Office of Auditor General: Standards, Restructuring and Governance, Turnaround, Staffing and Funding

Standing Committee on Auditor General

08 April 2008
Chairperson: Ms B Hogan (ANC)
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Meeting Summary

The Auditor-General and the Committee discussed the Audit Directive, Corporate Services Restructuring, and the governance framework. Further presentations were made on the financial turnaround strategy and staff retention, as well as their funding model. All the plans and strategies seemed to be progressing at a commendable rate. However there were some issues regarding funding. It was felt that the Auditor-General was outsourcing too much work and therefore losing funds. The solution was to correctly apply their staff retention strategy and increased salaries for the managerial position.

Funding Models were also debated. There were two options presented. The Chairperson was concerned by the possibility that the Auditor-General would request an allocation from National Treasury, as she pointed out that this scenario would not result in any guarantee. She reminded the Auditor-General that it was difficult to get the full amount of funds that were requested from Treasury, regardless of how important the OAG was. The Committee requested that the Auditor-General update them on the funding models as well as the Public Audit Act amendments.

Meeting report

Audit Directive 2008: Briefing by Office of Auditor General (OAG)
Mr Terence Nombembe, Auditor-General, gave a brief introduction and mentioned that the slide show presentation and the document named General Notice would be used in giving this part of the presentation.

Mr Jan van Schalkwyk (Business Executive: Audit Research and Development: Office of the Auditor-General) began the presentation by listing the objectives, which included the finalisation of the Audit Directive 2008. He then listed the four types of audits; being the regularity, performance, special and investigative audits, performed by the Office of the Auditor General (OAG). When performing these audits the OAG had adopted the standards set by the International Standards of Supreme Audit Institutions (INTOSAI). The audit finding model was then detailed. The different levels of the INTOSAI were listed. A comparison was done between the International Standards on Auditing (ISAs) and South African Auditing Statements (SAAS). The various characteristics were listed and explained. An update was given of the current developments in the profession. The format of the audit report played a role in the evaluation of success and that was listed in the General Notice. The Auditing of Performance Information (AOPI) strategy for 2005 – 2010 was explained. Performance and investigative auditing was also explained. Generally Recognised Accounting Principles (GRAP) statements were currently under development. He concluded with the Audit Directive for 2008 and their reputation promise

Mr Nombembe interjected to state that although the OAG had not adopted the INTOSAI standards as yet the OAG were in the process of aligning their principles. Although the OAG were advocating the ISAs standards, the OAG had anticipated adopting the INTOSAI standards by 2010.

Mr Nombembe gave context around the accounting framework environment. The OAG had realised that along with the development of the accounting standards the performance of the auditors in the public sector needed to improve, with particular reference to accrual accounting. Therefore the OAG had to ensure that there had been regular and constant training to understand this accounting. Even though National Treasury was the custodian of accounting, the auditors needed to understand the processes and that was the implication for his office arising from the directive.

The Chairperson asked when the General Notice would be published.

Mr Nombembe replied that it would be before the end of May, since the auditors would be using the General Notice when the OAG begin auditing.

The Chairperson reminded the Committee of their responsibility. In terms of Section 13 in the Public Audit Act (PAA), the Auditor-General, after consulting with the oversight mechanism, must determine the standards to be applied in performing auditing services and the nature and scope of such audits.

The Chairperson asked for further clarification on the nature and scope.

Mr Nombembe replied that the extent of cover by the Auditor-General would be the result of audits, performance and special audits and special investigations. Within that scope the Auditor-General would know which standards would be applied in order to adequately perform these audits.

The Chairperson noted that the Auditor-General was referring to the nature of the audit. The Committee wanted to know exactly who the OAG would be auditing, if the OAG were allowed that information.

Mr E Trent (DA) thought that all public entities including government departments had to be audited. He wanted to know if there were specific entities that had to be audited.

