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ATC181128: Report of the Standing Committee on the Auditor General on the Auditor-General of South Africa’s 2019- 2022 Draft Strategic Plan and Budget, dated 28 November 2018

Standing Committee on Auditor General

Report of the Standing Committee on the Auditor General on the Auditor-General of South Africa’s 2019- 2022 Draft Strategic Plan and Budget, dated 28 November 2018
 

The Standing Committee on the Auditor-General (SCoAG), having considered the 2019-2022 draft Strategic Plan and 2019/20 budget of the Auditor-General of South Africa, reports as follows:

 

 

1.Introduction

 

  1. The Auditor-General of South Africa (AGSA) is established in terms of Chapter 9 of the Constitution, and is a state institute supporting constitutional democracy. The Constitution guarantees the AGSA’s independence, and requires that the office operates in an impartial manner, and performs its functions without fear, favour or prejudice.
  2. Section 10(3) of the Public Audit Act, No 25 of 2004 (the Act) requires that the National Assembly provides for a mechanism to maintain oversight of the Auditor-General in terms of section 55(2)(b)(ii) of the Constitution. Accordingly, the Rules of the National Assembly provide for the establishment of the Standing Committee on the Auditor General (SCoAG). SCoAG is charged with assisting and protecting the AGSA in order for the latter to maintain its independence, impartiality, dignity and effectiveness.
  3. According to section 38(2) of the Act, the Auditor-General must submit its budget and business plan to the oversight mechanism at least six months before the end of the financial year. In terms of section 38(3) the oversight mechanism must within two months of the receipt of the budget and business plan, submit its recommendations to the Speaker and National Treasury.
  4. This report has been divided into the following four parts:

 

  • Part A, dealing with the draft strategic plan for 2019/2020;
  • Part B, dealing with the 2019/20 budget;

 

  • Part C, dealing with the proposed tariff increases;

 

  • Part D, dealing with the audit directives in terms of the Act;

and

 

  • Part       E,      containing        SCoAG’s        observations       and recommendations.

 

 

 

 

 

Part A

 

  1. Draft Strategic Plan

 

  1. Strategic Goals and Objectives

 

The AGSA’s commitments for the 2019-2022 period are informed by its four long-term strategic goals which are outlined below.

 

 

Value-Adding Auditing

 

  1. Value-added auditing is aimed at providing valuable audit-derived insights to stakeholders regarding the status of their internal control and performance environment, accompanied by actionable recommendations which, if implemented, should result in visible improvement in public sector administration. There are two strategic objectives under this goal i.e. to demonstrate value-adding auditing, and to ensure a high quality of audits.
  2. With regard to demonstrating value-added auditing, the AGSA aims to:
    • implement 80 to 100 per cent of all actions to improve stakeholders’ perception of added value; and
    • implement 80 to 100 per cent of the actions contained in the implementation plan for the amendments to the Act, i.e. in 2019/20, 80 to 100 per cent of the planned

work; in 2020/21, 80 to 100 per cent of the planned work, including 1st report, and in 2021/22, 80 to 100 per cent of the planned work including impact assessment.

  1. In terms of ensuring a high quality of audits, the AGSA will aim towards 80 to 90 per cent of all audit engagements meeting the quality standards.
  2. To achieve the above-mentioned objectives, the AGSA will:

 

  • institutionalise mechanisms and structures for developing deep knowledge if auditees and adding value to stakeholders through, for example, continuing to implement and refine its audit methodology to ensure that it responds to risk;
  • continuously implement the section 4(3) strategy, i.e. review and update the audit portfolio annually, and continue strict oversight of the governance of section 4(3) audits;
  • implement the amendments to the Act through actioning the implementation plan; and
  • continuously improve the quality of audits through, for example, the implementation of the audit quality indicators concept.

