Election of Committee Chairperson; External Auditor’s appointment

Standing Committee on Auditor General

18 November 2008
Chairperson: Mr V Smith (ANC)
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Meeting Summary

The Committee firstly elected Mr Vincent Smith as the new Committee Chairperson.

The Committee then discussed the appointment of an external auditor who would audit the Office of the Auditor-General (OAG). A proposal was made that the current auditors, BDO Spencer Steward, be awarded the audit contract for one further year. Members were not in disagreement, but discussed the possibility of appointing more than one Black Economic Empowerment audit firm, and noted that the current requirement of the audit fee being 10% of profit was intended to enhance independence, but was sometimes problematic as some firms were reluctant to tender, since their appointment would preclude them doing consultancy work for the OAG. Members agreed therefore that other options should be explored, such as the possibility of mergers, the question whether 10% was correct, and that there should be a tripartite meeting between the Auditor General, the Standing Committee on the Auditor-General (or a delegation of it) and the audit committee, to brainstorm the problems and risks, and to formulate some pointers for the incoming Committee that would take office when the new Parliament was elected.

Members continued to discuss the budget and strategic plan of the Office of the Auditor-General that had been tabled at a previous meeting. Members discussed the proposed lifting of the caps on tariffs, and expressed contrary views, with some feeling that this was not desirable and tended to create an image of a profit-driven office, but others considering that this was not a problem since there were other checks and balances in place. Some Members were concerned that there had been too large increases in the costs for “non core” functions such as corporate services, communications and branding, and emphasised the need to rationalise costs not associated with the revenue-generation side of the Office. The Auditor-General again explained that the capping had led to negative variances and deficits, and explained how the disparities arose. Members also asked about prioritisation of functions, the debt collections by the OAG, and the mix of contract and government work.

The Committee was asked to approve the SAICA tariffs set for the work performed by private firms on behalf of the OAG. There was a 17% increase, but this was below the general increase in the profession. Members agreed to approve the tariffs.

Finally members adopted the Minutes of 7 October and noted that early in 2009 it would be necessary to prepare a report on the work of this Committee during 2008, for the assistance of the incoming Committee of the new Parliament.

Meeting report

Appointment for Committee Chairperson
The Committee Secretary noted that there were two nominations for Committee Chairperson, namely Mr Vincent Smith (ANC) and Adv J Stephens (DA). The matter was put to the vote and Mr V Smith was formally elected.

Mr Smith then took the Chair.
Appointment of External Auditors
The chair referred to the letter to the Committee by Mr Peter Moyo, regarding external audits of the Office of the Auditor-General, as discussed in the previous meeting. 

Dr G Woods (Nadeco) proposed that the auditing and accounting firm BDO Spencer Steward be given one further year to deal with the audits of the Office of the Auditor General (OAG). The Committee was urged to possibly consider having more than one Black Economic Empowerment (BEE) firm to complete the external audit. He asked about the cost of the audit by BDO Spencer Steward and their cost proposals regarding their staff, noting that the services were likely to cost in the region of R2,5 million (within the allowed limit of 10% of their overall profit of R25 million)

Mr D Gumede (ANC) agreed with Dr Woods and said he would prefer to remain with BDO Spencer Steward, so that the OAG should remain on the same footing.

Adv J Stephens (DA) also expressed agreement with Dr Woods and Mr Gumede, as he felt there were no real alternative options at that time. He agreed that possibly having a pool of smaller BEE firms to do some the work would be a good idea in future.

Mr M Matlala (ANC) then asked whether it would be an option to look at the criteria that were used to recommend and appoint the external auditor. A resolution containing certain changed conditions, together with the resolution that was proposed by Dr Woods, could be another viable option.