Mr Wally van Heerden, Head of Auditing: Office of the Auditor-General, replied that the Public Audit Act (PAA) was clear on what had to be audited. Section 4.1 stated that this included all national and provincial state departments, all constitutional institutions, the administration of Parliament, all municipalities, all municipal entities and any other institution required by national and provincial legislation. There were in addition other entities, in respect of which the OAG was running a project in order to develop criteria, who were optional.

The Chairperson responded that there had been some clarity on those entities that were optional to audit.

Mr Nombembe added that if the OAG were to have a clear expectation from the Committee then it would assist them to align their presentations according to the expectation.
The Chairperson felt that the Clause 13.1(b), which stated that the Auditor-General may determine the nature and scope of the audits, needed to be explained.

Mr Trent wanted to know what was the definition of those that could be audited optionally. 

The Chairperson answered that it included any institution that was funded by the National Revenue Fund or a provincial revenue fund or by a municipality that was authorised by any legislation to receive funding from public funds. There had been an issue around the money that went to political parties from Parliament. In terms of the legal opinion received, political parties were considered private bodies and did not fall into the public domain. The OAG received money from the National Revenue Fund. She supposed that Parliament could ask the Auditor-General to perform its functions in terms of the optional section in Clause 3 of the PAA. She asked if it then correctly fell under nature and scope of the audit.

Mr G Woods (NDC) thought that the use of ‘scope’ was slightly different according to whether it was interpreted by its usual meaning, or by the auditing language. He thought that it would mean that when the Auditor-General audited, this would include who was audited and what was the scope of the audit. He noted that the presenters had forewarned that there could be substantial changes to the scope of the audit further down the road. 

The Chairperson agreed that there was definite meaning attached to the word ‘scope’. She asked if the Auditor-General was required to report back to Parliament on those institutions that fell into the optional category. Furthermore the Chairperson asked what guided the Auditor-General when it came to performing audits on those optional entities.

Mr Woods asked if that would fall into government funding.

Mr Trent noted that the Act prescribed who should be audited. It was then strange to find that the scope of the audit had to be assessed annually. He had the impression that it was interpreted differently. He suggested that perhaps the scope of the audit referred to how far the audit would have to go. The Committee needed some guidance on the further technical meaning of “scope:.

Mr Van Heerden replied that the nature and extent was measured in relation to those audits. Furthermore the Act dictated the nature and extent, or how far the Auditor wanted to audit. The extent of the audit was covered in the risk-based methodology that was used by the Auditor-General. The Auditor-General had the discretion on the extent of the audit. The Act was quite clear in Section 28. Even if the Auditor-General opted not to audit there was still a requirement that the auditors had to audit and report in terms of the PAA. The audits were still used for accountability and were tabled via the executive authority.

The Chairperson asked how was it accommodated in the Act.

Mr Kimi Makwetu, Deputy Auditor-General, added that under the scope of audits there was also an element of consultation that was referred to on individual audits. The scope of an audit was determined together with the audit committee of the body being audited, to find out whether there were any limitations on the entities that would be audited. The Auditor-General would then consult the committee and inform them that there would be certain limitations on the scope of the audit that were warranted because of the nature of the entity. The scope of the audit would be specific to each body being audited (the auditee).

Adv Frankie Jenkins, Parliamentary Legal Advisor, replied that the Act was clear on the prescribed audits and those that the Auditor-General opted to do. 

The Chairperson suggested that the issue of the optional audits should be reflected somewhere when the Auditor-General did an annual presentation out of the office. The Committee looked at the principles that would be applied when exercising the optional audits. Next year those principles would have to be part of the main solutions.

Mr M Johnson (ANC) mentioned that, in respect of the scope of the audits, political parties were critical.

The Chairperson concluded that the issue of optional audits was a work in progress as criteria had to determined. The issue of the Public Finance Management Act and the Auditor-General being directed to all the political parties had to be followed up. She asked that the Auditor-General’s Parliamentary Unit to monitor what occurred in terms of Parliamentary Finance and to keep the Committee informed. The procedures for handling complaints would be another issue that the OAG would have to assess.

