Report of the Ad Hoc Committee on Auditor-General on Annual Report and Financial Statements of the Office of the Auditor-General for 2003-04, dated 4 February 2005:

The Ad Hoc Committee on Auditor-General, having considered the Annual Report and Financial Statements of the Auditor-General for the year ended 31 March 2004 [RP 177-2004], reports as follows:

1. Introduction

The Ad Hoc Committee considered the 2003/2004 Annual Report of the Office of the Auditor-General on 16 November 2004. The Auditor General, Mr. Shauket Fakie, and its Chief Executive Officer, Mr. Terence Nombembe made presentations on the Annual Report, followed by discussions and questions from Members of the Committee. The following persons were present from the Auditor-Generals’ Office: Mr. Paul Mosaka, Mr. Cobus Botes and Mr Adiel Kamedien.

2. Mandate of the Ad Hoc Committee

The Chairperson noted that on Tuesday, 19 October 2004, the National Assembly agreed to refer the 2003/2004 Annual Report, and the Budget of the Auditor-General to an Ad Hoc Committee for its consideration, and for the Committee to report to the House before 19 November 2004. On 11 November 2004 the House further extended the mandate of the Ad Hoc Committee to maintain oversight over the Auditor-General until the oversight mechanism, as envisaged in the Public Audit Act (Act No 25 of 2004), could be established. As the budget was not yet ready for tabling, the Ad Hoc Committee agreed that it would consider the Budget and make a final report to Parliament on its return the following year (2005).

Some discussion was entertained on the expanded oversight mandate of the Ad Hoc Committee itself. It was noted that in terms of section 10(3) of the Public Audit Act, the legislation envisaged the appointment of an oversight mechanism in the National Assembly to exercise oversight over the Auditor-General in terms of section 55(2)(b)(ii) of the Constitution. Some aspects of that oversight function are clearly spelt out in the Act. They include consultation with the Auditor-General on:

standards to be applied in performing audits, the nature and scope of such audits, and procedures for handling complaints when performing these audits (section 13 (1));
the bases for calculating audit fees (section 23(1));
the retention of any surplus (section 38 (4) );
and the appointment of the Deputy Auditor-General (section 31(1)).

The oversight mechanism must appoint the external auditor on an annual basis (section 39(1)) and consult the recommended candidate for appointment as Auditor-General in order to make recommendations to the President regarding his/her conditions of employment (section 7(1)). It must receive any concerns of the Audit Committee (section 40(6)(b)(iii)) and consider and report to Parliament on the Budget, Financial Statements and Annual Report of the Auditor-General (sections 38(2)&(3) and section 41(5)).

The Ad Hoc Committee agrees that its mandate was defined by the terms of reference of the two resolutions of the House. However, in fulfilling its mandate, it will be guided by the envisaged powers and functions of the oversight mechanism in the Public Audit Act, as the Ad Hoc Committee was only a temporary measure pending the coming into being of the oversight mechanism. It notes too, that its scope should not include the internal audit function, which is to be performed by the proposed Audit Committee (section 40).

3. Presentation by Auditor-General and the Chief Financial Officer on the Annual Report and Financial Statement

3.1 Constitutional mandate of the Auditor General

The Constitutional mandate of the Auditor General was noted. As a Chapter 9 institution, the Auditor General is governed under Section 188 of the Constitution (Act no 108 of 1996). The work of the Auditor-General constitutes financial statements and management auditing in all spheres of government and public entities.

3.2 The evolving institution

The Office of the Auditor-General is continuously evolving into a modern, independent institution. This includes recruitment and appointment procedures for the most competent personnel. In the past, most of its staff members and officials came from the public service, and public service regulations and laws mainly governed them. Since the Auditor-General can now operate outside some of the public service regulations, it can appoint people with the appropriate skills. The Audit Arrangements Act (Act no.122 of 1992, created the Office as a separate business unit and the Office operates as an audit firm. In the past, the Office used to receive a budget from the National Treasury. The Office now bills its auditees, thus generating its own income from audit fees.

3.3 Key principles

A key principle for the Auditor General includes continuous independence. Some of the levels of independence are statutory, as defined in the Constitution and envisaged in the Public Audit Act. Others are financial and operational. The generation of audit fees and the appointment of appropriate personnel enhance its independence and promotes the credibility of the work of the Auditor-General. This is in the context of a continuous need for good governance and accountability. Enhanced mechanisms as envisaged in the Public Audit Act continuously assist the work of the Office.

3.4 Key clients

As a Chapter 9 institution, the Auditor-General must ensure that there is financial and performance accountability. The Reports of the Office are tabled in Parliament and most of them are referred to the Standing Committee on Public Accounts (SCOPA) for consideration.

