ATC121204: Report of the Standing Committee on the Auditor-General on the Annual Report of the Auditor-General of South Africa for the Financial Year 2011/12, dated 20 November 2012

REPORT OF THE COMMITTEE ON THE AUDITOR-GENERAL ON THE ANNUAL REPORT OF THE AUDITOR-GENERAL OF SOUTH AFRICA FOR THE FINANCIAL YEAR 2011/12, DATED 20 NOVEMBER 2012
The Committee on the Auditor-General, having considered the Annual Report of the Auditor-General of South Africa for the financial year 2011/12, report as follows:

1. Introduction

The Constitution of the Republic of South Africa (Act 108 of 1996) requires state institutions supporting democracy to be accountable to the National Assembly (NA) and to report on their activities and the performance of their functions to the National Assembly at least once a year. In addition, section 10 (1) of the Public Audit Act no. 25 of 2004 requires the office of the Auditor-General (AG) to report annually to the National Assembly on its activities and the performance of its functions. Auditor-General of South Africa (AGSA) is the Supreme Audit Institution of the Country. Section 181 (1) (e) of the Constitution establishes the AGSA as the institution that strengthens constitutional democracy in South Africa . The governing principle vested upon the AG by section 181 (2) of the Constitution states that the AGSA is independent, and subject only to the Constitution and the law, and it must be impartial and must exercise its powers and perform its functions without fear, favour or prejudice.

The National Assembly established the Committee on the Auditor-General as an oversight mechanism to monitor the performance of the Auditor-General. The AG’s annual report forms a significant part of this Committee’s responsibility in meaningfully overseeing the performance of the Office of the Auditor-General. The mandate of the Committee is to assist and protect the AGSA to ensure its independence, impartiality, dignity and effectiveness of the Office of the Auditor-General.

2. Performance evaluation of predetermined objective

The non-financial performance in this report is based on measuring actual performance against targets set on the following predetermined objectives as indicated in AGSA’s strategic plan for 2011/12 financial year:

2.1 Simplicity, Clarity and Relevance of Message

Committing to this objective, AGSA aims to empower the public to hold government accountable and responsive through objective information and reporting in a language that is understood by the stakeholders, allowing them to action audit reports.

AGSA achieved this objective as the achievement is demonstrated by the reaction of stakeholders including legislative oversight, the executive, accounting officers and coordinating ministries, to address the root cause of audit outcomes.

2.2 Visibility of Leadership

The fulfilment of AGSA’s promise in this objective is indicated by the ongoing engagement with the following internal role players and the stakeholders:

· The management of AGSA : the Deputy Auditor-General held series of in-depth discussions regarding the senior management leadership programmes with the management of all business units to enhance and enrich AGSA’s alignment;

· Constitutional stakeholders : AGSA leadership engaged with the executive authority following on their commitment in 2010/11 financial year to discuss the key controls;

· Cabinet : AG shared the PFMA and MFMA audit outcomes with the executive by presenting the outcomes to the cabinet;

· Executive authority : AGSA leadership encouraged the executive authorities to impact on the internal controls deficiencies within the organisations under the executive authorities;

· Audit committees : AGSA engaged audit committees at forum level in which the relationship with them was strengthened;

· Speakers’ Forum : AG extended interactions by engaging with the Speakers’ Forum, a critical oversight that drives the priorities of the legislative sector;

· National Assembly and National Council of Provinces : AG engaged the Chairpersons of both Houses during the presentation of the PFMA and MFMA audit outcomes. The provincial oversight authorities were included in the interaction during the roadshows ;

· Association of Public Accounts Committees (APAC) : AGSA leadership gets an opportunity to interact with the members of the Public Accounts committees during APAC training sessions;

· Municipal door-to-door visits : AGSA leadership concluded its programme of door-to-door visits to seven provinces in previous years. In 2011/12 financial year, the AG visited all 61 municipalities in KwaZulu-Natal Province ;

· Interaction with the media : To ensure transparency of audit findings and to communicate them to the public, AGSA used extensive media coverage.