Mr J Stephens (DA) asked about the alignments of the standards and the accounting framework and asked how would the synchronisation envisaged work with the International Standards of Supreme Audit Institutions (INTOSAI).

Mr Van Schalkwyk replied that the response to the accounting framework would ensure that the principles remained the same. The difficulty arose during the process of transforming national financial management. National Treasury did not always align fully with the rules of auditing. The level of alignment between National Treasury and the auditing standards was working well. If it was maintained it should not present a problem.

Mr Trent asked about the time framework for all four audit opinions, as well as whether compliance and other issues become vital to an audit opinion.

Mr Van Schalkwyk replied that the OAG would need all four aspects of audits to make an informed opinion. The current situation would eventually become stronger. The time framework would be guided by the maturity of the audit.

Mr Nombembe elaborated that the OAG had decided to use the international standards of auditing and that was why the OAG were at the various stages of auditing.

Public Audit Act (PAA): Proposed Amendments
Proposed PAA Amendments to align the Governance Framework
The Chairperson gave a background to the amendments proposed in respect of Section 40 and 43. In terms of the Act the Deputy Auditor-General was the accounting officer, and in effect the Chief Executive Officer (CEO). It was not appropriate for the audit committee to report to the CEO but rather it should report to a higher authority. It was agreed that the Auditor-General should be the person to whom this committee should report.

Mr Makwetu agreed with that proposal.

The Chairperson noted that there was no reference to the relationship between the audit committee and SCOAG.

Mr Woods asked if the Committee had accepted the assumption that the Auditor-General was a unitary board. If they agreed that the audit-committee reported to the Board, what assumptions regarding the Auditor-General would be accepted.

The Chairperson agreed that there was an assumption that the Auditor-General was the director of the institution. The Act stipulated that the Deputy Auditor- General had significant responsibilities in the area of the corporate services function. The Deputy Auditor-General was head of administration, had to carry out the duties delegated to him by the Auditor-General, and was the accounting officer. The Deputy Auditor-General provided corporate services backup. The Auditor-General was thus relieved of having to manage the office and was the lead person on the audits and kept his eye on the ball. There was a clear distinction between the roles of the Auditor-General and the Deputy Auditor-General. The Deputy Auditor-General reported to the Auditor-General. Accountability then became an issue because the Auditor-General then assumed the role that a board would usually fulfil. The Office was bound by the structure of the Act. However the Auditor-General had to be autonomous because his independence could not be risked by influencing roles of a board of directors. Problematic issues could arise if the Auditor-General were to report to a body other than Parliament.

Mr Woods mentioned that the principal issue was that a board would have to be sufficiently removed from the operations of the Auditor-General in order to avoid conflicts of interests.

The Chairperson added that the general concern was that the audit-committee had to report to a body different to that of the accounting officer. Ultimately the Auditor-General would become responsible and in that sense the Auditor-General would be privy to the information presented to the audit-committee. The comparisons with other countries showed that there were similar arrangements. 

The Committee then accepted the audit-committee would report directly to the Auditor-General, that the OAG would meet once a year with SCOAG, preferably before the Annual Report.

Mr Trent added that the meeting with the oversight body provided additional checks and balances.

Mr Stephens noted and understood what the Act was stipulating, but felt that the wording of the amendment was misleading. It seemed as if the audit-committee could request a meeting with the oversight body, and he thought that it could come from either body.

The Chairperson was happy with the Amendment to Section 52 and felt that the terms of reference should be detailed for the Executive Committee for corporate governance purposes.

The Chairperson noted that the OAG was placed in a quandary because the Act stipulated in Section 38 that late submissions would not be allowed but there would be occasions where the Auditor-General would be late, with a valid reason. There should be a clause that allowed for a possibility for a late submission.

Adv Jenkins replied that it was a regulatory area of the Act and that the OAG would not want to damage the integrity of Act, so measures would have to be detailed pertaining to that problem if it should arise. He felt there should be a mechanism within the law.

The Chairperson suggested that such a mechanism giving sufficient notice from the Auditor-General be drawn, noting that it should not allow for a lengthy timeframe. 

