services – significant decrease in stationary and printing because they have now set a limit.
▪ Communications – standardising and stabilising have improved the cost significantly.
▪ Capital Expenditure – there has been an increase in furniture and equipment as a result of the branding of the furniture of the Office furniture. This is in line with the branding audit.
▪ Employee Wellness Programme – its purpose is to enable the staff to feel that they are working for an organisation that cares. There is however a need for paying closer attention to standards of health and safety.

Discussion
Ms B Hogan (ANC) opened the discussion by asking about the nature of the research to be conducted on audit tariffs.

Mr T Nombembe (Deputy Auditor General) replied that SAICA believed that the tariffs were outdated and that the margin given was too low to run a business.

Mr Shauket Fakie (Auditor General) added that the Office of the Auditor General had been having discussions with SAICA. Previously private sector firms could offer discounted rates because the audit work for the Auditor General normally fell in a period in which they were not busy. With the introduction of the Public Finance Management Act, firms could maximise their profits elsewhere as opposed to doing work for the Auditor General because work for the Auditor General now coincided with their busiest time. The Office had requested a break-down of the firms’ overheads to understand their cost drivers and cost rates. As a result of this they had an in-depth review with the firms and found that initially the overhead structure was 2.5 which had recently gone up to 2.7. Further research would be done to find out the reality of the claim that the rate that international firms do work for the Auditor General are much more favourable.

Dr G Woods (NDC) asked whether there had been any reluctance from the firms. He said that the 28% margin looked like the Office had a profit motive. Consideration should be given to correct proportions from a cost effectiveness point of view.

Mr Fakie replied that there had not been stronger resistance from the firms because it affected them differently. The volume justified the discount rate, because although small firms said they were discounting, the also acknowledged that they were getting a lot of work from the Auditor General. They had had firms walk away, saying they were not getting money for their value. The overhead structure of small firms is lower and they were not complaining too much because they were dependent on Auditor General’s work. The Office needed to start thinking about whether it was worth contracting the firms if they were far more expensive than the Office. Mr Fakie added that the Office of the Auditor General had to start looking at growth in staff levels because it could reach a point where having more staff could lead to inefficiencies.

Dr Woods suggested that at the Committee's workshop, it needed to take a closer look at how the rate determined how much the Auditor General takes from the budget.

Mr Nombembe said that they needed to look at whether it was necessary to still cap the tariffs as they had been doing in the 2009 budget.

Mr Fakie noted that the Budget document showed that there had been a 7% increase in overall impact and the tariff structure saw a 4% increase in tariffs. The increase in tariffs was due to the unforeseen salary fluctuations. Staff members had probably moved from one band range to another. That caused them to look at how many staff where in that band and how that affected the band.

Mr Nombembe added that the movement between the bands depended on the qualification level of the staff member.

Dr Woods asked whether the Office had people moving to top positions after they had qualified. He also asked what salary increase staff members asked for when they moved up.

Mr Nombembe said that they still had lots of auditors and fewer trainees and that more people did qualify and move to the top positions. He said that they were adopting models of the firms even though the firms should be more efficient than them as they do not have legacy problems like the Office . He said the projected market movement was 8% and the Office budgeted 6% because the market one was not yet confirmed.

Mr Fakie added that if the salary increased by 8% and they only budgeted 6%, it would only change if a person moved from one band to another.

In reply to Ms Hogan asking if the Office had reached its Black Economic Empowerment (BEE) target the previous year, Mr Nombembe said that they had.

Mr Johnson asked for a comment about procurement entities. He said that a 90/10 split was a mockery of BEE and he understood that it was a matter that resided mostly in Treasury.

Mr Fakie replied that BEE was predominantly work contracted outside. The biggest procurement was travel and the other was accommodation. They went beyond BEE criteria with other firms.

Ms Hogan asked how they measured the gap between desired culture and current culture with respect to leadership in the Office.

Mr Nombembe replied that issues of emotional intelligence were undermined and once that had been dealt with, then they could start looking at other areas of leadership.

He mentioned that the previous year the issue of the reputation of the Office had been raised as a matter that concerned them. They have since introduced a survey company that is going to assist them in determining the baseline. He added that qualitative research was underway and that was expected to be finished at the end of October and then an analysis would be done from that.

Mr Nombembe said that with respect to the secondary focus areas, they had limited the competency between required knowledge and actual knowledge, skills and abilities. They had disregarded lower level measures and had been looking at how many people qualify as chartered accountants.

