ATC121204: Report of the Standing Committee on the Auditor-General on the Auditor-General of South Africa Budget and Strategic Plan for the 2013/14 Financial Year, dated 20 November 2012

REPORT OF THE COMMITTEE ON THE AUDITOR-GENERAL ON THE AUDITOR-GENERAL OF SOUTH AFRICA BUDGET AND STRATEGIC PLAN FOR THE 2013/14 FINANCIAL YEAR, DATED 20 NOVEMBER 2012
The Committee on the Auditor-General having considered the Budget and Strategic Plan of the Auditor-General of South Africa for the financial year 2013/14, reports as follows:

1. Introduction

The Public Audit Act (PAA) no. 25 of 2004, Section 38 (1) requires that the affairs of the Auditor-General (AG) be conducted in accordance with a business plan and a budget prepared by the AG for each financial year. The budget must include the estimated and projected revenue and expenditure that relates to the business plan including the basis on which audit fees for the year relate.

Section 38 (3) of the PAA requires that the AG must at least six months before the start of a financial year submit the budget and a business plan to the oversight mechanism and the National Treasury for planning and preparing the national annual budget.

Section 38 (3) further requires that the oversight mechanism consider the budget and business plan and within two months of receipt, submit the recommendations to the Speaker for tabling in the National Assembly and the National Treasury.

The Auditor-General has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa , the Office of the AG exists to strengthen the constitutional democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

The purpose of this paper is to highlight the performance targets set for achieving the five commitments and goals presented in the 2013/14 strategic plan of AGSA. The report further analyses the budget of AGSA for consideration by the Committee on Auditor-General as an oversight mechanism of the AG.

2. Projection of non-financial performance

The Office of the Auditor-General undertakes to discharge its mandate as the SAI of South Africa. AGSA commits to five predetermined measurable objectives that were set for the medium-term plan to ensure improvement its performance. The AGSA’s predetermined objectives aims to realise a clean audit outcome by 2014, an initiative introduced by the Minister of Cooperative Governance and Traditional Affairs ( CoGTA ). The following measurable predetermined objectives in 2013/14 are used to evaluate the performance of the Office of the Auditor-General:

2.1 Simplicity, clarity and relevance of messages

The target for this objective is set at 3 points on the rating scale of 4 points for 2013/14 financial year which is indicated by a clear communication of relevant root cause and recommendations. It will also focus on increasing the volume of performance audits to 10 per cent of the audit work within five years and a growth strategy and plan for the medium term to 2018 to be finalised soon. In 2013/14 AGSA will focus on increasing the implementation of performance audit as follows:

· Increasing integration of performance audit initiatives, observations and outcomes into regularity audits to ensure consistent and comprehensive audit messages;

· Enhance interactions with internal and external stakeholders to ensure an understanding of performance audit messages and to influence corrective action in areas where deficiencies have been identified;

· Create sufficient capacity to perform research and conduct performance audits;

· Utilise specialist capacity effectively within the Performance Auditing Business Unit to demystify complex areas within the various spheres of government.

2.2 Visibility of AGSA leadership

AGSA set a target at 3 points within the rating of 4 points to develop strong stakeholder relationships that encourage clean administration measured at high quality, value-adding stakeholder interactions to be conducted and escalated.

2.3 Funding

A target is set at 1 per cent to achieve net surplus in 31 March 2014 and pay creditors within 45 days from their voucher dates. A target for debt collection average in 2013/14 in all national business units is set at 99 per cent to 101 per cent. The debts collected from the National Treasury in 2013/14 for the municipalities of low capacity, the target is set at 100 per cent. Section 23 (6) of the PAA provides that if an audit fee exceeds one per cent of the total current and capital expenditure of such auditee , such excess must be defrayed from the National Treasury’s vote provided that the National Treasury is of the view that the auditee has financial difficulty . The target is set at 96 to 98 per cent for debts collected in all provincial business units.

2.4 Strengthen human resources

To have a motivated, high-performing and diverse workforce, AGSA set a target at:

· 90 per cent to achieve occupancy level;

· 3.4 rating in achieving culture index; and

· 3.4 rating in achieving leadership index.

The industry norm is rated at 3.2 per cent according to the five point Linkert scale from 1 to 5. AGSA’s human capital initiatives are to intensify the relevant training and skills development and to create audit professionals with integrity and ethics.

2.5 Lead by example

To continue adhering to standards of excellence for clean administration, AGSA committed to obtain a clean audit report in 2013/14. To continuously improve the timeliness of AGSA as legislated, the target is set at 95 per cent in 2013/14 for investigations deadlines. A target is set at 90 per cent for submitting audit reports of Public Finance Management Act 1 of 1999 (PFMA) and Municipal Finance Management Act 56 of 2003 (MFMA) by AGSA.

To maximise the AGSA’s contribution to transformation, a target is set at 3 points on a rating scale of 5 to achieve the identified Broad-Base Black Economic Empowerment (B_BBEE) in 2013/14 committing to be reviewed by an independent reviewer.

