A summary of this committee meeting is not yet available.
Meeting reportSTANDING COMMITTEE ON THE AUDITOR GENERAL
31 October 2007
AUDITOR GENERAL BUDGET AND STRATEGIC PLAN 2008-2011
Chairperson: Ms B Hogan (ANC)
Documents handed out:
Budget and Strategic Plan of the Auditor-General (April 2008- March 2011)
High Level Overview of the Auditor-General Budget and Strategic Plan 2008-2011
Budget 2008/09 Executive Summary
Governance Framework – July 2007
Compressed audio recording [Part 1][Part2][Part3]
The Auditor General briefed the Committee on their Budget and Strategic Plan as well as their governance framework. They focused on their reported net deficit as well as the skills shortage that they experience. There was an on-going focus to reduce contract work. Increased overheads were driven by increased audit activity and strategic imperatives, which include stakeholder reporting, leadership development, and audit technological support. There was a significant mismatch between the timing of inflows and outflows, which created a cash flow problem. A number of options were under consideration in order to improve the funding model for the Office of the Auditor General.
Committee questions focused on the deficit, the Auditor General’s cash flow position, municipalities not paying the Auditor General’s audit fees, National Treasury’s role regarding non-payment by local authorities, increased audit fees, the new funding model for the Auditor General, staff shortages and recruitment and the corporate governance framework of the Auditor General.
Mr Terence Nombembe (Auditor General), Mr Kimi Makwethu (Deputy Auditor General) and Mr Stuart Boyd (Acting Chief Financial Officer) gave a presentation to the Committee on their Budget and Strategic plan as well as their governance framework.
Mr Boyd said that a net deficit was reported as a result of skills shortages. Write-offs provision of R2 million and doubtful debts provision increased by R8 million. Cost reduction actions of R15 million were in place. During 2008/09, there would be a major focus on recruitment and the setup of new audit business units to achieve growth of audit and a net surplus of R8.4 million.
Overheads were normalising below 30% in 2009. There was an on-going focus to reduce contract work. Balance sheet growth was driven by audit income and staff growth as well as the inherent business model. There was a request to increase the Special Audit Services Fund but it was not generating sufficient surpluses to have reserves.
Audit income grew by 28%. An increase of 55% was due to increased work hours and 45% was due to salary increases. In terms of contract work, the increase was due to the increased AG vacancy rate assumption. An increase in pre-issuance activities was shown in the budget as well as the use of more senior staff than in prior years. The Office of the Auditor General (AG) was also negotiating contract work tariffs. The main drivers for increased audit hours were driven by expanded existing audit coverage, new audits and performance auditing. Movement in tariff intervals was due to 7% salary increases, planned recruitment at market levels and promotions.
Increased overheads were driven by increased audit activity and strategic imperatives, which include stakeholder reporting, leadership development, audit technological support and improved capability maturity. News costs in 2008/09 included the performance incentive provision of R9 million and once-off costs of R5.3 million for Information and Communication Technology (ICT) initiatives and the R3.6 million for a conference.
In terms of capital expenditure, R50.1 million was planned for 2008/09 versus R39 million for 2007/08. Capital expenditure would be directed at two new offices.
There was a significant mismatch between the timing of inflows and outflows, which created a cash flow problem. The current funding model did not adequately cater for working capital requirements, the managing of contract work and the capital expenditure and reserves for known future liabilities. A cash shortfall of R89 million was expected for 2008.
A number of options were under consideration in order to improve the funding model for the AG.
Audit work could be broken up into three stages, planning, fieldwork and reporting. Planning and fieldwork could be paid in advance, while reporting would only be paid afterwards. Another option would be to allocate corporate services, reserves and the capex budget to the AG. A third alternative would be to get a quarterly cash advance for operating expenditure. The AG’s tariffs could also be increased for working capital, capex and reserve funding. Another option would be to allocate the audit budget to the AG.
The AG would prepare a request for changing the funding model and obtain stakeholder input and support. The 2007/ 08 financial risks, which included cash flow optimisation including recruitment, project and capex postponement
In terms of the AG’s governance framework the funding issue has not been resolved given the focus on developing a new funding model. The measure for the cost of audit had also not been simplified and repositioned to allow for an external perspective. The AG could also not accommodate the Committee’s measure regarding learning and growth.
The AG indicated that they would be focusing on achieving milestones to be achieved within the next three years. The Office would also focus on developing standards for auditing and determining appropriate methodologies. An important objective would also be to identify the ideal skills mix that would be required in order do performance auditing.
