ATC071113: 2008 Report Annual Report of the Auditor General 2006/07
Standing Committee on Auditor General
National Assembly
National Assembly
Report of the Standing Committee on Auditor-General on the Annual Report of the Auditor General 2006/07, dated 13 November 2007:
Introduction
The Office of the Auditor-General (AG) tabled its Annual Report for consideration to the Standing Committee on Auditor-General (SCOAG)) within the prescribed deadlines in terms of Section 41(5) of the Public Audit Act (PAA). The Committee held hearings with the AG on 15 October 2007 .
Present at the meeting were:
Ms B A Hogan (Chairperson); Mr. D M Gumede; Rev N W Ngcobo; Mr. M L Mahlaba; Mr. M Johnson; and Mr M J Nene (ANC); Mr. E W Trent; and Mr. M Stephens (DA); Dr G G Woods (NADECO).
Mr. T Nombembe (Auditor-General); Mr. K Makwetu (Deputy Auditor-General); Mr. W Tutani (Business Executive: Governance); and Mr. A Kamedien (Senior Manager: Corporate Services)
The AG submitted its Budget and Strategic Plan for 2007/08 to SCOAG; towards the end of the 2006 financial year. It was establish that the reporting framework was inappropriate in that it did not provide performance indicators and targets. SCOAG raised the issue with the AG and suggested that the budget and strategic reporting framework be reviewed. At a subsequent meeting, a reporting framework with linkable targets was mutually agreed upon by SCOAG and the AG. The structure of the Annual Report 2006/07 conforms to the mutually agreed reporting framework.
Review of the AGs Mandate and Legislative Framework
The AG conducts its functions and responsibilities in terms of Section 188 of the Constitution Act 108 of 1996 and in accordance to the Public Audit Act 25 of 2004 (PAA). The AG issued the following notices through Government Gazette No. 29919 during 2006/07 financial year:
· Notice 645 of 2007: General Directive
· Notice 646 of 2007: Directive on performance information
· Notice 647 of 2007: Directive on Public Finance Management Act
· Notice 648 of 2007: Directive on unlisted entities
3. Review of AGs Programme Performance
3.1 Review of expenditure and spending trends
3.1.1 Deficit and Funding Requirements
The Committee noted a R 1, 8 million net deficit incurred by the AG, during the period under review, against a projected surplus of R 12, 9 million. Actual staff audit costs were under-budgeted by an amount of R 16 million whilst contract work was 21 percent (R 53 million) more than the budgeted amount. Contract work does not earn a surplus for the AG as no contribution is made to overheads. The reason for contracting out more work was attributed to a larger than projected staff vacancy rate, compounded by a higher than anticipated submission of municipal statements within the prescribed time period resulting in work bottlenecks. As a consequence of the above factors, the projected 31 percent gross contribution to fixed and operational costs (plus a targeted additional 1 percent increase) has not been achieved; 27 percent was attained which represents an amount of R 237 million. Although a funding deficit of R 27, 3 million was recorded, it is still sustainable as it is less than the working capital requirement of R 53, 7 million.
3.1.2 Debt Collection
The debt age for national and provincial departments is well within the target of 45 days. The collection of debts from local government and statutory bodies is still a challenge, with the ageing of debts standing at close to 120 days whilst legislation requires a norm of 30 days. This is impacting on the revenue collection as some of the audit costs are not recovered on time. This issue has been raised with the National Treasury in an attempt to secure assistance with encouraging state institutions and local government to settle their debts within legislated timelines.
3.1.3 Committees Observations
1. Although a deficit of R 1, 8 million is an improvement on last years performance, it remains unfortunate as it means that there will be no addition to retained earnings for this financial year. Retained earnings are showing a persistent declining trend, having fallen from R31, 4 million in 2005 to R 12, 7 million in 2006 as a consequence of the R 19, 9 deficits incurred in 2005/06. This years results record yet another fall to R 11, 288.
2. Whilst the overall financial results for 2006/07 indicate that the financial position of the AG is sustainable-despite a funding shortfall, as working capital exceeds the funding shortfall, there are nevertheless certain financial risks which will have to be managed to ensure the financial position of the AG is sustainable. Foremost amongst these is the deteriorating funding position of the AG and the revenue shortfalls arising from the inability of local government to pay on time.
3. An issue that the Committee considers to be critical for the long-term financial sustainability of the AGs office is the problem of a high vacancy rate and capacity constraints resulting in costly additional contract work; this must be addressed notwithstanding the undoubted challenging and competitive environment within which the AG has to compete for staff.
