ATC131108: Report of the Standing Committee on the Auditor-General on the Integrated Annual Report of the Auditor General for the Financial Year 2012/13, dated 6 November 2013.

REPORT OF THE STANDING COMMITTEE ON THE AUDITOR-GENERAL ON THE INTEGRATED ANNUAL REPORT OF THE AUDITOR GENERAL FOR THE FINANCIAL YEAR 2012/13, DATED 6 NOVEMBER 2013.

The Standing Committee on the Auditor-General, having considered the Integrated Annual Report of the Auditor-General 2012/13, referred to it, reports as follow:

Legislative Functions

The Auditor-General of South Africa (AGSA) is established in terms of section 181(i) of the Constitution Act 108 of 1996 as one of the institutions supporting democracy.  The Constitution provides that AGSA is subject only to the Constitution and law.  Furthermore, the constitution requires that the AGSA must be impartial and exercise its powers and perform its functions without fear, favour or prejudice.

To give effect to the provision of the Constitution, and assigning audit function to the AGSA as the Supreme Audit Institution (SAI), section 2 of the Public Audit Act 25 of 2004 (PAA) provides for the auditing of institutions and accounting entities in the public sector.  Section 10(3) of the PAA provides for the establishment of an oversight mechanism to maintain oversight over the Auditor-General (AG).  Therefore the Standing Committee on the Auditor-General (SCoAG) was established in 2006.  The legislative mandate of the SCoAG is to assist and protect the AG in order to ensure the independence, impartiality, dignity and effectiveness of the Office of the Auditor-General; and to advise the National Assembly (NA) accordingly.  Section 10(1) of the PAA requires that the AG must annually submit a report to the NA on his or her activities and performance of his or her functions including the annual report, financial statements and audit report on those statements.  To assist with oversight, the audit committee is established in terms of section 40(6) of the PAA to oversee AGASA.   Audit committee does not have any management responsibility.  However, it assists the Deputy Auditor-General (DAG) in discharging his duties with regards to maintaining effective, efficient and transparent systems of financial management, risk management and internal controls.

1. Introduction

The annual report of the AG for the period of 2012/13 is the last annual report of the current Auditor-General, Mr. Terrence Nombembe, since he was appointed as AG on 01 December 2006 for tenure of seven years.  This report is the enlightenment of the performance of AGSA against the predetermined objectives and targets pointed out in the strategic plan for the financial year of 2012/13.

This report highlights the performance of the AGSA in the area of non-financial, financial and environmental issues.

2. Non-financial performance

The non-financial performance refers to the set targets on the strategic plan for the period of 2012/13 versus the actual performance on the annual report for the same period.

2.1          Simplicity, clarity and relevance of messages

In this predetermined objective AGSA undertook to present reports that communicate the results of its audit in a clear and understandable way to enhance oversight and governance in the public sector as well as accountability to the public.  As indicated in the strategic plan for the period in under review AGSA set a target at 100 percent for performing this objective.  At the end of this period AGSA achieved the target of 100 percent as intended in the strategic plan for the period of 2012/13.

2.2          Visibility of leadership

This objective intends for the interaction of AGSA leadership with both internal and external stakeholders.  The Public Finance Management Act 1 of 1999 (PFMA) and Municipal Finance Management Act 56 of 2003 (MFMA) audit outcomes during the leadership interaction with stakeholders were presented to all spheres of government.  In the presentations AGSA leadership highlighted the need to intensify corrective actions in order to achieve a desirable level of good governance and administration.  In quarterly interactions with the executive authority in all spheres of government AGSA leadership emphasised the need for ensuring effective and sustainable internal controls and governance systems.

AGSA set a target of 100 percent in 2012/13. To achieve high quality, value added on stakeholder interactions were conducted and escalated.  At the end of the period of 2012/13 AGSA achieved 100 percent as planned in its strategic plan of the same period.

2.3          Strengthening human resources

In this objective, AGSA aimed to build a skilled, motivated, high performing and a diverse workforce to deliver on its mandate.  AGSA discontinued the fixed term contracts for the levels of business executive and below excluding trainee auditors, audit supervisors, audit clerks.  Discontinuation of fixed term contracts for the affected levels aimed to retain the accumulated experience  in the senior leadership and preventing the high turnover of staff.  AGSA spent more than R65 million on study support, learning and growth.  And the number of qualified professionals increased from 56 in 2011 to 76 in 2012.