The Chairperson remarked that usually the Committee would approve the draft of the Strategic or Budget Plan. However when it was tabled at Parliament it would be the version that included any changes that the Committee might have suggested. She suggested that the Auditor-General inform the Committee of any amendments to the draft strategic plan prior to tabling in Parliament.

The Chairperson remarked that the Act as currently framed, stipulated in Section 39(1) that the Audit-Committee gave the recommendations and that SCOAG made the final decision on the appointment of the external auditor.
Mr Woods suggested that the wording be reconsidered. SCOAG must consider the recommendation of an external auditor by the audit-committee before appointment in terms of Section 39.

The Chairperson moved on to Section 43 and mentioned that the management of the internal audit function was the role of the Deputy Auditor-General. Given the nature and scope of the internal audit, she asked who would assume that role if it was not managed by the Deputy Auditor-General.

Mr Makwetu replied that the internal audit function was primarily a management tool and would be the responsibility of the Deputy Auditor-General because it was part of corporate governance.

Mr Woods wanted to know if the audit committee would have exclusive approval of the internal audit plan.

Mr Sizwe Nyenyile, Parliamentary Researcher, highlighted that normally the internal audit function was highlighted according to the international internal audit functions. The audit-committee would also oversee the requisite audit functioning.

The Chairperson was concerned by the word ‘manage’ and felt that it was not a precise word when considering the internal audit processes because it could mean a range of issues. She suggested that the OAG go back and revise this issue

Mr Nombembe mentioned that role of the audit-committee in the internal audit function was clearly defined in the terms of reference. The audit-committee was confused by the term “manage” and assumed that it was an executive function. The audit-committee wanted a terminology that would avoid that sort of confusion.

The Chairperson then suggested that the term “manage” had to be clearly defined in the terms of reference.

Mr Nombembe corrected the Chairperson by saying that the audit-committee wanted the word removed from the legislation as it derived from the terms of reference.

Mr Adiel Kamedien, Secretariat: Corporate, Office of the Auditor-General, mentioned that specific reference was made in Section 43(b)(2).

The Chairperson noted that this section actually used the word ‘control’ rather than the word ‘manage’.

Mr Woods thought that there should be some degree of independence.

Mr Nyenyile responded that internal auditor would functionally report to the audit-committee and administratively to the accounting board.

The Chairperson asked the parliamentary researcher to reflect on the issue and investigate whether the reference to the auditing standards provided a more clearly-defined explanation, and then return to the Committee with amendments.

Adv Jenkins replied that there was a precedent set in the Public Finance Management Act (PFMA) that stated that the institution must ensure that it had an internal auditor and that it should report administratively to the accounting officer and functionally to audit committee.
The Chairperson said that if the PFMA was aligned to the regulations set in the auditing standards then what was in the PAA should reflect what was in the internal auditing standards. She asked that the Auditor-General’s office should decide whether they should amend the Act or change the regulations to provide clarity on the control of the internal audit.

Mr Van Heerden replied that normally the audit-committee must express their view in the annual report on the effectiveness of internal control. Since the internal auditor was viewed as internal control the audit-committee would have to have some kind of relationship with the internal auditor. The internal auditor would audit according to their standards, therefore the audit-committee would not require the internal auditor to perform any function that was outside those standards. It was a regular occurrence for the audit-committee to have final sight of the audit plan.

The Chairperson reiterated that it should be aligned with the auditing standards so that it was clearer. She added that it required further thought and consideration.

The Chairperson raised an issue around the advisory boards. She was concerned by the possibility that the advisory board could evolve into another body.

Mr Nombembe replied that the advisory board did not have any governance status, but was merely a sounding board that the Auditor-General might choose to use. The Auditor-General could use anyone for advice.

The Chairperson thought that the advisory board should be left as a sounding board.

Mr Trent asked why an advisory board was required if the Auditor-General had any other body at his disposable.

The Chairperson replied that it was because of the enormous constitutional responsibility placed on the Auditor-General. It was assumed that all resources should be at his disposal.  