4. Whilst the timeliness and quality of municipal financial reporting is unpredictable in the immediate aftermath of the implementation of the MFMA, it seems necessary to review the adequacy of the AGs forecasting assumptions, and its early warning system, so as to avoid backlogs and bottle-necks in the future.
5. A much more pro-active debt recovery plan must be developed to cater for the revenue shortfalls arising out of the unwillingness or inability of local government to pay audit fees. The Committee further commits itself to liaising with the National Council of Provinces (NCOP) to instill a more disciplined approach for local authorities in dealing with state debts. The Committee notes that discussions are presently underway with National Treasury about how to recover these monies and wishes to be kept abreast of developments.
6. Finally, the under-provision for accumulated leave benefits by an amount of R 7, 2 million and no provision made at all for overtime and performance bonuses in the 2006/07 budget (resulting in a further shortfall of R 3 million), as well as the budgeted shortfall in internal audit fees [1] is indicative of certain weaknesses in strategic planning and human resource management which will need to be addressed.
3.2 Review of Achievements and Shortcomings in terms of AGs Key Performance Indicators and Targets
3.2.1 Audit Quality
The Auditor General reported as follows regarding the quality of audit work:
· Excellent Performance: The AG exceeded the 70 percent target, with the actual performance reflecting 75 percent achievement.
· Good Performance: The 30 percent target was not achieved with actual results showing a 10 percent achievement in this performance level.
· Poor Performance: The AG did not perform well in this category. A target of 0 percent was planned but the actual results show a 15 percent score in this category.
The AG cited the following reasons for poor performance in audit quality:
· Poor performance was not realized throughout the AGs office but was limited to specific centers. The geographical placement of these centers did not provide the kind of skills required to produce quality work. Nor was poor performance limited to the AGs office; it was also encountered in work that was contracted out.
· The high vacancy rate at audit manager level, affected by the implementation of the minimum qualifications framework compromised the quality of audit work. One of the reasons for the low retention rate is that people are not comfortable with the limited-term employment contract offered by the AG (5-years).
· Some of the auditors did not comply with prescribed standards, such as non-compliance with pre-issuance reviews.
The AG further mentioned that the following remedial actions will be taken:
· Remedying the level of delegation in signing off audit work.
· Stringent peer review practices will be applied on work conducted in the centers showing poor performance.
· Re-building the team of skilled audit managers through an aggressive recruitment campaign aimed at ultimately filling the 700 vacancies by the end of the next financial year. Employment contracts will be extended to an 8 years fixed contract.
The AG specified that some of the proposed interventions will be partly implemented in this financial year.
3.2.2 Committees Observations
1. The Committee noted and congratulated the AG for the impressive achievement of dramatically improving its audit quality in the excellent performance category from a low of 32 percent in 2005 to its present level of 75 percent in 2007. It notes that poor quality performance is still too high although has marginally improved by 2 percent since last year.
2. The Committee acknowledged the difficult environment in which the AG operates and welcomes all the interventions proposed to remedy the situation in order to improve the quality of work in the office.
3. The Committee recommended that the results shown in poor performance category should be elevated to the good performance category and no poor performance should be reported in future.
3.3 Cost of Auditing
The AG achieved a gross contribution to fixed and operational costs of 27 percent compared to the target of an additional 1 percent to the budgeted figure of 31 percent. As discussed above, this decrease in the gross contribution to fixed and operational costs was influenced by the following factors:
· High vacancies, in excess of an assumed level of 10 percent, and a staff turnover rate of 16.1 percent as compared to the industry level of 12 percent, resulted in the Office of the Auditor-General recruiting more contract and temporary workers in order to fulfill its legislative mandate.
· In complying with the MFMA, more local authorities submitted financial statements than anticipated.
· Some of the local government financial reporting was of such a poor quality that it had to be returned for re-doing. This led to more bottlenecks.
· Audit staff expenses exceeded the budget by R 16 million.
3.3.1 Committees Observation
1. The same comments that applied for financial performance are equally applicable here.
3.4 Timeliness
The AG set a target of finalising 95 percent of all audit reports within the prescribed deadline for financial statements submitted on time. The actual results are as follows:
· Ninety percent (90 percent) PFMA organizations
· Ninety five percent (95 percent) other PFMA organizations
· Forty two percent (42 percent) MFMA organizations
The main reasons for the delays in the completion of audit reports within the prescribed timelines related to:
· Audit capacity constraints to deal with the backlogs. MFMA compliance increased the workload of the AG as local authorities submitted more financial statements than anticipated.
· Material changes to annual financial statements. Some financial statements were prepared but not in compliance with the accounting standards. The non-complying financial statements were sent back to the organisations to look at compliance issues. The majority of these cases were experienced in local authorities due to the lack of financial management expertise.
