ATC140311: Report of the Standing Committee on the Auditor-General on the Strategic Plan and Budget for 2014-17 Financial Years, dated 7 March 2014.

REPORT OF THE STANDING COMMITTEE ON THE AUDITOR-GENERAL ON THE STRATEGIC PLAN AND BUDGET FOR 2014-17 FINANCIAL YEARS , DATED 7 MARCH 2014.

The Standing Committee on the Auditor-General (SCOAG) having considered the Strategic Plan and Budget of the Auditor-General of South Africa for the financial years 2014-17, reports as follows:

1. Background and 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 projected revenue and expenditure for the two financial years following the year to which budget and business plan relates.

Section 38 (2) 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.

Importantly, 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.

It is therefore against this background that the SCOAG is compelled to consider the Strategic Plan and budget of the AGSA and draw some recommendations for the National Assembly to approve. Subsequently, this report seeks to highlight the performance targets set for, to achieve the five commitments and goals presented in the 2014-17 strategic plan of AGSA (projection of non-financial performance). The report further highlights and analyse the key aspects of AGSA’s budget for 2014/15 financial years and the outer years of the Strategic Plan and Budget 2014-17. Lastly, this report summarises the key findings and aspects of this report; based on that recommendations are drawn.

2. Projection of non-financial performance

Based on the full understanding of AGSA’s Constitutional mandate, that is to strengthen the country’s democracy, the environment at which AGSA operates and being cognisance of risks that can potentially impact on its ability to execute its mandate, AGSA has translated its mandate into five strategic commitments. Currently, AGSA’s strategy is anchored around the five strategic goals of: Simplicity, clarity and relevance of messages, Visibility of Leadership, Funding, Strengthening Human Resources and Leading by example. These strategic goals are summarised as follows:

2.1 Simplicity, clarity and relevance of messages

The focus of this strategic goal is on enhancing and consolidating AGSA’s audit efforts to provide one consistent, simple, clear and relevant audit message of spotless quality. The main reason for ensuring that the audit messages contained in AGSA’s audit reports are relevant is to enable those charged with government to act on and implement recommendation made by AGSA so as to improve public sector administration. This goal is premised on two objectives which are: to provide value-adding recommendations to stakeholders based on audit results; and continued excellence of the quality of audits performed.

The first objective relies on AGSA’s ability to identify the relevant root causes of failures in the control environment of auditees and the reasons for insufficient delivery on predetermined objectives. Thus, AGSA seeks to encourage improvement in the administration of the public sector and ultimately to reach the goal of clean and effective administration . For that good cause, AGSA is targeting 100 percent over the 2014/15 to 2016/17 financial years respectively, to produce reports that are clear to communicating relevant root cause and recommendations.

The last objective concentrates on the quality of audits performed, which measures the relevance of AGSA’s opinions. This is directly dependent on the effective functioning of the organisation’s systems of quality control consisting of leadership responsibilities, ethical requirements, management of client relationships, human resource development, audit performance and monitoring AGSA’s standards against the International Standards of Quality Control. To crystalised AGSA’s commitment on achieving this strategic goal, AGSA has set 100 % target over the three financial years covers by this Strategic plan.

2.2 Visibility of AGSA leadership

AGSA aims to continue with its journey of leadership visibility to share its insights with auditees and recommend good practices. By doing so, AGSA will also mitigate, to a large degree, the risk that sometimes its mandate is not always fully understood by its stakeholders. Most importantly, the visibility programme enhances public awareness and debate around the audit results.

In view of the above, AGSA plans to ensure a close liaison with all levels of executives, councils and other oversight structures in all three spheres of government. Moreover, AGSA aims to interact with governing bodies and standard setters, private firms and everyone who is focused on enabling and encouraging clean and effective administration.

Thus, this strategic goal is grounded on the objective to develop stakeholder relationships to encourage clean administration. As such AGSA has set a target of 100% over the financial years 2014/15-2016/17 respectively to conduct and escalate, where necessary, high quality, value adding stakeholder interaction.

2.3 Funding

The current funding model has enabled the AGSA to generate sustainable finances over the last few years; hence there will be no change in its funding model so as to ensure that the AGSA operates independently for the foreseeable future. To achieve the funding as a strategic goal, AGSA objects to execute the organisation mandate economically, efficiently, and effectively.

Subsequently, a target is set at 1 per cent to achieve net surplus in 31 March 2015 and thereby increase to 2% for 2015/16 and 2016/17 financial years respectively. Creditors are set to be paid within 45 days from their voucher dates. A target for debt collection in 2014/15 in all national business units is set at 98%-100% for 2014/15 financial year and the outer years respectively. The debts collected from the National Treasury in 2014 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 to settle the cost . The target is set at 96 to 98 per cent for debts collected in all provincial business units.

Importantly, in this Strategic Plan, AGSA has emphasized to pay a special attention to effective debt collection, particularly, local government. Surprisingly, AGSA has omitted to set a target for this critical aspect. Debt collection, particularly to local government has been a persistent challenge over the previous years and is still continuing.

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 over the three financial years covers in this Strategic Plan

· 12% Staff Turnover over the Financial years of Strategic Plan 2014-17

· 3.75 rating in achieving culture index for 2014/15, 3.77 and 3.79 ratings for 2015/16 and 2016/17 respectively.