Ms Hogan asked for an annexure of what they were achieving in terms of training and the pass rates of trainees. She commented that the Office did not need to use learning growth as a performance measurement. She asked what level 3 was with respect to operational excellence.

Mr Nombembe replied that it was the level at which the Office was fully compliant with organisation policies before looking at optimising operations within the organisation. He added that they had not achieved it as yet and that the process of re-engineering would assist them

Dr Woods asked how they decided on the levels of operational excellence and how it impacted on the strategic plan. He also suggested that the Auditor General take them through it at the workshop.

Mr Fakie explained that it was a Canadian capability model that consisted of 6 levels as follows:
Level 1 – total chaos and no proper policies in place.
Level 2 – policies and procedures not properly institutionalised in the organisation resulting in low compliance
Level 3 – good policies and procedures resulting in high level of compliance.
Level 4, 5 & 6 – optimises effectiveness in the Office.

Mr Nombembe explained that the net surplus budgeted for was a catch-up measure and that that was the bottom line. The additional percentage was as a consequence of adding on to the gross profit margin in order to finance the performance bonus.

Dr Woods commented that the net surplus was an efficiency gain. He raised concern that the previous year the Office had had an operational loss but management had not commented on how they offset this against the gains.

Ms Hogan made the suggestion that they look at performance bonuses.

Mr Nombembe said that they were based on gross profit levels and had a consequential effect on surplus. The Auditor General had the discretion on the policy around bonuses. They were working on situations where the Office had to pay bonuses but there was no funding for them.

He continued that in terms of staff numbers, the cost efficiencies were going to come from the span of control. Senior management felt that they were being overworked and therefore it was decided to reduce hours for senior management and those are what the recoverable hours consisted of. There had been an increase in hours income from 578 million to 700 million due to a change in the existing hours. This was as a result of the introduction of international auditing standards. There had also been a change in existing audits because some were done by the Office and some by audit firms. The decrease in catch-up work was due to staff working more efficiently. There was thus a reduction in the amount of time in which they were trying to get timeous submissions.

Ms Hogan asked why Gauteng had the most significant increase in public audits.

Mr Fakie said it was because utilities companies such as City Power and Metro were being done by private audit first and the Auditor General had taken over from them.

Mr Nombembe noted that once National Treasury updates its list of public entities, it is going to have an impact on the new audits. The Public Audit Act has a requirement for the Auditor General to get stability on these public entities. There would be an increase in the audit scope which forms part of the targets, and it is expected to grow gradually until the Office stabilises standards that National Treasury has. He added that specialised audits linked to marginal growth in the audits.

Mr Fakie said that he sought guidance from the Committee as to what the Office should do when they are faced with a situation where they will not be recovering their costs from certain departments. He asked whether they should request funding or use one of their reserves and then come and disclose it to the Committee.

Dr Woods said he believed that the guideline in the Act stated that they can use a reserve. Ms Hogan noted that the Auditor General was given authority in section 29 to do so.

Ms Hogan then went on to ask about how the Office arrived at a 28% increase in travel and accommodation.

Mr Nombembe replied that those were the inflation rates taken from agencies.

Dr Woods asked whether foreign currency had become tricky to convert as international income was only 5% which was a small amount.

Mr Nombembe replied that they had a separate line for international audit income. It used to be tricky because of payment patterns and exchange rates, but exchange rate differentials were not a problem. The major concern was how to account for that income.

Mr Nombembe discussed personnel expenditure saying that it impacted on both the audit and non-audit section. They had analysed how much the costs were in relation to benchmarks and it was shown on the expenditure schedule that pay ranges were within the norm, even if they were in the lower range. Attracting people on payment options should not be a problem and that other issues should affect them.

In reply to Dr Woods asking what the medical aid contribution was, Mr Nombembe said that currently it was two-thirds for staff and 100% for trainees.

Ms Hogan said that she had noted an expansion of personnel levels and asked what was guiding Auditor General personnel strategy.

Mr Nombembe replied that it was the sustainability of the work that they were going to do because if it was once-off then they could allocate it to audit firms. It was also influenced by gross profit norms and guided by the span of controls norm.

Mr Nombembe noted that liaison was mainly stakeholder management and reputation index. At the bottom of each cost they had worked out the percentage to total income which was part of the transitional plan. The increase in costs was influenced by the deliberate strategy to enhance media management as a catalyst for the Auditor General brand and reputation index.

Ms Hogan thanked the delegation from Auditor General's Office for attending and adjourned the meeting.