Culture index – AGSA set a target based on industrial norm which was the scale of 3.2.  At the end of the period of 2012/13, AGSA exceeded the industrial norm of 3.2 as it achieved 3.73.

Leadership index – a target was also set at 3.2 of the industrial norm for period of 2012/13.  The actual performance exceeded the industrial norm scale to 3.74.

Staff management index – AGSA set a target at 3.2 of the industrial norm for the period of 2012/13.  At the end of this period the actual performance was rated at 4.03 exceeding the scale of 3.2 of the industrial norm.

The ultimate goal of AGSA in these efforts was to build a skilled, motivated, high performing and diverse workforce in order to deliver on its mandate.

2.4          Leading by example

In this objective AGSA aimed to achieve the quality of its audit and compliance reports to be exemplary to the auditees so that they follow suit.

Audit opinion – AGSA set a target to achieve clean audit.  At the end of the period of 2012/13, AGSA obtained clean audit.

Broad-Based Black Economic Empowerment (BBBEE) – AGSA set a target of achieving the identification of BBBEE at level 3 rating for the period of 2012/13.  At the end of this period AGSA achieved the level 3 rating for 2012/13.

Quality standards on regulatory audit – adherence to quality standards on regulatory audit, AGSA set a target of 87 percent for the period of 2012/13.  At the end of the period of 2012/13, AGSA achieved this target.

Complying with legislative deadlines – for producing PFMA audit reports, AGSA set a target of 90 percent for the period of 2012/13.  At the end of this period AGSA achieved 90 percent target in meeting the deadline of submitting PFMA audit reports.  For producing the MFMA audit reports, AGSA also set a target of 90 percent in the period of 2012/13.  The actual performance for producing and submitting the MFMA audit reports fell on 88 percent below the target set for the period of 2012/13.  This is a decrease of 8 percent compared to 96 percent that AGSA achieved in the period of 2011/12.

The ultimate goal of this objective was to ensure that AGSA comply with the legislative timeframes in producing and submitting audit reports.

3. Financial performance

The financial performance of AGSA includes budget, funding and financial statements.  In 20012/13 AGSA continued to apply its self-funding model.  In its strategic plan AGSA committed to run the organisation economically, efficiently and effectively.  Section 38(1) of the PAA requires that the affairs of the Office of the AG must be conducted in accordance with a budget and business plan prepared by the AG for each financial year, which must include estimates of revenue and expenditure for the year to which it relates.  AGSA indicated the budgeting performance targets for the period of 2012/13 versus the actual performance at the end of this period as follows:

3.1          Funding

The Office of the Auditor-General is not funded from the fiscus like other Chapter 9 institutions. Tariff was increased in line with the AGSA annual salary increase.  AGSA has been accumulating surplus since the financial year of 2009/10. This signifies that AGSA is financially sound.

Debt collection trend - targets were also set for debt collection in the following manner:

For debt collected within 30 days from all national departments, including Gauteng and the Western Cape Provinces, a target was set at  between 75 percent and 80 percent for the period of 2012/13.  At the end of this period, 78 percent of these institutions were able to pay their debt within 30 days.

A target was set between 65 to 70 percent of debt collected within 30 days from Limpopo and KwaZulu-Natal Provinces for the period of 2012/13.  At the end of this period 53 percent of these institutions paid their outstanding audit fees within 30 days.  This fell below the minimum target of 65 percent by 13 percent.

Debt collected within 30 days from North West, Free State, Northern Cape, Eastern Cape and Mpumalanga Provinces: a target was set between 55 to 60 percent for the period of 2012/13.  However, 45 percent of these institutions paid their debts within 30 days which fell below the minimum target of 55 percent by 10 percent to 45 percent at the end of the reviewed period.

Although some targets were not achieved, the debt collection had improved compared to the previous years.

Aging of debtors including accruals – the national departments had 35 days outstanding audit fees of R65 million as at 31 March 2013.  For provincial departments the amount of R93 million was still outstanding for 41 days on 31 March 2013.  Local government owed the amount of R262 million which was outstanding for 253 days.  For statutory bodies an amount of R55 million was aging for 114 days as at 31 March 2013.