Amongst some of its international achievements, the Office has also developed special working relationships with its equivalents in almost 22 English-speaking countries in Africa and completed its last term as the external auditor of the World Health Organisation (WHO). The Auditor General was reappointed the Chair of the Panel of External Auditors of the United Nations, the specialised agencies and the International Atomic Agency. He also currently chairs the United Nations Board of Auditors for 2004.

3.5 Organisational strategic goals

The current strategy of the Office of the Auditor-General is called Siyanqoba, an isiZulu word meaning, "We are conquering". The idea is that the Office of the Auditor General (OAG) is conquering the challenges it faces as it evolves towards being the best provider of a cost-effective audit service (as its primary output) and value added services (as its secondary output) in the public sector. All organisational activities must be aligned to the strategy. The Office has emphasised the importance of all its staff members being committed to a shared vision of the strategy. The vision of the Auditor General as an independent world-class provider of public sector audit services is central to the work of the Office. The mission is to provide independent, objective and value-added services in the management of public resources, thereby enhancing good governance in the public sector.

The effective management of the three P’s (people, process and product) is an integral part of the Auditor General’s strategy in achieving its strategic mission.

People – People should be motivated and enthusiastic in the Organisation in order to get the job done.

Process – The Office should continuously meet its standards, both with respect to its audit function and the internal management of the Office. This includes processes that are efficient, cost effective and supportive of effective decision-making.

Product – The emphasis is on innovation, quality and timeliness. Practices that enhance audit capability should be introduced. In terms of quality, the products delivered and the service rendered should meet professional quality requirements and this should be achieved on time, in other words within deadlines.

3.6 Impact on the outcome

The idea is that proper management and implementation of the three P’s should minimise the cost of audits. There are other intangible outcomes, which include positive perceptions from stakeholders. These include staff members and audit firms. The strategy should contribute to enhancing individual performance in the Office.

4. Discussions and Recommendations of Ad Hoc Committee

4.1 Evaluation of overall performance of OAG

The Committee requests that it be briefed in the future on the concept of the Balanced Scorecard, as it appears to be a critical management tool in strategically aligning the OAG, securing results and the evaluation thereof.

4.2 Management of employees

The Committee welcomes the improved satisfaction with the management of relationships with employees from a low average of 32% in 2002 to an improved score of 62% in 2004. This is a marked improvement but it comes off a low base. The OAG is focusing on the quality of leadership, as they believe this is central to improving staff satisfaction. Perceptions of fairness at work are still not satisfactory and an Innovation Forum had been set up to understand feedback from the staff. Whilst race and gender discrimination played some role, there were other reasons for dissatisfaction. Surveys have revealed that the issue of leadership was at the root of these poor perceptions.

The OAG is to be congratulated on its ambitious and vigorous programme of continuous learning. Already over 60% of staff have been assessed and will be assessed every 18 to 24 months for development purposes. Minimum Qualifications Frameworks and Continuing Professional Development requirements have been established for professional audit and non-audit staff. Over 800 staff attended management development programmes and technical in-house update programmes. The Office has 572 trainee accountants (of which 80% are from disadvantaged backgrounds) and it is sponsoring 36 full-time CTA/B.Com.Hons students. Recognition for Prior Learning has been instituted through the auspices of the South African Institute of Government Auditors, and 184 people were given formal recognition in 2003/04. However, one weakness is reflected in the success rates of students writing the final qualifying examinations for chartered accountants with pass rates below the national average. This is the first time this has occurred and the OAG is addressing the problem. Finally, as part of its social responsibility programmes, the Office sponsors 20 students from previously disadvantaged communities for careers in auditing and 134 students have benefited from this programme since 1997.

There is no doubt that the OAG is engaged in an intensive programme of training and upgrading skills in the field of auditing. Poaching staff members by other agencies is a serious issue and the OAG is devising strategies to address the problem. Moreover the Committee requires some assessment of how this massive investment in continuous learning is impacting on overall performance in the Office.

In the year under review, the Office achieved a symbolic milestone when it exceeded its affirmative action target of 55% for target groups at all levels of employment. This completes the first phase and the OAG is preparing targets for the second phase, which is related to a study being undertaken with academic institutions on projected employment figures based on success rates in the future. There is an average employee satisfaction of 54% with the success of the employee equity plan with equalisation of opportunities rating highest at 60% and elimination of unfair discrimination rating lowest at 47%. Perceptions of unfairness emerge again, and the Committee recommends that attention be given to this result. The Committee looks forward to the finalisation of the second phase of the Employment Equity Plan.