 

 

Visibility for Impact

 

  1. This objective structures the AGSA’s engagement programmes to encourage and enable the required improvements in the public sector, i.e. to encourage stakeholders to implement its recommendations.
  2. The strategic objectives under this goal are to: achieve impact through visibility programmes; and to engage actively with citizens. To this end, the AGSA aims to,
    • implement 80 to 100 per cent of the viability programmes (constitutional stakeholder engagement plans);
    • implement 80 to 100 per cent of the planned status of records reviews in 2019/20 to 2021/22; and
    • implement 80 to 100 per cent of actions in terms of its citizen engagement plans (non-constitutional stakeholder engagements).
  3. The AGSA’s main strategic initiatives in this regard are to:

 

  • ensure high-quality, practical and effective engagements with constitutional stakeholders through the use of the status of records and commitment reviews;
  • continue the implementation of the citizen engagement strategy which is aimed at increasing the reach and impact of engagement on the AGSA’s mandate and role, and enhancing stakeholder awareness and understanding of audit outcomes;
  • continue implementing its international participation programme through, amongst others, participate in the peer review initiative of the International Organisation of Supreme Audit Institution (Intosai)which will see the AGSA leading the Supreme Audit Institute of Canada’s review.

 

 

Viability

 

  1. This objective focusses on the AGSA’s internal workings, and is aimed at ensuring that the organisation had the necessary resources,

i.e. an enabling legal framework; independent financial resources; and the required skills, competencies and culture to execute its mandate economically, efficiently and effectively.

  1. The strategic objectives under this goal are to:

 

  • maintain financial viability and legal independence by attracting, developing and retaining great talent;
  • create an enabling culture and leadership through enabling operational efficiencies;
  • create an enabling culture and leadership to drive strategic execution; and
  • enable operational effectiveness and efficiencies.

 

  1. To this end, the AGSA’s aims to:

 

  • maintain a net surplus of 0-1 per cent in 2019/20, and 1-4 per cent in 2020/21 and 2021/22 respectively; and to maintain a 2 to 3-month safety/cash margin;
  • maintain a 6-8 low level, 7-9 medium level and zero high or very high risk rating by the South African Institute of Chartered Accountants (SAICA) of the AGSA’s training offices;
  • maintain an 8 to 12 per cent voluntary turnover of high-potential individuals and critical skills;
  • achieve 80 to 100 per cent implementation of the culture and staff engagement plan deliverables for each of the three financial years;
  • implement 80 to 90 per cent of identified information and cyber security initiatives; and
  • development of an information management strategy (2019/20); implementation of the deliverables in terms of the strategy (2020/2021 and 2021/22).
  • The AGSA’s main strategic initiatives towards maintaining viability and legal independence are to:implement the 2018-2024 finance strategy through optimising operational costs in 2019/20, and implementing debt management strategies;
  • implement the 2018-2024 people strategy through improving talent management and skills retention in 2019/20, strengthening the pipeline for taking in certificate in theory of accounting (CTA) trainees, and enhancing development programmes for the AGSA’s professionally qualified staff through the Trainee Auditing scheme;
  • implement the culture improvement plan through actioning engagement and culture plans in 2019/20;
  • continuously enhance its IT solutions through defining an information security plan, implement information and cyber security initiatives, and develop infrastructure and data centre migration plan in 2019/20; and
  • implement the 2018-2024 ICT strategy throughimplementing an information security framework and plan, and an information management framework and solutions.

 

 

Vsion and Values-driven

 

  1. The AGSA aims to, through its work and behaviour, continually demonstrate that clean administration and transformation are achievable.
  2. The strategic objectives in this regard are to: drive the AGSA’s transformation plan, demonstrate clean administration and safeguard the ethical character of the organisation. To this end the AGSA aims to:
    • maintain a Level 2 B-BBEE rating over the next three financial years;
    • maintain a clean audit over the next three financial years; and
    • maintain a 100 per cent achievement with regard to decisive and timely action against reported ethical breaches.
  3. The AGSA’s main strategic initiatives towards adherence to its vision and values are to:
    • continue implementing the transformation strategy by growing its people and supporting its suppliers and communities via, for example, reviewing the CWC allocation model to ensure its responsiveness to changes in the B-BBEE environment;
    • enhance ownership and accountability of business process owners through, for example, ensuring that processes and controls are relevant to the environment the AGSA operates in;
    • cultivate an environment that enables the desired ethical behaviour through continuing to implement the relevant measures to strengthen leadership ownership in driving ethical behaviour; and
    • demonstrate quality and transparency of reporting in its accountability in its Integrated Annual Report, Strategic Plan Budget through, for example, increasing awareness of the concept of sustainability within the organisation.