Mr T Mahlaba (ANC) thought that the advisory board was not yet in existence but that it was mentioned as and when it was created.

Mr Nombembe replied that was correct, and that currently there were people that the Auditor-General used for advice.

Mr Trent questioned the value of the advisory board if the Auditor-General had anyone at his disposal and since it did not take any responsibility.

Mr Nombembe suggested that any reference to the advisory board be eliminated.

The Chairperson thought that the advisory board provided a measure of protection.

Adv Jenkins agreed with the Chairperson.

Mr Van Heerden replied that it was not a board in the formal sense.

Corporate Services Restructuring presentation
Mr Van Heerden referred to the structure and mentioned that the cost of the process to restructure was R16 million as well as the consultancy fee. The OAG allowed for a two-year transition period that was set for completion at the end of 2007. The refinement process included the restructuring of the chief operational division. The Chief Operational Officer resumed responsibility at the end of the last financial year. A chief executive was established, that would be responsible for auditing and best practices within the auditing environment. The head of auditing was established to coordinate all auditing activities. The corporate office was established within the Deputy Auditor-General’s office. The Deputy Auditor-General, Chief Operations Officer and the Head of Audit would make up the operational committee.

Mr Makwetu added that the OAG was beginning to see the benefits of the restructuring.

The Chairperson asked if the bulk of the process was completed.

Mr Makwetu replied that it was completed.

Financial Turnaround Plan presentation
Mr Makwetu gave an introduction to the presentation and mentioned that the Financial Turnaround Plan was finalised in December 2007.
Mr Stuart Boyd, Chief Financial Officer: Office of the Auditor-General, gave a brief run through of the presentation. He gave a background of the turnaround plan. Strategically the major focus was on the financial management capability of the Auditor-General. The financial management capability framework was detailed. Performance management was also vital to the turnaround plan. Objectives and milestones were listed for staff, the product and the processes for 2008. The project status was detailed, and the people in place were mentioned. There was a slight delay due to the later start for additional resources. The project status in terms of the products was also detailed in the presentation, as was the status of the process. Monitoring and control initiatives were explained.

Mr Woods asked if the OAG had given an accounting as to how the OAG had got into the state of affairs requiring a turnaround.

The Chairperson responded that the details were in the Annual Report and the budget plan.

Mr Woods replied that it was not the first time this had happened and that the fact that it did happen again was disappointing.

The Chairperson clarified that this was and issue of financial management. This was not the body that looked at financial management issues. The mandate to report to SCOAG was very specific.

Mr Trent was concerned by the fact that the OAG was in a level two situation, why it happened, and why it was so far behind.

The Chairperson clarified the issues raised by the members by saying that they asked about financial management rather than financial results, which was more in line with their mandate.

Mr Nombembe replied that the OAG was not talking about the collapse of the system of control. Rather, when assessing the sustainability of the system of control, there had been a continuous strengthening of the system. Since their responsibility was to report on other departments’ financial affairs the OAG had to ensure that their own affairs were scrupulously correct.

The Chairperson reiterated the question of how the Auditor-General got into the crisis of financial management that it required a turnaround plan.

Mr Nombembe replied that it was not a crisis; rather just a restructuring, because it was vital to managing their deliverables. These concerned the unit that dealt with the cash flow and the deficit position, and it all had to deal with financial management.

Mr Boyd commented that it was important to understand that in terms of the maturity model there were few organisations in the world that were certified above level 3. Attaining a certifiable level 2 position was a significant achievement. He wanted to ensure that the perception of anything below level 5 meant poor performance must be discarded, as level 2 was a good achievement.

Mr Trent was concerned by the deterioration shown by the slippage backwards. He added that the OAG needed to stabilise at level 2 in 2008.

Mr Boyd replied that the action that initiated the turnaround plan was to avoid further deterioration.

Mr Makwetu added that when issues that were assessed when the internal audit report was received, steps were taken as corrective action. The OAG started to identify the profile and skills that were required to deal with the issues highlighted in the report. Progress was assessed to ensure the increase in demand was handled properly.