AGSA also committed to a sustainable performance review by acknowledging the importance of environmental and sustainable development issues. In leading by example, AGSA promised to establish the baselines for the following:

· Electricity and water use;

· Paper use and paper waste generated;

· Business travel by vehicles and by flights;

· Carbon footprint;

· Completion of annual disclosure of interest declarations; and

· Incidents of integrity beach by AGSA’s employees.

The sustainability performance review is the King III best practice initiative that an organisation’s board should use to ensure that the organisation is seen to be a responsible corporate citizen, appreciate that strategy, risk, performance and sustainability are inseparable, and realise that sustainability reporting and disclosure should be integrated with the organisations financial reporting.

3. Projection of financial performance

AGSA is leading by example that the auditees can adopt including the projections of the financial performance of financial statements. The projected financial statements are not only provided as a snapshot, but they are also a powerful tool that AGSA uses to evaluate its strengths and weaknesses in financial performance and pave the way forward. Therefore, the projected financial statement of AGSA projects the financial position, income and cash movement and guide AGSA’s financial performance and its standing by suggesting ways to achieve clean audit at the end of 2013/14 financial year.

· Projected statement of financial position (balance sheet) : The projected statement of financial position projects AGSA’s assets and liabilities reflected in short and long term obligations;

· Projected statement of comprehensive income: The projected statement of comprehensive income or (profit and loss statement) identifies AGSA’s projected revenue and expenses for the 2013/14 financial year;

· Projected cash flow statement : The cash flow statement of AGSA forecasts the amounts of cash and cash equivalents over the 2013/14 financial year. It also projects the cash and cash equivalents of AGSA, which influence its continuity and ability to pay suppliers. Remunerate its employees and honour the short term liabilities.

The projection of financial statements also serve as a planning tool that can be used by auditees to address the uncertainty of clean audit outcome without relying only on guidance of accounting procedures and policies during the financial year.

4. Budget Analysis

The total budget of AGSA amounts to R 2.555 billion in 2013/14, increasing by R73.5 million from R2.226 billion in 2012/13 financial year.

4.1 Audit income

Audit income includes own hours, contract work, subsistence and travel and present value of revenue adjustments. Total revenue amounts to R2.474 billion.

4.2 Other income

Other income comprises of interest received, interest received SCMB ( write out in full ) and sundry income which amounts to R80.709 million.

4.3 Direct audit expenditure

Direct audit cost includes contract work of audit income and subsistence and travel amounting to R1.8 billion.

4.4 Operating cost

Operating costs are associated with the administration expenses on day to day basis. Operating costs remain the same regardless of a number of variables that can vary according to quantity. Total operating costs amounts to R828.6 million. The key drivers of the operating costs are the salaries, salary increment and maintenance of business operations.

4.5 Other expenses

Other expenses are associated with non-operating activities, such as interest expenses on liabilities, bad debts provision and depreciation. Depreciation is the decrease in value of assets, and the allocation of the costs to periods in which the assets are used. Generally, the cost is allocated, as depreciation expense in the period in which the asset is expected to be used. Such expense is recognised for financial reporting. AGSA made provision for depreciation in 2013/14 amounting to R47.4 million, increasing by R7.3 million from R40 million in 2012/13 financial year.

The provision for bad debts amounts to R20.5 million in 2013/14 increasing from R5.1 million in 2012/13.

4.6 Capital Expenditure

The budget for capital expenditure is provided to acquire the following assets:

· Motor vehicles;

· Furniture and equipment;

· Computer equipment;

· Computer software; and

· Leasehold improvement and obligation.

Included in capital expenditure budget are the amounts to be spent on:

· Acquiring fixed assets and in some cases, intangible assets such as computer software;

· Repairing of existing assets to improve its useful life; and

· Restoring property or adapting it to a new or different use.

4.7 Net Surplus

Net surplus is the profit remaining after subtracting the operating expenses, taxes, interest, insurance and other expenses. AGSA projected net surplus of R25 million or 1.02 per cent of total income in 31 March 2014, decreasing from R46 million or 2.07 per cent in 31 March 2013. The AG reduced the projected surplus by increasing the operational costs to avoid potential conflict between trying to maximise surplus and carrying out the operational activities.

5. Tariffs

Section 23 (1) of the PAA requires that the AG determines the basis for the calculation of audit fees to be recovered from auditees in respect of audits performed. AGSA is increasing the audit tariffs by 5.7 per cent in 2013/14 financial year. The tariffs increase is affected by the market related salary increase of 8.1 per cent. The salary increase is one of the major cost drivers that determine the budget of AGSA in 2013/14 financial year.

6. Audit Directives

Section 13 of the PAA requires that the AG must determine the standards, scope and nature of audits after consulting with the Committee. However, the AG advised the Committee that it was not necessary to update the audit directive of 2012/13 that was published in the Government Gazette No. 34783, volume 557 of 28 November 2011 as it would still be effective in 2013/14 financial year.

7. Recommendations

The Committee on Auditor-General recommends that:

· Parliament approves the audit tariffs increase of 5.7 per cent for the financial year 2013/14; and

· Parliament also approves the Auditor-General’s request that the audit directive of 2012/13 as published in the Government Gazette No. 34783, volume 557 of 28 November 2011, remain in force.

Report to be considered.