With regards to BEE it should be recognised that the AG was an audit office. Their focus would be on engaging with third party service providers, which helped the AG with its audit service. The allocation of work would consist of identifying players that have the appropriate BEE profile.
Ms Hogan asked the Office of the AG to focus on the figures in the budget of the Auditor General. She wanted to know where it becomes apparent in the budget that there was a R41 million deficit given that a net surplus of R8.4 million (on page 84 of the AG’s budget for 2008/09) was envisaged.
Mr Stuart Boyd (Acting Chief Financial Officer) said that the capital expenditure deducted from the surplus resulted in the deficit of R41 million. It did not mean that there was a deficit in the income statement of R41 million. Capital expenditure was a balance sheet item and when it would be incurred, it would be capitalised on the balance sheet and depreciation costs was included in the R8.3 million. The net surplus line of R8.4 million was where the final performance measure was going to be determined.
Mr M Stevens (DA) said that he was bothered by the AG’s cash flow position as per page 80 of the AG’s budget. He indicated that the AG would be working with a R165.75 million deficit on cash flow. Collections would be a problem and Mr Stevens wanted to know what one could do about that.
Mr Makwethu replied that the AG did a detailed analysis on the funding and that the current AG model did not allow a lot of flexibility. He indicated that the cash flow projections also included the AG’s liabilities with regards to pensions.
Mr Stevens asked if R80.2 million and the R32,6 million was a net present value of future expenditure or was it an annualised figure, if staff would be put on retirement or leave.
Mr Makwethu replied that the post retirement medical aid was based on a valuation at year-end done by Alexander Forbes to determine future liability regarding medical aid liability.
Ms Hogan asked where was capital policies derived from and why the AG was committing to them.
Mr Nombembe replied tariff structure for the Office was one area that needed review. In 2009 a clearer basis for the cost of auditing would be determined.
Mr D Gumende (ANC) asked if the problem with municipalities was affordability.
Mr Makwethu replied that municipalities indicated that they had already committed their resources and also did not have a Chief Financial Officer.
Mr D Gumede asked if there were any guarantees from the Treasury or other government bodies for municipalities given that it was a constitutional obligation for local authorities to do an audit.
Mr Makwethu replied there was no money sitting in an account at Treasury for paying for local authority audits. Treasury was however using their resources to assist the AG.
Ms Hogan said that recovering of money from local authorities was an ongoing issue for the last ten years.
Mr Stevens said that the income situation for the AG was unacceptable. The AG should be paid for services rendered and potentially one could look at an amendment of the Public Finance Management Act (PFMA) or the Municipal Finance Management Act (MFMA). It was an essential service rendered by the AG and this institution should be paid. Debt older than 3 years remains payable but not enforceable, which created a problem.
Mr D Mhlaba (ANC) asked whether it was only certain provinces or only certain municipalities who did not pay the AG. He asked if municipalities had their own internal audit function if they could not pay for an external audit function.
Mr Gumede said that perhaps there should be a guarantor of last resort built into the system of auditing municipalities. It could be that municipalities were not able to attract the appropriate accounting skills in some rural areas. This issue should be included in the parliamentary report and it should also be raised with the Finance Portfolio Committee.
Mr Nombembe said the Public Audit Act allowed for support by Treasury when it was necessary.
Ms Hogan said that the Constitution was changed to allow provincial or national intervention if a municipality failed to execute a statutory binding obligation. Paying audit fees was a statutory obligation. National Treasury could defray funds from the budgetary vote for the audit fees.
Mr Nombembe said that National Treasury would be provided with sufficient information regarding the audit fee issue at the AG’s next meeting with Treasury.
Ms Hogan said that National Treasury should appear before the Committee with the AG present in order to resolve the issue of non-payment of audit fees by municipalities. It was proposed that the non-payment of audit fees be raised during the hearings at the National Council of Provinces and the Joint Budget Committee when they have municipalities appearing before them. This issue should also be raised with other committees in Parliament when regular oversight work were being done
Mr Stevens asked if there was a note in regular audit reports which indicated whether audit fees had been paid or not. He asked if it was possible to include this information in reports, given that the Standing Committee on Public Accounts (SCOPA) was also operating on municipal level.
Mr Nombembe said there had not been a comment to draw attention to non-payment and that it might be useful to include this in the audit reports.
