Office of Auditor General Strategic Plan & Budget 2009-12

Meeting report

Election of Acting Chairperson
Ms Shanaaz Isaacs, Committee Section representative, stated that according to NA rule 130, a new Chairperson had to be elected for this meeting, due to the recent appointment of the former Chairperson, Ms Barbara Hogan, as Minister of Health.

The Committee elected Mr D Gumede (ANC), who took the Chair.

Office of the Auditor General (A-G or the Office): Strategic Plan and Budget 2009-12 Briefing
Mr Terence Nombembe, Auditor-General, reported that the Office of the Auditor-General (A-G) staff who were present at the meeting were at the forefront of developing the Strategic Plan and Budget for 2009 to 2012.

Mr Nombembe then gave the Committee background to the Strategic Plan 2009 - 2012. He noted that the A-G’s report had been submitted six months before year-end for the consideration of the Committee, and he was looking forward to the input from this Committee. He stated that if the Office were to audit effectively, they needed to be seen to be effective and this would require recognition in the public sector, and accountability.

He noted that the previous vision and mission statement had run its course and there was now a revised mission, focusing on performance auditing and initiatives. The core product and messages must be relevant and the Office would drive its understanding. Strong leadership would be paramount.

Mr Kimi (T) Makwetu, Deputy Auditor General, Office of the Auditor-General, discussed the plans for learning and growth of staff over the next three to five years as well as efforts to attract and retain new talent. The key strategic focus areas were described as regularity audits, performance auditing, the funding model, vacancies, debt collection, the trainee accountant scheme, leadership, governance and reputation.

The most important change in the strategic plan was the removal of the cap on the rate that the A-G had charged the State for auditing services. The Office would also continue the focus of debt collection, especially regarding their municipal debtors, for the next three to five years. Initiatives to address the vacancy problem included collaboration with Deloitte & Touche on the Trainee Accountant Scheme. The Office would continue to address governance and risk management in order to improve the processes in terms of human capital, finance and information systems. This was all crucial in ensuring that it was highly unlikely that the Office would ever receive a qualified audit.

Mr Makwetu also commented on the importance of the international peer review and mentioned the preparation for the public comment the A-G would have to make at the 2010 Soccer World Cup.

Mr Makwetu then briefed the Committee on the Budget 2009 to 2012 and financial highlights (see attached presentation). He discussed the budget assumptions. The projected Income Statement illustrated that the capped rates up to 2008 had an effect of an approximate loss of 40% of revenue, as the Office had received no profit margin on the work contracted out. The gross margin projected for the two years following the removal of the cap was 25%, and that margin was projected to increase to 34% over the next three to five years. He presented the overhead statement, audit income movement figures and the projection for the changes of the net surplus as a percentage of audit income. The other initiatives the Office of the Auditor General would be undertaking, in order to achieve the net surplus objective, would be to address the areas of contract hours, training and development hours and the debtors current position. The budget briefing was concluded with a brief overview of the suggestions of how to improve cash collections.

Discussion
Mr G Woods (NADECO) commented that he thought that the A-G had underestimated the risks identified in the previous year and that this had caught up with them. These matters had not been mentioned in the presentation. They had dealt with part of the problem in the capping issue. He was curious as to what happened if the debt collection rate deteriorated and how could this be accommodated.

Mr Wally van Heerden, Head of Audit: Office of the Auditor General, responded that for the interim year the debtors figure stood at 44% of debtors being older than 80 days. These debtors were also mostly at local government level. The Office of the Auditor-General had visited all the provinces and met with the MECs for Local Government and Premiers and had indicated the situation to them. The Free State MEC for local government had paid the full debt. This was a very positive move. There was a slight technicality regarding reporting and they were asking the National Treasury how they could account for an amount paid by provinces on behalf of municipalities. There was a particular issue with conditional grants but on the whole, they were to collect the debts at a higher level.

Mr Woods referred to staffing and arresting contract hours. He commented that this had been proposed for 15 years. He remarked that the situation in the labour market was due to market forces and asked if the risks to staffing had been addressed in the strategic plan.

Mr van Heerden agreed that the vacancies were a real risk and reported that that there were recruits coming off the Registered Government Accountants (RGA) scheme. These people would fall into the management level of the A-G. The Deloitte collaboration project would provide further stability with the Trainee Accountant Scheme. The Office was  were also looking at salary differentiation, to bring salary scales more in line with education, skills and experience. This would help the Office to retain staff and allow those staff members to use their skills. They could also generate more opportunities for their business units and increase income by decreasing contract work allocation. These efforts would achieve success as well as reducing risks.