· Coordinating ministries : AGSA leadership engaged with the Presidency, the Department of Public Service and Administration and the Department of Cooperative Governance regarding financial and performance management in the public sector;

· Public sector regulators and standard authors : As a member of the Professional Standards Committee of International Organisation of Supreme Audit Institution (INTOSAI), AGSA has a close relationship with the Independent Regulatory Board for Auditors (IRBA), the Accounting Standard Board of South Africa (ASB), and the Accountant-General’s Office in the National Treasury;

· Professional bodies : The trainee Auditors at the AGSA participated in the leadership programmes of the South African Institute of Chartered Accountants (SAICA), the Southern Institute of Government Auditors and the Information Systems Audit and Control Association;

· Contracted private firms : AGSA fostered a close relationship with contracted private audit firms by including them in its training, road-shows and stakeholder interactions; and

· International collaboration: AGSA played a leading role in INTOSAI throughout the past years as the chairperson of the Working Group on the Value and Benefits of the Supreme Audit Institutions ( SAIs ).

The engagement with the above stakeholders is the evidence that AGSA fulfilled its promise by strengthening communication for better understanding of AGSA’s responsibilities, audit work and findings. AGSA also engaged these stakeholders responding to changing environments and stakeholder expectations without compromising its independence.

2.3 Leading by example

AGSA promised to lead by example on matters of risk management, Auditing standards and methodology, internal controls, transformation, quality and timeliness of AGSA’s products as encouraged by the fundamental requirement 11 of INTOSAI. The fundamental requirement 11 of INTOSAI stipulates that in keeping with the principle of leading by example, SAIs need to adhere to the same, appropriate rules and philosophy that SAIs expect from auditees as a minimum. The performance of AGSA in this objective is indicated as follows:

· Auditing standards and methodology : Section 13 (1) of the PAA requires that the AG, after consulting the oversight mechanism (the Committee), must determine the auditing standards to be applied in performing audits on the accounts, financial statements and financial management of all national, provincial state departments and administrations and all municipalities and municipal entities. AGSA is one of a few SAIs in the world that has fully implemented the clarified international Standards on Auditing in SAIs regularity audits;

· Quality of audits performed : AGSA engaged in performance review by the Independent Regulatory Board of Auditors (IRBA) regarding adherence to all quality standards. In the strategic plan AGSA set a target at 86 per cent for 2011/12, however, the actual performance fell to 70 per cent. The AGSA’s actual performance in 2011/12 declined compared to the actual performance in 2010/11 which was rated at 77 per cent.

· Timeliness of audit reports : AGSA set a target at 90 per cent in complying with statutory and legislative deadlines for PFMA and MFMA audit reports but AGSA achieved compliance with legislative deadline of 95 per cent, exceeding the target;

· Striving towards an ethical culture : AGSA fulfilled the promise that ensures that the Code of Good Practice is founded on the principles of the International Federation of Accountants (IFAC), INTOSAI codes of ethics and AGSA’s own procedures on ethical and independence requirements, are applied and adhered to;

· Maximising the impact of transformation : AGSA has been certified a level 3 contributor by independent economic rating agency Empowerdex . To comply with preferential procurement policy requirements, AGSA realigned its enterprise development plan so that the focus is on stimulating sustainable black enterprise development, contributing to the growth of the profession, and seeking innovative and creative solutions to enterprise development. To lay the foundation for equitable future, AGSA focused extensively on gender equality and embarked on an all-embracing disability awareness campaign to address gender and disability-related challenges as identified in the 2010 employment equity report to the Department of Labour;

· Investing in excellence through corporate social investment : AGSA approached Corporate Social Investment (CSI) by developing a CIS plan which is investing towards educational freedom and making a meaningful contribution to the lives of the community members. This is done through the rural schools programme which is focusing on creating awareness of the accounting and auditing profession to enable growth in the profession, thereby contributing towards the sustainability of the economy;

· Leading by example through proactive risk management : AGSA has enhanced its risk management processes in 2011/12 to reach a higher degree of alignment with the King III Code of governance principles and other best practices, such as Committee of Sponsoring Organisations (COSO) and International Standard Organisation (ISO). AGSA has also achieved clean audit report as the target was set at achieving clean audit report again in 2011/12;