Part B

 

3.         2019/20 Budget

 

 

  1. Context

 

  1. Although the AGSA’s funding model which was revised in 2008 is achieving surpluses, some of the surpluses have not translated into cash resulting in a backlog in some Capex and infrastructure projects. The AGSA’s cash cover, which at the time of reporting stood at 2,14 months, was therefore below the desired three months.
  2. The AGSA also reports an emerging risk of budgetary constraints from the side of its auditees which has manifested through write-offs (unbillable audit hours). This was exerting pressure on the AGSA’s revenue line.

 

 

3.2Summary budget proposal

 

The table below summarises the AGSA’s proposed budget for 2019/20 financial year.

 

(R million)

Actual 2017/18

Budget

2018/19

2019/20

Audit income

3 247

3 382

3 624

Own hours

2 672

2 791

3 031

Contract Work

575

591

593

Direct costs

2 064

2 108

2 256

Gross profit

1 183

1 274

1 368

Other income

68

71

69

Overhead expenses

1 184

1 303

1 459

Net Surplus/(Deficit)

67

42

(22)

Appropriation - PAA

 

 

50

Net surplus

67

42

28
  1. The AGSA’s budget revenue is expected to grow by 7 per cent, driven by inflation and additional revenue due to new audits, e.g. DENEL, the Development Bank of South Africa (DBSA) and Trans- Caledon.
  2. Overheads will grow by 12 per cent, mainly due to additional costs to support and coordinate the extended functions and powers brought by the amendments to the Act.

 

 

Part C

 

  1. Recommended tariffs

 

  1. The AGSA’s tariffs are based on the average staff costs per band and interval, mark-up factor and recoverable hours per band. The average 2019/20 tariff will be R781 per hour, i.e. an increase of       5 per cent or R39 on the previous year’s tariffs. This increase is in line with inflation.

 

 

Part D

 

  1. Audit Directives

 

  1. The AGSA tabled several changes to the audit directive issued in terms of the Public Audit Act in November 2017. The main purpose of the proposed amendments was to enable the work of AGSA. For instance, the AGSA previously reported on the difficulties as far as obtaining performance information from auditees. Therefore, the audit directives proposed the addition of a requirement to submit information for the audit of reported performance information with the annual performance report. The AGSA also proposed minor changes to its mode of operation, such as the implementation of a new revised audit methodology. The SCoAG endorsed the audit directives in November 2017.
  2. On 21 November 2018 the AGSA informed the Committee that it was not proposing any amendments to the audit directives that were approved in 2017.

 

 

Part E

 

  1. Observations

 

6.1. SCoAG notes that the AGSA has requested a R50 million once off appropriation for the implementation of the amendments to the Act. SCoAG has also noted that should the request be declined, the AGSA was confident that it would be able to fund the implementation from its R3,4 billion fee income.

  1. SCoAG notes the anticipated 7 per cent increase to the AGSA’s revenue, and that the AGSA believes this increase realistic and attainable despite the fact that historically many financially strained auditees have been unable to settle their audit fees. SCoAG further notes that the AGSA intends to identify those auditees who posed little risk to negotiate parameters for the scope of their audits, in so doing reducing the cost of those audits therebymitigating the risk of non-payment owing to lack of funds.
  2. SCoAG notes that the AGSA anticipates an increase in the challenges to its audit outcomes owing to the more severe consequences flowing from the amendments to the Act. SCoAG also notes the role National Treasury plays as far as informing auditees of the rules and guidelines through their technical documents, and that the AGSA merely provided assurance that the auditees have accounted for the monies as prescribed by section 216 of the Constitution.

 

 

7.Recommendations

 

The Committee supports the AGSA’s 2019-2022 strategic plan, and 2019/20 budget. Its recommendations in relation to the implementation of the strategic plan and budget are contained below.

  1. The AGSA should keep SCoAG abreast of any developments in relation to the request for R50 million for the implementation of amendments to the Act. SCoAG should be alerted of any challenges with regard to the implementation.
  2. The SCoAG should be provided with the list of the low risk auditees with whom the AGSA will negotiate audit parameters, and should be advised of any challenges as far as payment of audit fees.
  3. SCoAG recommends that the National Treasury and the AGSA work together closely to ensure that auditees understand the implications of the amendments to the Act. The Committee should be provided with the schedule of engagements with various stakeholders who have a role to play as far as ensuring that the new provisions are adhered to.
  4. SCoAG notes that the audit directives will not be amended, and has no recommendations in that regard.
  5. SCoAG supports the proposed 5 per cent increase in tariffs.

 

 

 

Report to be considered

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