Ms Hogan asked if there was a document, which had the full details of outstanding debts. This document could be tabled during hearings with National Treasury.
Mr Makwethu replied that the AG would prepare an updated document detailing outstanding audit fees owned by municipalities.
Ms Hogan requested that this document needed to be finished before National Treasury finalised their budget.
Ms Hogan asked if the AG expected increased tariffs from auditing institutions.
Mr Boyd confirmed that auditing institutions were concerned about low-level increases in tariffs. They asked the auditing institutions for cost drivers, which would support a business case for increasing tariffs.
Mr Makwethu said that the AG’s rates were lower than normal. Auditing firms linked to global institutions had high costs associated with professional indemnity and available technology.
Ms Hogan asked if there was not a conflict of interest when the South African Institute for Chartered Accountants (SAICA) was appointed to the research for the AG.
Mr Boyd replied that SAICA knew the industry and the AG’s role and was therefore equipped to do the research.
Mr Stevens asked the AG which of the different funding models would be an ideal solution.
Mr Boyd replied that models were still being analysed and that he could not recommend a preferred funding model. He did however indicate that he had a problem with the audit staff collecting money. This practice was a waste of a highly skilled and highly paid resource and it also impinged on the independency of the AG.
Mr Makwethu said that structuring the payment plan would be the best method in the interim, while a better model was being developed to deal with cash flow challenges.
Ms Hogan said that if the AG asked National Treasury for funding, it would result in intense scrutiny and bargaining for getting money.
Mr Nombembe said that Public Audit Act made provision for parliamentary appropriation, which is similar to the UK where the AG gets their money from its parliament.
Ms Hogan asked what the basis would be for getting funding from Parliament. She said that Parliament could use the budget as an instrument to shift the priorities of the AG. Funding from the legislature would also be an option depending on how that would happen. Ms Hogan asked the AG if they would then submit a budget to Parliament. She stressed that the AG should still be as independent as possible. Ms Hogan said that the other alternative would be to increase audit fees, which would give the AG its greatest independence.
Mr Nombembe confirmed that the independence of the AG should not be compromised.
Ms Hogan asked if the AG had broached the issue of audit fee payment by local government.
Mr Nombembe said that the AG had not formally approached National Treasury in order to discuss the non-payment of local government.
Ms Hogan requested the AG to draft new timelines given the constitutional issue or to inform the Committee if anything changed.
Ms Hogan said that the use of a budget specialist would be useful for the AG in order to do performance auditing and information auditing.
Mr G Woods (NADECO) asked if performance auditing should not become less prominent over time.
Mr Nombembe said that the Office of the AG looked at how performance auditing was done internationally about six years ago. A project was initiated with National Treasury to determine their role in implementing performance auditing. Performance auditing would be rolled out. The Office would not be looking at financial reporting but operational reporting.
Ms Hogan said that the AG’s recruitment strategy was very ambitious and asked the AG’s response. She asked if the AG had already embarked on their strategy.
Mr Makwethu said that the AG was running short on the supply side. Projects were initiated to manage the ambitious recruitment strategy of the AG. The AG was getting promising responses from potential recruits and service providers. The ability to provide resources when new recruits start at the AG was a challenge and systems were developed to deal with large numbers of new recruits.
Ms Hogan proposed the Committee would accept the AG’s documents.
Ms Hogan asked what timelines the AG had for the completion of the items in the AG’s corporate governance framework. Ms Hogan said that the Committee needed more time to read through the AG’s corporate governance document.
Mr Woods said that the AG did not fit in a conventional sense, given that there were two boards. The AG could be considered to be a one-person board and the Committee was also playing the role of a board. There could be a conflict between the AG and the Committee regarding who fulfils the oversight function. The Committee had no other independent view besides the information coming from the AG. The current model had limitations.
Ms Hogan was not sure if the Portfolio Committee was the appropriate structure for a board. She asked the AG if a review of the corporate governance arrangement was necessary or if it was too early for a review.
Mr Nombembe said it was important to review the corporate governance arrangement. The AG was in a very difficult situation given that legislation governed the corporate governance arrangement. The creation of a committee to advise the AG was possible but such a committee would have no decision-making powers but only be able to advise.
Ms Hogan suggested that the relationship between the Committee and the AG needed to be fine-tuned.
Mr Nombembe said that the AG would make amendments to the documents they had submitted and resubmit these to the Committee.
The meeting was adjourned.