Ms L Jabavu, Chief Operations Officer, Office of the Auditor-General, added that the management had looked at the labour market turnover. In order to be more realistic they had compared salaries with the external environment. The roadshow had helped them identify issues, and make interventions and initiatives to address the risks.

Ms S Chikunga (ANC) pointed to the key sectors highlighted in the strategic plan of Education and Public Enterprises. She noted that other sectors of Health and Crime Prevention had been targeted by government for performance audits. She asked when these additional sectors would thus be identified for a performance audit, and whether the A-G could assist government in realising their priorities for these departments.

Mr Makwetu responded that the Office had looked at the total picture and at the reality of their capacity, expertise and resources. Major areas such as Health were too complex to deal with, in addition to their other responsibilities. They were currently recruiting accountants to do regularity audits as this was already a challenge. They had thought that other interventions could be pursued, but that issue was on the back-burner for now.

Mr T Mahlaba (ANC) asked if the A-G had thought of presenting  the Committee with options regarding the removal of the cap. He asked what would be the forecast if the capping was not removed. He also enquired if there was a contingency plan and what would the impact be if the cap was not removed.

Mr Makwetu responded that this was one of the options of a funding model. He reported that this impression had arisen from the last meeting of SCOAG. The Committee had expressed the opinion that removing the cap would probably be best. He explained that the audit fees for government had been historically capped. The Office had not had growing rates in line with the Consumer Price Index (CPIX), for instance. However, its costs were growing at more than 4% annually. This had impaired their ability to improve staffing and this was a major challenge. If the cap was retained, the Office would make a loss. Their capacity to retain staff and hire new staff was related to their ability to offer market related remuneration. In essence, with the cap they were unable to attract talent. The primary intention of removing the cap was not to make money. The balance between spending and earning had to be maintained.

Mr Nombembe added that this issue had been discussed with the Committee and the only pending matter was the formal consideration by the National Treasury. The Office had received an indication of support from them, and furthermore Treasury was also likely to allow the Office to do debt collection on its own.

Mr Mahlaba asked what the collection of the outstanding debt would bring to the budget, and whether this would help them achieve the 6% surplus. He asked whether provision had been made for not being able to collect the accumulated debt.

Mr M Johnson queried the sustainability of collecting municipality’s debts from provinces, and asked what would happen when provinces were not able to pay.

Mr Makwetu replied that the Office was essentially doing these audits on credit. There was a fundamental risk in not being able to collect the money. The key here was persuasion, as the life cycle of the debt collection ended only when legal forces were used to get the debtor to pay. The A-G did not have the capacity to undertake enforcement through the courts. Persuasion might be more effective if they used their relationship as a leverage. The problem was what to do if persuasion was no longer effective. The Office had not engaged with the possibility that there was an expectation that they must take the debt collection right to the legal conclusion

Adv J Stephens (DA) commented that the Office would have to take into account the option of enforcing debts through legal process. He suggested that litigation should be considered as a definite part of the programme of debt collection. This would require a provision in the budget for legal costs. The other issue would be how to operate with clients and in this regard he suggested that the matter be discussed with the State Attorney to study the relevant documents, and ensure that the eventual figure was in the form of a liquid claim. In his view, it was essential to clear up the legal points beforehand, as this was their best chance of getting a fast judgment. He did agree that it should be a matter of last resort.

Mr van Heerden responded that this was a relationship problem. He referred to a test case in Kwa Zulu Natal, where the Office had enforced a letter of demand. This had been successful but in principle the senior managers of the A-G did not want to have to enforce a letter of demand. He agreed with Adv Stephen’s comment on documentation and added that it was a case of formalizing that this was a matter of last resort. They would have to encourage managers to pursue letters of demand.

The Chairperson asked if the external audit of the Auditor-General had been finalised yet.

Mr P Serote, Corporate Executive, Office of the Auditor-General, stated the external audit had not been finalised. The responses to the tenders were very poor and none had met the criteria set out. The Chair of the Audit Committee should meet with SCOAG to see what could be done. If stipulations were relaxed, and they could get around conflicts of interest, there might be a higher number of applicants.

The Chairperson asked if the external auditors of the Auditor-General were excluded from other contracts and if this was the case, he wondered if it would be wise for these businesses to audit the A-G as they would lose other contracts.

Mr Mahlaba commented that it was worrying that neither of the applicants had met the requirements.