4.3 Quality of product

The Office is targeting the development and effective implementation of best practices to improve the Office’s quality control standards. It has developed its quality assurance strategy based on the most recent International Standards on Auditing and Quality Control and this is due to be implemented over the next 3 years. One requirement was that there should be a second review by an independent person on all major accounts – this was very onerous. The Office would be initiating a second review of all audits done on major departments. Internal quality controls had also been improved. Every file had a quality control checklist. 80% of the reviewed audit files met the quality assurance criteria but 20% were classified as poor. The Assessment Committee of the Public Accountants and Auditors Board quality assurance process did these reviews.

The Committee endorses the decision to review the Office’s technical support capacity in order to enhance the effectiveness of peer reviews. Staff will also have to be continuously trained on the new quality assurance strategy.

The Committee notes a marked improvement in satisfaction with overall feedback from auditees rising from a low average in 2002 of 35% to 54% in 2004. Moreover, in conducting this exercise, the Office should ensure that its independence was not compromised. High levels of satisfaction could sometimes reflect poor reporting. The Office must exercise caution. Timeliness in reporting to stakeholders has improved dramatically with a completion rate of 100% of all provincial reports and of 97% of all national departments. However, no information was provided on timeliness of municipal audits. Now that the Municipal Finance Management Act (Act no 56 of 2003, the MFMA) is in place, such information should be forthcoming.

Recent developments have necessitated new reporting obligations with regard to performance information auditing and the construction of an interim audit approach for local government, focusing on compliance with integrated development plans. The OAG also developed a financial capability auditing approach. At present 3 to 4% of resources were spent on performance audits; the Office was targeting 7% in the future. This figure may have to be increased in the future because of the requirements of the MFMA. This matter should be addressed in the budget.

4.4 Risk management and information and communications technology

Underspending had been recorded on the Information Communication Technology (ICT) budget due to the deferred spending on the portal system and on the upgrades on software. Other aspects of ICT spending had been stretched. The Office was presently upgrading its storage and back-up capabilities (including off-site storage).

The recovery of municipal debt had improved significantly. The only remaining problems were in the Free State. An amount of R12 million was still outstanding but this was not material when compared against the budget as a whole (in excess of R500 million).

The Committee commends the OAG for having finally reduced the risk it was exposed to through unrecovered municipal debt.

5. Financial Statements

5.1 Audit report

The Committee congratulated the OAG for receiving an unqualified audit opinion with no matters of emphasis. The Audit Commission had already dealt with all areas of concern and concurred with the finding. The inclusion of matters of emphasis in audit reports is, strictly speaking, a practice in public sector auditing, which has a low risk tolerance for non-compliance, a principle underlying the PFMA. The OAG does not fall under the PFMA and its statements are audited in line with principles pertaining to the private sector, which is driven more by results, and less by compliance objectives. However, there have been occasions, as in 2002, when the external auditors have emphasised certain matters. The Committee is of the view that in such instances, and in general, the powers and functions of the Audit Committee vis-à-vis the Oversight Committee must be clearly understood. It recommends that the two committees engage with one another on these issues in preparation for the internal audit and for the annual financial audit.

5.1 (a) Balance sheet

Ministerial approval has been granted for the retention of R90 million in the general reserve for the re-capitalisation of the Office. It was explained that the amount was the equivalent of share capital in the private sector which did not report any movements and which was usually reserved for large capital expenditure. Hence the amount has remained constant. Ministerial approval has been granted for the retention of the 2003 surplus but the Minister has yet to be approached for the retention of the accumulated surplus for the 2004 funds. The retention of the surplus was necessary in order to fund the Office’s ongoing concerns for the next three years. It is only in 2007/08 that no surpluses would be required. These requirements account for the rise in retained income of approximately R35 million. The significant increases in cash and cash equivalents are due to improvements in the discipline in the Office in collecting cash from its auditees. Approximately R84 million is on call with the Public Investment Commissioners largely to cover retirement benefit obligations.

5.1 (b) Income statement

The surplus from operations increased from R26 million to R36, 3 million over the financial year. This amount is reflected in retained income until approval has been granted by the Minister, in which case it will be transferred to the general reserve. The impact of the strong Rand on foreign earnings has not had a major effect on revenue, as the amount earned is less than 4% of total revenue in general.

The reasonableness of staffing costs was checked by productivity indicators, which assisted in determining staff complements. The total staff complement was due to rise to 1400, however not all vacancies could be filled so more work had to contracted out. R281 million had been budgeted for staff costs of which only R265 million expenditure had been incurred. On the other hand, R111 million had been budgeted for contract work and yet R143 million had been spent. The Office made no profit on contracted work. The margins were much better if the Office did the work itself. The Committee will continue to monitor staff vacancy rates and will require regular reporting. A major drive to fill vacancies was to be embarked upon in December 2004 and January 2005.

The Committee noted that the Audit Commission drew no matters to the attention of the Committee.

Report to be considered.