· Delays in the submission of supporting documentation during the audit. Sometimes auditee staff members responsible for crucial information necessary for the completion of the audit were not available during the audit. This delayed the audit work as no opinion could be made without a proper verification of supporting documents.
3.4.1 Committees Observations
1. The Committee commended the 95 percent achievement with regard to other PFMA organisations and has a slight concern with the 90 percent achievement for PFMA organisations.
2. The Committee is more concerned about the 42 percent performance with regards to local government. It appreciates, however, that this is an improvement on previous years performances and that the implementation of the MFMA is still in its early stages.
3. Many of the reasons for late submissions are outside the control of the AG and reside with the behaviour of auditees at local government level. The Committee looks forward to reviewing how the engagement of National Treasury on these matters will improve timeliness in future years. In this respect the readiness of AGs clients for audit work was identified as one area of improvement.
3.5 Auditing of Performance Information
AG reported 100 percent achievement in its targeted goal of completing Phase 1, which involves an understanding of the audit entity and its performance information systems, controls and measures. Further audit plans are being synchronized with National Treasurys developing framework for performance information which was issued in this current year. [2] The 2007/08 strategic plan will provide milestones and detailed targets for the better and clear understanding of reporting in performance information. The AG will fully comply with section 13 [3] of the Public Audit Act during 2009/2010 financial year.
3.5.1 Committees Observations
1. The Committee commended the AG in the achievement of its targets for this year.
2. A concern remains that the reporting format for the auditing of performance information is insufficient and notes the AGs assurance that more information will be available in the Budget and Strategic Plan for 2008/07.
3. The standards used to audit performance information are further required to be perused by the Committee and should be communicated to SCOAG in due course.
3.6 Performance Auditing
6 percent of total audit resources was utilised for performance auditing compared to the planned 7 percent utilization. The reason for this small percentage of audit resources being allocated to performance audits was due to the unpreparedness of auditees for performance auditing. The AG specified that the resource allocation for performance audits will be kept at 7 percent for now until the clients are ready for performance auditing. The cost recovery plan on performance audits is something that the AGs office will look at in future.
3.6.1 Committees Observations
1. The Committee was of the view that the AG performed well in terms of its target. It noted however, that as with performance information auditing, there is a great demand for more performance auditing but believes that the AG should not embark on too many projects for now because the office might end up loosing focus.
2. It is essential that the nature, scope and standards for performance auditing be properly elucidated in consultation with key stakeholders before the AG embarks upon any expansion programme.
3. The cost recovery plan for performance audits was another matter that needed attention. This should include the possibility of allocating resources for special projects.
4. Review of Operational Efficiency and Governance
4.1 Leadership Effectiveness
During 2006/07 financial year, the AG developed a model that seeks to measure leadership effectiveness within the organization. Competency assessments were done on the whole of senior management and the results are to be used as a base-line for learning and development. A culture index has been set up as a measure of leadership effectiveness and a base-line of 14 percent was established. This must be compared with the industry benchmark of 40 percent, which is now set as a target.
4.1.2 Committees Observation
1. The Committee noted the instrument used in assessing the effectiveness of leadership within AGs office and recommends that a session be arranged to engage meaningfully with AG in order to better understand the designed leadership effectiveness model.
4.2 Reputation
A new reputation model has been set up, based on attaining a synergy between desired vision, culture and image. A baseline reputation index was established, measuring 19 percent, with an industry benchmark of 40 percent.
4.2.1 Committees Observations
1. The Committee noted the reputation index baseline and welcomes an opportunity to further engage meaningfully with the AG for better understanding of this model.
4.3 Operational Excellence
The AG is currently using two tools to measure the excellence of operations. The Control Self Assessment (CSA) tool is used to document and monitor key controls in respect of business risks. The Capacity Maturity Model (CMM) is being used to measure the maturity of the AGs business processes. An assessment of the maturity of the processes within 16 previously identified risks was conducted in November 2006 to assess the maturity against the targets set for the AG to be reached by end of 2007. The assessment revealed that 19 percent of the risk focus areas were found to be at a start-up level, where no proper control framework exists, 69 percent of processes were in a development stage and 13 percent of processes were standardised and documented.
4.3.1 Committees Observations
1. The Committee noted the maturity levels as reported by the AG; however the concern was with the pace in which processes are maturing within AGs office. The committee further suggested to the AG to report on all its maturity levels (1 [4] , 2 [5] , 3 [6] , 4 [7] , 5 [8] & 6 [9] ) in future.