Mr Serote responded that the cause of this was that stipulations had gone even higher and smaller firms did not have the capacity to comply. He noted that the Office proposed that they retain BDO Spencer Steward. He asked what the views of the Committee were on this.

The Chairperson replied that the Committee would discuss that with the Audit Committee. Length of association was an issue, as was the related issue of conflict of interest. If this decision was taken, it should have the blessing of the Audit Committee. This was important for integrity. This Committee and the Audit Committee would come to a conclusion at a later date.

Mr Mahlaba referred to the initiative mentioned to address vacancies and commented that SCOAG had an interest in the success of this, as well as in the corporate social positive investment. He asked how the process would unfold, and whether there were any areas that presented challenges. He stated that it was often the case that such opportunities were concentrated in the cities, but he felt there was also a need to target he rural areas and look at the poorer districts, to address the greatest needs in the lives of ordinary people.

Ms Jabavu responded that the Office had looked at rural areas and commented that it was difficult to attract skills to these areas. They encouraged staff members willing to relocate by incentivising them. Most of the fifteen schools identified were in rural areas, spread throughout the provinces, with at least one in each province. The Office aimed to identify children who did well at mathematics, and encourage them to follow the auditing route and hopefully have them go back to work in their provinces once they qualified. Interventions were being pursued to attract people to those provinces.

Mr Woods commented that he preferred the new vision and mission statement but felt that the wording was not too elegant, and thought it should be looked at again. He also felt that the prioritising of strategic goals was not quite correct, and that reputation should be mentioned last because reaching all the other goals would lead to a good reputation.

Mr Woods asked whether, once the new rate was budgeted for, it would remain in place for the financial year. He remarked that this was a major shift for the A-G, with both the new tariffs and the projected 6% net surplus, and asked how it compared with private audit firms. He asked if this would yield a higher profit margin than the private audit firms, and whether it was accommodating excessive overheads.

Mr Makwetu responded that the Office was still behind the rates of the private firms.

Mr R Mahabeer, Office of the Auditor General, replied that in the analysis, the Office had used the South African Institute of Chartered Accounts (SAICA) tariffs as a baseline for comparison. The companies’ rate was generally higher than the SAICA rates. The A-G was still below the SAICA rates. On average the A-G came out on 93% of the SAICA rate. Certain categories of staff were levelled at a higher rate. Their other rates were still below the SAICA rates. The impact of what the analysis would mean to the auditees was an average increase in fees of 35%. This was a once-off impact. If other costs remained comparable in ratio to the direct cost, their overall impact over time would remain relative to the CPIX (baseline inflation). There was also no reason why there should be a disruption in rates going forward.

Mr Woods remarked that the new tariff regime should be lower. He queried the exact percentage drop in cost and what profit margin the A-G would make.

Mr Makwetu responded that private firms currently made 50% to 60% in profit, whereas the Office of the A-G made only a 30% margin on average. Therefore the gap on the profit margin was in the region of 20% difference.

Mr van Heerden added that there were three tariffs: their own tariff, private audit firm tariffs and commercial tariffs. The A-G was way below the second two rates but was under tremendous pressure to reconsider their tariffs.

Adv Stephens asked why the impact on the Land Bank was so great.

Mr Mahabeer responded that there was a mix of skills involved, making the complexity of the audit greater, which led to the higher rate being applied.

Mr Makwetu added that during the risk assessment they had looked at a number of issues and had given particular attention to the comments of the audit firm, Ernst & Young. There were also extra people involved in an audit of the Land Bank, leading to higher costs and a higher rate.

The Chairperson asked if they were using the National Skills Development Fund, and to what extent, and the reasons if it was not being used.

Mr Nombembe asked if this related to FASSET, the Sector Education and Training Authority (SETA) for Finance, Accounting, Management Consulting and other Financial Services. The Office of the A-G was part of FASSET and were claiming from it, which was shown as a line item in the budget.

The Chairperson asked if the Office was training people.

Mr Makwetu replied that in addition to the trainee accountant scheme and the registered government accountants, the Office was developing a programme with the help of SAICA. The programme was sourcing funds from FASSET, and aimed to provide lecturers to supply support to staff who were still studying.

Mr Nombembe commented that there were specific decisions that the Committee had to make. On the tariffs, it would be good to get confirmation, so that the tariffs could be approved by the beginning of the next financial year, on 1 April 2009.

The Chairperson replied that the Committee would be dealing with that at the next meeting. The principle of removing the capping was understood, but the Members needed more time with the details and would finalise at the next sitting.

The meeting was adjourned.