Mr Trent asked if it was one component in the Chief Operations Officer’s office that was the problem.

Mr Nombembe added that it was part of the restructuring process. It was fundamental to straighten out that specific unit.
The Chairperson responded that financial management was not in the Committee’s mandate but when that affected the health of the organisation it became a problem. The audit-committee expressed on numerous occasions that they were concerned. Their report however said little about the issue. She mentioned that when the audit-committee reported issues to Parliament there were problems. Although there was a peculiar governmental arrangement the relationship that SCOAG had with the audit-committee had been unsatisfactory. She acknowledged the problems and she thought that perhaps the OAG would have to reassess the governance structure.

Mr Johnson asked who would be the final oversight authority regarding financial management issues.
Mr Nombembe replied that it seemed it would be the role of Parliament.

The Chairperson thought that the issue was that the internal control systems of the Auditor-General’s office were having significant problems.

Mr Trent thought that as the oversight committee, Members had to oversee the Auditor-General’s Annual Report and performance and had to receive answers to their questions. He welcomed the fact that the Auditor-General had approached the Committee with the problem and the solution created to repair the issue.

Mr Woods thought that more definition was required. He added that the Auditor-General had different set of rules compared to other Chapter 9 bodies. He thought that issues of corporate governance should be revisited.

Mr Makwetu replied that three areas were looked at when assessing how SCOAG could strengthen its relationship with the structures within the Auditor-General office. If the audit-committee reported on the Auditor-General‘s Annual Report a generic report would be received. It created an opportunity for SCOAG to carefully analyse the report in an engagement with the audit-committee. The relationship with SCOAG should also be assessed as this was relevant. In order to secure skills in the Auditor-General’s office SCOAG was to be assisted by the audit-committee. Standards were also a relevant issue because of the PAA requirements regarding the consultation that was to occur. There was also an auditing standards committee that currently did not have a direct line of reporting with SCOAG.  All these committees mentioned were all engaged with the Auditor-General but there was no line of reporting to SCOAG.

The Chairperson noted that a more effective board was required. The PAA had created an oversight mechanism that did not have any board function. SCOAG could not exercise any executive functions. The Committee were there to look at results. She would be happy to revisit these issue, however she was not confident that the issues relating to the audit-committee and SCOAG would be resolved. She suggested that in an informal setting the Auditor-General should express their view on the issue of corporate accountability.

Mr Nombembe suggested that the strengthening of the relationship and access to the information through the important bodies framework should be adopted. He added that the role of SCOAG should be better defined to close the gaps.
The Chairperson agreed that an interim solution was needed.

Adv Jenkins mentioned that the Office of the Auditor-General was treated differently from any other Chapter 9 bodies, and that created difficulty. He reminded the Committee that its role was to assist and protect the Auditor-General.

The Chairperson thought that a commitment should be made to do some critical thinking to corporate governance.

High level Recruitment: Reduction of the Vacancy rates
Mr Makwetu gave a brief background. The OAG had flagged the issue around vacancy and the fact that the OAG had a large vacancy rate. The OAG had made significant strides in reducing their large vacancy levels. The progress made was predominately in the lower level of the organisation. The Office was struggling to fill managerial and supervisory positions in the organisation. Another potential risk had been created because many of the trainees and junior positions would then remain unsupervised. The OAG had decided that this was their area of focus. Currently their vacancies were down to 592 vacancies. Growth opportunities were created for the internal staff of the organisation.

Mr Makwetu noted that there had been a recent development as Deloitte approached the OAG with the possibility of secondment of skills from, for instance, India. They had submitted a proposal to the Auditor-General. No decisions had been made yet as consultation had to take place. The OAG was grappling with the issue of attracting skilled people. There might be a number of risks associated with going out into that market.