· Information and communications technology : All Information and Communications Technology (ICT) policies, procedures and service level agreement ( SLA ) between ICT and business units were reviewed to strengthen AGSA’s internal IT control environment. The data analysis ( QlikView ) reporting tool was procured and the SLA reporting function was implemented within the tool. AGSA experienced delay in the implementation of the Customer Relationship Manager (CRM) tool due to unavailability of the necessary PeopleSoft skills for the project. This implementation was scheduled to be completed at the beginning of the following financial year in May 2012;

· Knowledge sharing : In this regard knowledge sharing among the employees provided a platform where the topics of (understanding the audit process and audit outcomes and the general report) were discussed. The renowned speakers were also invited to share their knowledge and experience with the organisation on the art of networking, strength of professionalism and aggressive conversation; and

· Celebrating 100 years of existence : AGSA successfully celebrated its 100 years of existence not only by targeting the 100 year legacy of the organisation, but also sought to position the vision that the organisation has for its future as it executes its critical mandate for the country and beyond.

2.4 Strengthening human resources

AGSA’s many-sided strategy to build a motivated, high-performing and diverse workforce encompasses improvements to the trainee auditor scheme, focus on leadership development, succession planning and performance management, innovative approaches towards sourcing, developing and retaining talent, and creating prospects for the long-term growth of the employees. The effort of AGSA in pursuing this objective is indicated as follows:

· Employee wellness programme : AGSA initiated the employee assistance programme assisting individual employees with problems ranging from psycho-social to legal, financial as well as other health and wellness-related problems;

· Talent management, retention and recruitment : To strengthen the workforce AGSA introduced a dual career path for leadership and specialisation which aims to recognise employees in various functional streams. Talent is viewed as one of the contributors to the achievement of the organisation’s occupancy levels. A target was set at 80 per cent for achieving occupancy levels for 2011/12, the actual occupancy levels as at 31 March 2012 was at 89 per cent, exceeding the target;

· Staff turnover profile : The rate of staff turnover in 31 March 2012 was 15 per cent. It exceeded the 11 per cent of staff turnover in 31 March 2011 but it is still below the industry norm of 17 per cent as reported in April 2012;

· Performance in terms of organisational indices : AGSA set a target of 3.2 per cent in achieving culture index in 2011/12; the actual performance increased to 3.7 per cent, exceeding the target. The target for leadership index was also set at 3.2 per cent in the year under review and the actual performance averaged 3.8 per cent. A target was also set at 3.2 per cent for staff engagement index in 2011/12; the actual performance exceeded the target rated at 4 per cent. The actual performance indicates that AGSA performed above the industry norm in all the three indices that were evaluated in 2011/12;

· Enhancing the effectiveness of leaders : AGSA initiated the following programmes to enhance the effectiveness of leaders:

o Strategic organisational development and leadership;

o Executive coaching;

o Leadership pipeline development and succession planning;

o Building effective business teams;

o Executive performance management; and

o Continuous learning and professional development.

· Creating a highly skilled workforce – AGSA is creating a highly skilled workforce by growing the number of qualified audit professionals including chartered accountants, registered government auditors and certified information systems auditors. AGSA is one of the biggest donors to the Thuthuka Bursary Fund, through the Fund AGSA is currently sponsoring 40 students per year at a total cost of R1.6 million.

AGSA is greatly honoured to be a partner of the University of Limpopo for placing AGSA academic trainees at the school of accounting as they were trying to obtain SAICA accreditation for the undergraduate curriculum. AGSA is also assisting the University of Fort Hare to sustain its SAICA accreditation. In 2011/12 the University of Forth Hare received R3.37 million from AGSA as funding towards the salaries of the lecturers for the school of accountancy and the cost of learning material.