The total debt aging on 31 March 2013 for all spheres of government and statutory bodies amounts to R475 million.  This is a significant amount for an institution, like AGSA, that is self-funded.

Bad debt provision – amounted to R115 million as at 31 March 2013, the bad debt provision was calculated considering the collection of debt from local government debtors which were challenges in the previous financial years.  The bad debt provision was also calculated taking into account the state of local government finances and financial management as reported by the National Treasury in 26 October 2012, in a report titled “State of Local Government Finances and Financial Management”. It was reported that 94 municipalities were being financially distressed.

Creditors’ payment terms – a target was set at 45 days for paying creditors from voucher day in the period of 2012/13.  AGSA paid its creditors within 31 days from the date of receipt of invoices.

3.2          Comprehensive income

The purpose of highlighting the comprehensive income and the financial performance is to determine whether AGSA was able to carry on with its business activities in the period of 2012/13.  Comprehensive income reports on AGSA’s income, expenses, and profits in the financial year of 2012/13.  These include revenue (audit income), contribution to overheads, net surplus, other income and direct audit cost, and overheads incurred during this period.

Revenue – AGSA projected its revenue to R2,226 billion in its strategic plan for the period of 2012/13.  At the end of this period the actual revenue decreased by R12 million to R2 214 billion below the set target for the period of 2012/13.

Direct audit cost – was projected to R1,545 billion for the period of 2012/13.  However, the actual direct audit cost increased by R28 million to R1,573 billion compared to R1,545 billion projected for the period of 2012/13.

Other income – AGSA did not provide projections for other income, but it received the amount of R5 million from other income at the end of the period of 2012/13.  According to note 13.1 to the financial statements other income includes sundry income, telephone charges recovered, profit on sale of property, plant and equipment and other.

Contribution to overheads - AGSA projected the amount of R700 million for contribution to overheads for the period of 2012/13.  At the end of this period the actual contribution to overheads decreased by R54 million from the projected R700 million to R646 million.

Overheads – were also projected to R700 million for the period of 2012/13.  At the end of this period AGSA spent R688 million on overheads saving R12 million.

Net surplus – is the profit remaining after subtracting the operating expenses and interest payment which was projected to R46 million for the period of 2012/13.  However, the actual surplus amounts to R19 million decreasing by R27 million from the projected R46 million at the end of the period of 2012/13.

The decrease in total comprehensive income results from decrease in revenue by R12 million and increase in direct audit cost by R28 million from the projected R1,545 billion to the actual audit cost of R1,573 billion at the end of the period of 2012/13.  The decrease of R54 million on contribution to overheads also impacted negatively on the total comprehensive income.

3.3          Financial position

Financial position will help to determine the assets, liabilities, and equity of AGSA in the financial year of 2012/13.

Non-current assets – these are fixed assets and are also known as long-term assets.  Non-current assets include furniture, motor vehicles, buildings, land improvements (or Leasehold improvement if you rent), machinery, equipment and any other items within an expected business life that can be measured in years.

AGSA projected the value of non-current assets at the mount of R148 million for the financial year of 2012/13.  At the end of the financial year the actual non-current assets decreased by R47 million from the projected R148 million to R101 million.  A decrease on non-current assets may result from depreciation of asset value and less additional assets.  Although there is decrease on projected non- current assets at the end of the financial year of 2012/13, but this does not mean that AGSA is at unhealthy financial state, compared to previous financial years.  For the period of 2012/13 AGSA projected the non-current assets very high in its balance sheet.

Current assets – include cash, accounts receivable, inventory, prepaid expenses and anything else that can be converted into cash within one year period.  Cash will include cash on hand, in the bank and accounts receivable is what AGSA owed by customers or auditees (that includes audit fees).

Current assets were projected at R795 million for the period of 2012/13.  The actual current assets’ value increased by R85 million to R880 million exceeding the projected R795 million at the end of this period.

The actual total assets increased by R38 million at the end of the period of 2012/13.  This results from the increase on value of current assets.