· 3.74 rating in achieving leadership index for 2014/15, 3.76 and 3.78 ratings for 2015/16 and 2016/17 financial years respectively.

The afore-said targets crystalised AGSA’s commitment to human capital initiatives which aimed 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 commits to obtain a clean audit report over the years. To continue improving the timeliness of AGSA’s reports as legislated, the target is set at 90 per cent for 2014/15 to submit for both audit reports of Public Finance Management Act 1 of 1999 (PFMA) and Municipal Finance Management Act 56 of 2003 (MFMA) by AGSA. Further, a target of 95 percent is set by AGSA to submit performance audit reports timeously for 2014/15 financial year.

To maximise the AGSA’s contribution to transformation, a target is set at 2 points on a rating scale of 5 to achieve the identified Broad-Base Black Economic Empowerment (B_BBEE) in 2014/15 committing to be reviewed by an independent reviewer.

Lastly, AGSA also committed to a sustainable performance review by acknowledging the importance of environmental and sustainable development issues.

3. Projection of financial performance

Projection of financial performance encapsulates the projected financial statements of AGSA. The projected financial statements are made up of projected financial position, financial performance and flow of cash from operating activities and other activities. 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 standing, thereby pave a way forward.

· Projected statement of financial position (balance sheet) : The projected statement of financial position projects AGSA’s equity and obligations, and working capital over the 214/15-206/17 financial years;

· Projected statement of financial performance (comprehensive income statement): The projected statement of comprehensive income identifies AGSA’s projected revenue and expenses for the 2014/15-2016/17 financial years;

· Projected cash flow statement : The cash flow statement of AGSA estimates the amounts of cash that will flow in and out of the institution over the 2014/15-2016/17 financial years. This statement influences AGSA’s continuity and ability to pay suppliers, remunerate its employees and honour its short term liabilities.

4. Budget Analysis

4.1 Audit income

Audit income which is made up of own hours, contract work, subsistence and travel is budgeted to generate a total revenue amounting to R2.658 billion for 2014/15 financial year, R2.854 billion and R3 083 billion for 2015/16 and 2016/17 respectively. It is worth noting that the own contract revenue has increased by 9 percent between 2013/14 and 2014/15 financial years and thereby increase by 8 percent for 2015/16 and 2016/17 financial years respectively. On the other hand, revenue from Contract Worker has decrease by 4 percent for 2014/15 financial year and thereafter budgeted to stabilise at 5 percent and 8 percent for 2015/16 and 2016/17 financial years respectively.

4.2 Direct audit expenditure

Direct audit cost includes contract work of audit income, staff remuneration from audit business units and subsistence and travel has been budgeted an amount of 1.799 billion for the financial year 2014/15. This represents a 6 percent increase when it is compared to 2013/14 financial year.

4.3 Operating cost

Operating costs are associated with the administration expenses on day to day basis. Total operating costs has been budgeted an amount of R875.2 million for the 2014/15 financial year, which represents a percentage increase of 11 percent. Some of operating cost which play a significant share to operating costs item include amongst others a 100 percent increase in the funds budgeted for Senior Management Workshop; and 46 percent overseas trip

4.4 Other expenses

Other expenses are budgeted to increase to R33.7 million for the 2014/15 financial year. This represents a significant increase of 64 percent compared for the 2015/16 financial year. Amongst other expenses that contributed significantly to this huge increase in other expenses item, include provision for bad debts which increase by a noticeable 34 percent.

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. Furthermore, tariffs are based on the average staff costs per band and interval, mark-up factor and recoverable hours. The average 201/15 budget tariff is R576 which is more than by R30 compared to R546 for 2013/14.

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. AGSA has consulted with Standing Committee on Auditor-General and SCOAG has given AGSA a go ahead to use the current audit directives.

Summary of key findings and aspects

• In this Strategic Plan, AGSA has emphasized to pay special attention to effective debt collection, particularly, regarding local government. But there was no clear explanation on the strategy that AGSA aims to adopt in this regard. This has been a persisting challenge to AGSA so a strategy to overcome this challenge is needed. Moreover, this commitment is translated into neither AGSA’s non-financial performance nor financial performance since no target set for the collection of debtors from local government.
• Revenue which is planned to be generated from Own Hours has increase by 9 percent for the period between 2013/14 and 2014/15 financial year. Whilst revenue generated from contract workers is budgeted to increase by 4 percent for the period between 2013/14 and 2014/15 financial year. The two significant increases in these revenues are in line with AGSA’s plans which include the increase of scope of audit to audit Further Education and Training (FET) Colleges and Universities, and to intensify the implementation of performance audits.
• Direct audit costs increase by 6 percent for 2014/15 financial year. However, this increase is below the expectations considering AGSA’s plans such as to expand the audit scope by producing audits for FET colleges and universities. This increase can only cover inflation related increase.

7. Recommendations

The Standing Committee on Auditor-General recommends that:

• The House approves the AGSA audit tariffs increase from R546 (2013/14) to R576 for 2014/15 financial year.
• The House also approves the AGSA’s requests with regard to audit directive of the 2014/15 financial year.
• In order to address and recoup the outstanding audit fees owed by municipalities, AGSA should interact with the Minister of Co-operative Governance and Traditional Affairs ( Cogta ), as well as the Minister of Finance.

Report to be considered.