3. Financial performance

The Management of AGSA is committed to run the institution economically, efficiently and effectively and observing laws and regulations to ensure financial sustainability and report publicly on these matters. This objective upholds the fundamental requirement 8 of INTOSAI framework which requires transparency and accountability in communicating and promoting the value and benefits of SAIs . The following is the key financial position as highlighted in the integrated annual report of AGSA for 2011/12:

· Audit income : The audit income is made of revenue generated by AGSA’s employees, private audit firms, recovery of subsistence and travel costs from the auditees and the audit fees paid by the national, provincial and local governments. AGSA budgeted for the audit income of R2.88 billion; however, the actual audit income as at 31 March 2012 compared to the target decreased to R2.7 billion. The decrease on audit income results from the own income and subsistence and travel costs from the auditees ;

· Tariffs or charged out rate per hour : The budgeted tariff rate per hour was R489, however, the actual tariff rate was R491;

· Gross profit : Gross profit remained at 30 per cent the as the previous year within the set target for 2011/12. The variance of 3 per cent results from the present value adjustment of R32.9 million, which was determined at the end of the financial year due to the requirement of the International Accounting Standards;

· Direct and indirect overheads : The direct costs were budgeted for 67 per cent against the audit income, however, the actual direct costs increased to 70 per cent on 31 March 2012 exceeding the target by 3 per cent. Indirect costs were budgeted for 31 per cent; the actual expenditure fell at 29 per cent below the target by 2 per cent. AGSA should be commended for maintaining the average trend of expenditure in both the direct and indirect costs. These costs are not easily controllable because are also determined by the economic external factors beyond their control;

· Surplus : The target to accumulate surplus was set at 3.8 percent, the actual surplus fell at 4.8 percent (R99 million). The increase in actual surplus is due to interest income being higher than budgeted and remarkable under-spending on indirect cost in certain classes of operating expenses such as staff remuneration, professional assistance and information technology projects. The under-spending results from delays in the start of some projects;

· Financial position : The financial position of AGSA indicates a significant increase in equity. Equity is the balance after all debts and obligations have been paid off. It includes outstanding debts that can be converted to cash in a short period of time or within a year. Therefore, AGSA has a strong financial position that means it can still carry on its day-to-day business;

· Debtors: At the end of 2011/12 financial year, the total outstanding debt was R480 million compared to 31 March 2011. This indicates that a large number of auditees are not paying their audit fees on time or not paying at all;

· Debt collection : The local government on 31 March 2012 was still owing R206 million of the total outstanding debts of R480 million (ageing for 233 days), the national departments owing R63 million (outstanding for 15 days), provincial departments owing R124 million (outstanding for 37 days) and the statutory bodies owing R58 million (ageing for 79 days). AGSA received R29 million from the National Treasury covering the debts of some low capacity municipalities. Due to budget constraint National Treasury could not afford the R24 million from the R53 million that was expected from low capacity municipalities;

· Creditors : AGSA paid its creditors on within the agreed period, this is one of leading by example indicators. In its strategic plan AGSA promised to pay its creditors within 45 days, however, they were be to pay their creditors within 31 days exceeding their target by more than 14 days. This also indicates that AGSA has no cash flow problem;

· Quick test ratio : AGSA’s closing cash balance increased from R352 million in 2011 to R415 million as at 2012. This indicates that AGSA has a healthy financial position although it also confronted with a challenge of debt collection from the municipalities.

4. Sustainability Performance Review

AGSA presented an integrated annual report for the first time, responding to King II best practices advice that an organisation’s board should 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 financial reporting.

· AGSA achieved a high level of integrating the management of sustainability issues in its core business. Many of the issues in sustainability performance have been integrated in five main objectives of AGSA in which it has performed excellently;

· AGSA responds to the environment positively, as it encourages the recycling of paper and subscription to electronic news papers to support the going green initiatives. AGSA has been awarded the Miercom Green certification for energy consumption due to the network equipment which AGSA has standardised;

· AGSA reduced the number of business kilometres travelled per employee by initiating technological solutions as follows:

o Video conferencing systems were used for a total of 454 meetings during the year which removed the need for the participants to travel and achieved a saving of approximately R1, 3 million;

o Staff has accessed to remote AGSA systems from their laptop computers and this reduces the requirement to travel to update information.

· AGSA has implemented the water saving initiatives. Health and safety manuals and procedures are being developed.

5. Conclusion

AGSA should be commended for excellent performance in categories of its day-to-day business activities in 2011/12 financial year. AGSA’s integrated annual report for the period under review is credible and reliable as it reports on the findings of the independent reviewers beginning with the non financial information, financial information and sustainability performance review.

6. Recommendations

The Committee on Auditor-General recommends that Parliament approves the surplus to be utilised by Auditor-General of South Africa in the next financial year.

Report to be considered.