Equity – is what is left over after liabilities have been subtracted from the assets of AGSA.  This equity includes the investments plus any profits minus any losses that have accumulated.

Equity was projected at the value of R440 million for the period of 2012/13.  At the end of this period the actual equity value increased by R19 million from the projected R440 million to R459 million.  This amount is what is left after AGSA subtracted all its liabilities.  It signifies a healthy financial position.

Non-current liabilities – these are any debts that must be paid more than one year from the date of the statement of financial position.  This may include long-term loans, vehicle finance, and mortgage bond.

Non-current liabilities were projected to R78 million for the period of 2012/13.  At the end of this period the actual non-current liabilities decreased by R6 million from the projected R78 million to R72 million.

Current liabilities – are accounts payable to banks or others, accrued expenses such as wages, salaries, and taxes payable.  Current liabilities are due within one year and any other obligations to creditors that are due within one year from the date of the statement of financial position.

Current liabilities were projected to R425 million for the financial of 2012/13.  The actual current liabilities at the end of this period amounts to R450 million increased by R25 million from the projected R425 million.

The actual total equity and liabilities increased from the projected R943 million by R38 million to R981 million at the end of the period of 2012/13.  The actual total equity and liabilities do not exceed the total asset favourable balance.  Therefore this suggests a healthy financial position.  This is also the indication that AGSA managed the working capital effectively which enabled them to fulfil their financial obligations.

4. Sustainability performance review

In consideration of International Organisation of Supreme Audit Institutions (INTOSAI) recommendations regarding the importance of sustainability and the principles of good governance, transparency and accountability, AGSA endeavours to be recognised as a model institution that makes a difference to the lives of individuals and organisations.

4.1          Preferential procurement

The economic aspects of sustainability concerns AGSA impact on the economic conditions and of its stakeholders and the economic system.  AGSA outsources some of its audit work to provide employment to a substantial number of small, medium and large firms with specific incentives for emerging audit firms.

The organisational procurement policies of AGSA are also aimed at supporting and promoting the participation of small and medium enterprises.  AGSA spent an amount of R619 million as part of its enterprise development commitment in which 23 percent of this amount was invested in small enterprises and 42 percent was spent in the medium-size enterprises.

AGSA also created sustainable value for its internal and external stakeholders through sustainable economic growth and development including the following elements:

·         Economic sustainability

·         Stakeholder engagements

·         Social sustainability

·         Cultural sustainability

·         Environmental sustainability

To add value for the public, AGSA strives for efficiencies in its audit process, audit fees that are affordable to auditees and jobs that are created internally.  Through the supply chain management AGSA gives access to wealth-creating opportunities to the members of the society (suppliers, employees, providers of capital and the community).

The environmental dynamics of sustainability deal with AGSA’s impact on the natural systems, encompassing land, air and water.  AGSA is also committed in quantifying its carbon footprint by monitoring the use and minimising the waste of water, energy and paper.

5. Conclusion

AGSA should be commended for excellent performance in categories of its day-to-day business activities in 2012/13 financial year.  AGSA’s integrated annual report for the year reports on the non-financial information, financial information and sustainability performance review.  This substantiate its commitment in leading by example as there are few institutions that have started in reporting on integrated annual report.

It is however, a fact, that there are some challenges facing AGSA such as debt collection in particular to local sphere of government whereby the debt collection initiatives implemented by AGSA were very less responsive to local sphere of government.

6. Recommendations

The Standing Committee on the Auditor-General recommends that the National Assembly:

·         Adopts and approve  the AGSA Integrated Annual Report 2012/13;

·         approves the surplus to be utilised by AGSA in the next financial year as required by the PAA;

·         approves the AGSA audit directive: 2014;

·         approves the AGSA external and internal auditors;

·         The Committee further recommends review of section 23(5) of the Public Audit Act so as to assist the Auditor-General in collecting its outstanding debts from auditees; and

·         National Treasury should ensure that the credibility of the budgets from municipalities, provinces and national departments are measured by, amongst others, on whether audit fees are appropriately budgeted for. The idea behind this is to have funds set aside in their budgets for the payment of audit fees which is the element that can positively contribute towards elimination of outstanding debts currently experienced by the Auditor-General.

Report to be considered.