Mr Woods though that the suggestion of Deloitte was a very novel idea. He asked how would the Auditor-General get assurance of the competency of the Indian skills.
Mr Makwetu replied that the OAG had considered this and that there was a certain level of risk. They were part of the firm that offered assistance to the organisation in term of the external auditing. Part of the process would be to assess whether Deloitte had provided proper training to these candidates with regard to auditing in the public sector. Deloitte also had an outbound programme, whereby they would send their staff to America to audit during the busy period to assess whether they could handle that type of pressure. Deloitte therefore took the responsibility to prepare their auditors for different legislative requirements. 

Mr Johnson asked if they had issued requests such as those offered by Deloitte to other similar institutions perhaps to assess whether they would receive better services.

Mr Makwetu replied that the OAG had not responded yet to Deloitte. The OAG wanted to assess the proposal and whether the firm was capable of providing what they were proposing Deloitte’s proposal arose from their global talent management programme and the OAG was not aware of other institutions that offered a similar talent management scheme.

Mr Nombembe added that he had spoken to the Auditor-General in India and was informed that Deloitte in India was the only firm that had a reservoir of these kind of skills.
Contract Work Variances
Mr Van Heerden gave a quick definition of contract work. Contract work represented that portion of the Auditor-General’s work that was contracted out to other firms and that was performed on behalf of the Auditor-General. The Auditor-General had a budget for contract work for 2007/08 of R250 million, which represented 26% of their total auditing income. The budget was based on the vacancy assumption of 5%. In terms of the actual contract work for the eleven months ending February 2007 the figure was R377, 9 million. Statistics were presented (see attached presentation) of the lost hours, lost revenue, increased revenue contract hours and increased audit costs. There was a challenge to find top calibre professionally qualified suitable candidates. The Auditor-General had embarked on a recruitment to fill vacancies. He detailed the vacancies filled. At the end of February 2008 there were 592 vacancies that still needed to be addressed. He explained the management of contract of work in proportion to the vacancies. The budget for 2008/09 was given. The contract work saw an increase of 39%. In conclusion the recruitment drive would continue to yield better results.

Mr Mahlaba was worried that the Auditor-General office was noting a high demand for more personnel but he had not seen any advertisements for prospective employees. He asked for details of the process and what were the minimum requirements.

Mr Van Heerden replied that the recruitment agencies that the OAG used had yielded better results than advertisements in the newspapers. Their internal recruitment was advertised within the OAG. The retention strategy had resulted in them looking at the areas that caused high staff turnover. The OAG wanted to improve on conditions of employment and research and development

Mr Makwetu added that the OAG recognised that it had in the past been reactive in response to retention. It was now attempting to address these issues and agreed that it had not given their full attention to the issues. The retention strategy was not based purely around compensation issues.

Mr Trent asked what percentage of work was outsourced. He understood the cost implications of outsourcing. He suggested that perhaps the Auditor-General’s focus should be monitoring the outsourced work. He thought that perhaps if the outsourced work was managed effectively then the staff complement could be adjusted accordingly to be more effective.

The Chairperson clarified that when outsourcing occurred, then funds were not earned, and that was detrimental to the Auditor-General’s financial position. The deteriorating position that the OAG found itself in was a direct result of it having outsourced more. That was the reason for the revision of the funding model.

Mr Van Heerden clarified that the OAG was an accredited institution and had taken on board numerous trainee accountants. There was a need for them to continue their audits. The more work contracted out, the less they received. There was a percentage that the OAG had committed to outsourcing and the OAG had contributed to transformation by using small audit firms.

Mr Johnson asked for further clarification on the compensation that was mentioned in relation to the retention strategy. He asked for clarification on the minimum qualifications, and examples. He asked if there was another option of the conclusion of course work done by those students that were conscripted.

Mr Makwetu replied that the OAG had committed to repositioning of remuneration. The OAG took the recommendation that required salary adjustment with managerial positions. It was done in the last two months. It was a significant step. OAG was committed to fixing the levels below managers by June. The senior managers and upward had yielded no gaps.