Mr Gumede commented on the reluctance of firms to bid for external auditing. If they were appointed it would mean that they could not be appointed by the OAG as consultants whilst they were engaged as the external auditors. This was compounded by the fact that non-audit work was more profitable. He noted that the smaller BEE audit companies did not have enough income to really consider bidding. In fact, one of the conditions to allow them to bid is that they must have a relatively large income. Another option might be to have BDO Spencer Steward forming a merger with smaller companies.  It was understood that BDO Spencer Steward had looked into this and could possibly do this next year.

The Chairperson agreed that the criteria should be reviewed. The fact that so few firms were applying for the work was worrying, but he understood the problem as they could not consult and audit the OAG at the same time, due to a conflict of interest.

Dr Woods noted that the question must be asked why 10% was needed as a criteria. 

Mr Terence Nombembe, Auditor-General, commented that the option outlined in Peter Moyo’s letter was valid, as it was indeed unattractive to most South African firms to bid for the auditing contract, for commercial reasons. It was necessary to find another way forward.

Mr Kimi Makwetu, Deputy Auditor-General, agreed, saying the “Big Four” auditing and accounting firms were not interested, but the emerging BEE firms did look to the public sector for contractual work. He said that it was unsure whether BDO Spencer Steward could continue to be the OAG’s external auditor. BDO Spencer Pretoria, which was a separate entity from the national office of BDO Spencer Steward, was possibly going to merge with the latter and this would create a larger firm, with a larger income, so that perhaps consultation and contract work would be more attractive to it.

Mr Nombembe commented that the audit fee was problematic to many firms, as only two firms met the criteria to audit the OAG. The fee they charged the OAG must be 10% or less of their income. He said that it was necessary to look also at who was willing to undertake the audits, and he agreed that relying upon one firm was risky. He noted that the 10% was a criteria agreed to by BDO Spencer. This figure represented R2.5 million for BDO Spencer Steward. Setting the audit fee at 10% of the income was intended to prevent a situation where independence might become compromised.

The Chairperson referred back to Mr Moyo’s letter, and agreed with the recommendation that there should be a tripartite meeting with the Auditor General, the Standing Committee on the Auditor General (or a delegation f it) and the audit committee, to ensure that any risks could be eradicated before next year, that BDO Spencer Steward did not become disqualified, and that other firms might be able to have a better chance. Such a meeting would enable a brainstorming and a lessening of the risks. The participants would then draw up some pointers for the incoming committee that would be formed in the next Parliament, so as to ensure that the problems encountered by this Committee were not repeated. The SCOAG Committee would thus initiate this meeting.

Members agreed with these proposals.

The Chairperson advised the OAG that it could proceed with the appointment of BDO Spencer Steward for next year, but noted that this decision would be reviewable over the next six months. He stressed again that in view of the current situation other options for the work of the external auditor must be explored.

Office of the Auditor General: Budget and Strategic Plan 2009 – 2012 deliberations
The Chairperson tabled the Researchers’ report on the Strategic Plan and Budget of the OAG, which had been presented some time ago to the Committee.

Dr Woods enquired about certain aspects of the plan that were discussed at a previous meeting. He spoke about the proposed lifting of capping of tariffs and a limitation by that Office on cost control. He was worried about the degree of discretion that OAG had on increases of tariffs and its costs structure, and felt that there was a need to limit these tariffs to the core responsibilities of the AG. He commented that other aspects, such as the surveys used to gauge the reputation of the OAG, its corporate services and communications and its efforts to improve branding were not core functions, although these showed significant increases. He stressed that it should not become too costly to meet these matters, which were not listed as Constitutional requirements. He emphasised the need to rationalise costs not related to the revenue income side of the operations.

The Chairperson agreed with Dr Woods’ concerns around the removal of the capping, as he said that the costs of using the services of the AG could increase. The problems it already experienced in collecting debts, especially from Local Government, could be exacerbated by increasing the rates. There was a perception that the OAG was profit driven, through its debt collection. There should be a more concerted effort in cost control, and towards improving the profit-driven image that it had.