4.4 Corporate Services Restructuring
The AGs Corporate Services department has been greatly restructured with an intention to achieve more and better focused service delivery to the rest of the institution. The Budget and Strategic Plan 2006/07 placed considerable emphasis on restructuring with its completion due in November 2007. Despite an assurance that progress would be reported on in the 2006/07 Annual Report, unfortunately no such information was contained in the report.
4.4.1 Committees Observation
The Committee is dissatisfied with the quality of reporting on Corporate Services Restructuring, especially given the amount of resources allocated to the restructuring process, and requests that this matter be rectified.
5. Human Resources
5.1 Broad-Based Black Economic Empowerment (BBBEE)
The AG reported 100 percent compliance with the BBBEE in contracting its audit work to audit firms.
5.1.2 Committees Observation
1. The Committee commended the Auditor-General on its 100 percent compliance with the BBBEE legislative prescripts.
6. Employment Equity
The AG exceeded the employment equity target of 80/20 by 4 percent. The affirmative action achievement was influenced by the representation of different groups in the AGs employment profile as follows:
|
|
African % |
White % |
Coloured % |
Indian % |
Disability % |
|
Male |
26% |
16% |
3% |
4% |
0.60% |
|
Female |
24% |
16% |
4% |
4% |
0% |
In an effort to increase the number of black professionals in the trainee accountant scheme, the AG has run an ambitious training programme. During 2006/07 the AG had 681 SAICA trainees, 8 RGA trainees, and 34 CISA trainees of which only 6 percent were white males. Furthermore the AG had 337 staff registered with SAICA, ACCA, CISA or SAIGA of which 5 percent are from the target group.
6.1 Committees Observation
1. The Committee congratulated the AG on achieving its targets on employment equity but noted that people with disability are still under-represented.
7. Corporate Governance
The following stakeholders are regarded as key mechanisms in strengthening the corporate governance within the AGs office:
(a) Standing Committee on Auditor-General (SCOAG)
The National Assembly established the SCOAG on June 2006 to exercise oversight over the AG as required by the Public Audit Act 25 of 2004.
(b) Audit Committee
The Audit Committee of the Auditor General was established in terms of Section 40(6) (a) of the Public Audit Act 245 of 2004 to assist the Deputy Auditor-General in discharging his/her duties relating to:
· Maintaining a sound financial and risk management and internal control system.
· Maintaining an effective functioning system of Internal Audit.
(c) Remuneration Committee
The Auditor-General established a Remuneration Committee to provide specialised advice to the Auditor-General in respect of remuneration and related issues.
(d) Executive Committee
In terms of delegation of authority, as contained in the AGs management approval framework, an Executive Committee (EXCO) has been established to manage the business and affairs of the institution
7.1 Committees Observations
1. The Committee finds its relationship with the Audit Committee to be unsatisfactory; and request that it should be fine-tuned in the year to come. The Committee suggests that the AG regularly review the Corporate Governance structure be re reviewed.
8. Comment on the Quality of the AGs Annual Report
During the Budget and Strategic reporting, the structure used by AGs office was inappropriate in that it did not provide the performance indicators and targets for measurability during annual reporting. The SCOAG raised the issue with the AG and suggested that the budget and strategic reporting framework be reviewed. A well designed framework with linkable targets was agreed upon by the Committee and the AG.
The structure of the annual report met the agreed standards as per reporting framework during 2005/06 financial year. The report was presented in a very concise and understandable manner, and outlined the achievement status of all the AGs performance targets for 2005/06 reporting period. The annual report was audited by the external auditor (BDO Spencer Steward Chartered Accountants) who focused on the financial and operational aspect of the business
9. Conclusion
The committee noted all the concerns raised in the AGs annual report and has no doubt that the proposed interventions will remedy the situation within short, medium and long terms. In our analysis of the report, nothing was noted to have threatened the independency and objectivity of the Auditor-General in conducting it duties. The audit work was conducted without fear of undue influence by the external factors in compliance with the International Standards of Auditing (ISA).
Report to be considered.
[1] The audit coverage plan was not completed by the time the budget was finalised.
[2] The directive used for the auditing performance of information was issued in the Government Gazette (No. 29919).
[3] Audit Standards.
[4] Maturity level 1: start-up level where no proper control framework exists.
[5] Maturity level 2: development level where a proper internal framework is developed.
[6] Maturity level 3: control level which focuses on the compliance and control.
[7] Maturity level 4: information level that measures the utilisation of resources with effective results.
[8] Maturity level 5: management level that will determine the utilisation of resources with effective results.
[9] Maturity level 6: optimisation level which enables continuous improvement and learning.
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