Funding Options for Office of the Auditor General

Standing Committee on Auditor General

12 June 2008
Chairperson: Ms B Hogan (ANC)
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Meeting Summary

The Office of the Auditor General presented its detailed evaluation of alternative funding options for the institution. This was in response to the Auditor General’s deteriorating funding position as a result of the limitations that were placed on tariff increases and bad debts. In doing so it outlined its key financial indicators, the funding deficit drivers, global benchmarking, its evaluation of funding options, its recommendations and the way forward.

The recommendations included the retention of the current method of fee recovery from auditees, subject to the removal of tariff caps and adjustment of the budgeted recoverable hours.  Market-related tariff increases should also be introduced in subsequent years, and an unconditional grant should be made available to relieve the funding position of the Auditor General until the introduction of these recommendations.

Members were concerned that the independence of the Office of the Auditor General must be maintained. They recognized that the matter of debtors has been a challenge for many years. Questions were asked about whether interest was charged, municipalities unable to afford auditing fees and the possible intervention by National Treasury on this, the proposal for a cash injection by National Treasury, essential and non-essential aspects of an audit, and the vacancy rate.

The Committee appeared set to approve the Auditor General’s plans for tariff increases by the following week. If National Treasury objected, it would have to appeal to the Committee.

Meeting report

Office of the Auditor General presentation on Funding Options
Mr Kimi Makwetu, Deputy Auditor General, and Mr David Forbes, Acting Senior Manager: Process, in their presentation outlined the key financial indicators, the funding deficit drivers, global benchmarking, the evaluation of options, recommendations and the way forward. They said that the Office of the Auditor General’s funding position was deteriorating as a result of the limitations that were placed on tariff increases. This resulted in the “capping” of certain tariff increases at 4%.  There had also been difficulties in collecting fees from financially strapped local authorities, resulting in an increase in bad debts and a growing arrear debtor’s book.  The issue of staff vacancies was also a major challenge.

In addition, the budgeted average recovery rate (number of recoverable hours per annum) for 2007/08 was missed by 1.9%. In the past year, average debtor days increased by 25%. This was driven mainly by deterioration in collections from local authorities and provincial governments. Provisions for bad debts increased by 33% relative to total audit income.  The Office of the Auditor General had brought funding problems to the attention of the Committee on 1 October 2007 and an initiative to evaluate the way forward was endorsed. The various options were considered in detail including the retention of the current method of fee recovery from auditees with market-related annual tariff increases.

Mr T Mahlaba (ANC) said that there needed to be clarity on what happened with the bad debts. If National Treasury approved the Auditor General’s R150 million request and the Auditor General decided to collect the bad debts at the same time, would the amount provided by National Treasury assist the Auditor General in maintaining their reserves? Clarity should also be given on whether the increase of auditee fees would encourage the auditors that have been outsourced to request more funding.

Mr Makwetu replied that the amount took into account debtors over a long period of time. If the request were approved by Treasury, then the amount recovered from the debtors would have to be ring fenced. There needed to be sufficient monitoring of the amounts recovered from bad debts and the Office had implemented measures which would avoid double payments.

Mr Forbes replied that the auditee fees would increase, however there would be significantly less work done by contractors. The rates charged to the subcontractors were predetermined and there was a table that determined the rates.

Mr Makwetu added that the South African Institute of Chartered Accountants had an interest in the rates that were being charged, and the table of rates was provided to them. There was a process of negotiation on the rates which involved a number of stakeholders.

Mr Terence Nombembe, Auditor General, added that that the rates had been set and firms had no other choice but to accept the rates and they seemed to have settled on an understanding.

Mr Johnson (ANC) said that it was very good that the Committee was engaging on the matter so that an independent view was formed. The issue of vacancies and the retention strategy needed to be addressed and the Committee needed to look into the matter.

The Chairperson added that the Committee needed to be updated on the vigorous recruitment process.

Mr Makwetu replied that the Office of the Auditor General had engaged itself on a vigorous recruitment process and the Office would continue engaging with the Committee on the matter. Filling staff vacancies was an ongoing project, and significant progress had been made at the lower levels in terms of attracting auditors and accountants. The efforts that had been made in filling in the management and senior management positions had not had any dramatic or positive impact.  There were several engagements aimed at addressing the matter. They had engaged with Indian auditors about bringing them into the country as managers. The Office of the Auditor General needed to build the capacity of their trainee accountants and at the same time continue finding the necessary people to fill the managerial vacancies.

The Chairperson said that the Committee needed to look at the models that the Office of the Auditor General was proposing and whether they were financially sustainable. Maintaining the independence of the Office of the Auditor General would also be a factor when looking at the proposals.

Mr D Gumede  (ANC) said that during a hearing of the Standing Committee of Public Accounts, one of the public entities noted that they could not afford the fees charged by the Auditor General. Clarity should be provided on the matter.

Mr Forbes replied that this matter was part of what underpinned the increase of the surplus. This would create reserves for self initiated audits when these were not affordable by the auditee.

Mr Gumede added that there should be criteria in the Office of the Auditor General that would exclude unnecessary aspects of the audit and maintain what is necessary.

Mr Makwetu replied that if members looked at the Office of the Auditor General’s financial statements, they would see that there was a reserve of R5.3 million. There needed to be engagement on what the reserves should be used for when the Office of the Auditor General presented its annual report.

Mr Nombembe added as the tariffs were raised, one needed to determine what the added value to government would be. A process had begun which looked at the matter. However when one performed an audit, there needed to be assurances that there were no gaps in the audit.

Mr M Nene (ANC) sought clarity on the matter of the lack of affordability, especially for the municipalities.

Mr Makwetu replied that this had been highlighted by various local governments which could not afford the audit costs, and Office of the Auditor General was in the hands of National Treasury. When looking at the affordability issue, one needed to know to what extent the audit should take place. One had to determine, with the assistance of National Treasury, the minimum framework that was required.

Dr G Woods (NADECO) noted that the discussions on the independence of the Auditor-General needed to take place urgently. The Committee had wrestled with the debtors issue for many years. Clarity should be provided on whether interest was charged, and if the Office of the Auditor General had asked for National Treasury’s intervention. Staffing was the biggest issue, and unless it was resolved there would be a problem. 

Mr Makwetu replied that the Office of the Auditor General had not addressed the issue of vacancies as well as it should. The challenge about what should or should not be done in an audit would be determined by what the auditing standards required. There had been a programme which enabled people to achieve a minimum qualification and the Office of the Auditor General then took on these individuals. The retention strategy still remained a challenge and there needed to be further engagement on this.

Mr M Johnson (ANC) asked if the new Public Finance Management Amendment Bill would have implications on the work of the Auditor-General. The problems of bad debts and staffing needed to be addressed urgently. The Auditor-General would have to provide an analysis of the bad debts to determine how the bad debts were rated.

The Chairperson commented that the staffing matter needed to be monitored closely by the Committee and the bad debts needed to be looked at from a provincial and a national basis. The Committee felt that the Auditor General had to retain its independence but National Treasury might not be satisfied with the tariff increases. However there needed to be a sense of realism, given inflationary pressures. If there were contention about the tariff increases, then National Treasury would have to appeal to the Committee. The Committee would approve the Auditor General’s plans the following week and it would be interesting to see what National Treasury’s comments were.

The meeting was adjourned.


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