Mr Nombembe replied that the capping of rates was dealt with in the report last year, in the context of how to address the consistently negative variances and the resulting deficit. The OAG found that the rates that it charged were capped at around 4%. The rates that they should be charging to cover the costs of training new accountants, in order to increase the professionalism of the OAG, must increase, but the money it was permitted to charge was capped. There was a disparity between real costs and income. The OAG had difficulties in recouping its expenses. It was necessary that the OAG make use of contract work, in order to be able to increase the margin and there was an urgent  need to fill the vacancies in the Office, both in order to complete the basic work and in order to bring in extra revenue by way of contract work. However, it was not aiming for a surplus in excess of 6%.

Mr Nombembe then turned to the comment around high indirect costs that were not related to the core function, such as corporate services. This was quite a difficult issue. It was necessary to have a proper level of motivation and use of resources in the organisation. Staffing was the highest cost and this did need to be managed. The OAG had not yet looked at the other costs, such as communication and branding, in any detail as yet.

Mr Makwetu noted that the budget allocated to OAG did give some leeway with staffing costs. Each cost item was examined carefully. The problem of the deficit must be dealt with by looking at the cost of personnel, and the present budget did allow for this. Furthermore, even if the capping on the tariffs were to be removed there would still be accountability. All issues that were raised in the 7 October meeting were taken into account, and all costs were benchmarked thus ensuring that the tariff increases were not substantial.

Mr Makwetu asked the Committee to refer to page 6 of the Report that did in fact represent a prioritisation of functions in the Office of the AG.

Mr Wally van Heerden, Head of Audit, Office of the Auditor-General said, in relation to the debt collection, that there was a plan to get the auditees to pay before an audit was undertaken, thus ensuring that they were able to afford the audit.

Mr Gumede said there was a need to bear in mind the oversight function of this Committee over the OAG. The integrity of the OAG was related to its reputation of properly fulfilling all its constitutional and government functions. He felt the plan was acceptable, but said that the possibility of abuse had to be looked at. The rate of inflation was likely also to have an effect.

Adv Stephens looked at the plan as an academic exercise, as it was impossible to pay attention to every strategy in the plan. He said that there should be prioritisation of the functions and highlighted skills training as one of the most important.

Dr Stephens commented that the profit maximisation and the profit-driven image of the OAG was normal.

Dr Woods said it was important to look at the mix of contract and government work. The qualified accountants who were paid were vital, but he remained concerns about increases in non-core areas such as professional assistants and corporate services.

Mr Makwetu responded that in fact corporate services represented an investment in training of the OAG staff, to decrease the OAG’s dependence on other audit firms. The cost of liaison was needed to communicate between offices and between the top leaders.

The Chairperson felt that Members were reasonably satisfied with the presentations by the OAG. He said that in the next meeting the Committee would look at the Public Audit Act (PAA) and review its effectiveness.

SAICA tariffs
Mr van Heerden raised a further issue about the tariffs charged by private firms who did work on behalf of the OAG. Their rates set at the South African Institute of Chartered Accountants (SAICA), must be approved by this Committee. There was an increase of 17%. He pointed out that because this had increased more than had the increases for the OAG’s own staff, the OAG would be trying to use its own staff as far as possible. He tabled the Sensitivity Analysis of SAICA tariffs.

Dr Woods wanted to know why there was such a large increase, representing twice the  inflation figure.

Mr van Heerden responded that the market increase was in fact far higher than these increases. Auditors were in high demand. The OAG could verify that the individual was receiving the increased rate.

The Committee adopted the rate increase for SAICA members doing work for the OAG.

Closing remarks
Dr Woods proposed that there be documentation prepared on what this Committee had been doing, to assist the incoming Committee next year, and it was agreed that this could be done early in 2009.

Adoption of the Minutes
The Minutes of the meeting on 7 October were tabled and discussed. Members adopted these Minutes as an accurate reflection of the meeting.
The meeting was adjourned.


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