Mr Van Heerden added that the OAG had drawn up a minimum qualification framework. In terms of professional qualifications, the staff required a Chartered Accountant qualification or an equivalent. The OAG were continuously promoting those standards. It was necessary to have those qualified people to supervise and train trainee accountants. The OAG had success in moving staff to those minimum qualification and had reached 100 qualified personnel over the past year. There were certain circumstances to allow some deviation, but this would only be allowed for a minimum period.

Funding Model
The Chairperson asked that the full presentation not be given. She indicated that the options provided by the Auditor-General were twofold. Option 1 was to retain and improve the existing model. Option 2 was to resort to utilising a Chapter Nine allocation. The Auditor-General indicated that after consultation with National Treasury, SCOAG and various others a decision would be made.

The Chairperson thought the route offered by the Auditor-General should be taken.

Mr Trent asked about the adjustments that the Auditor-General was requesting and asked what were the percentage increases over the past five years.

Mr Boyd replied that there two components; hours and rates. The hours had been increasing significantly and were driven by the introduction by the auditing standards. The rates were increased by a set model with tight constraints to inhibit increases and were less than inflation for the past three to five years.

The Chairperson responded that the Committee were sympathetic to the models.

Mr Nombembe clarified that the models presented were complementary.

Mr Trent noted that government departments must budget for their audit and had to budget adequately.

The Chairperson clarified that the Auditor-General was not advocating either option. She noted that the Committee was of the view that Option 1 was preferred. Their reasons were that once allocation was provided they would have no other recourse. However option 1 was a huge responsibility in an embattled environment. She was interested what the Auditor-General meant when he indicated that the options were not mutually exclusive.

Mr Nombembe replied that he meant that the basis for determining the funding for the Auditor-General’s office would need to be done accurately. If it were not done properly, regardless of the origin of the funds, there would be a shortfall. The cash flow was also problematic, and this was an issue that the Office was currently trying to address.

The Chairperson noted that it would be up to the budget committee and Treasury whether the Auditor-General would receive funds upfront and it could result in a revised allocation. The OAG would be subject to the fiscal health of government, and there was no guarantee that all funds requested would be received. She saw potential risk.

Mr Nombembe replied that the OAG was undertaking an exercise that looked at the detailed process, and conditionalities of the model would provide an answer.

The Chairperson responded that there could not be a guarantee in terms of the Constitution except for a direct charge.

Mr Van Heerden added the PAA did allow that some their funding could be appropriated by Parliament. The current processes that the OAG had in determining the audit fee would allow them to have a good position for motivation. He added that it would be based on factual figures. The only issue would be their overheads; however these were in line with the average international benchmark.

The Chairperson responded that the OAG presented a good moral argument but it was not a guarantee unless it was a direct charge on the National Revenue Fund. In her experience she had not come across any agency or department that had asked for a certain amount and actually received that amount, it was subject to the availability of funding. The OAG would have to compete for funding within a limited revenue base. She appealed to the Auditor-General to carefully assess their decision.

Mr Woods thought that the points were valid. The Auditor-General was set apart because the OAG was constitutionally viable. He thought that both options required a closer look and that before they get to the final recommendation the Committee needed to be updated.

The Chairperson added that there was a limited pool of resources and it was the agencies that could provide political leaders that would get funding. The Auditor-General did not have a political head that argued for their position.

Mr Woods suggested that the legal researcher should look at the option of a direct charge against the National Revenue Fund.

Adv Jenkins replied that a direct charge would not affect their budget and it would not solve the issue.

Mr Nombembe replied that the comments were useful in terms of highlighting the risk of the model in terms of funding, and these would be taken into account.

The Chairperson was not convinced that Treasury and Ministry of Provincial and Local Government had exercised their minds regarding non-payment of the audit fee by local government. A constitutional amendment and legislation was brought, requiring that a MEC would have to intervene when there was a failure. Outstanding audit fees were a problem. She not convinced that there was enough political pull to force local government to pay the fee.

Mr Woods hoped that the Auditor-General was still considering both options.

The Chairperson asked if there was any other route for the cash flow to be improved.

Mr Makwetu added that the OAG had planned on giving feedback on the follow up steps.

The meeting was adjourned

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