PARLIAMENT: RESEARCH UNIT

Analysis of Annual Report for the Auditor-General for the Year End 2006/07

11 October 2007

1. Introduction

Section 181 (5) of the Constitution of the Republic of South Africa (Act 108 of 1996) requires state institutions supporting constitutional democracy to be accountable to the National Assembly, and to report on their activities and the performance of their functions to the Assembly at least once a year. In addition, section 10 (1) of the Public Audit Act (Act 25 of 2004) requires the Auditor-General (AG) to report annually to the National Assembly on his or her activities and the performance of his or her functions.

The National Assembly established the Standing Committee on 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 AG's office.

The main purpose of this analysis is to assist the Standing Committee on Auditor General to evaluate the AG's performance as part of its oversight responsibility. The aim is to ascertain the extent to which key strategic and operational objectives were achieved, as set out in the strategic plan and budget of the Auditor-General. '

2. Legislative Mandate

The AG's legislative mandate is provided in section 188 of the Constitution and in the Public Audit Act. These Acts clearly highlight the AG's responsibility for auditing and reporting on all tiers of Government as well as Public Entities.

3. Mission Statement

The Auditor-General's mission as provided in 2005/06 annual report is to provide independent and objective quality audit and related value-added services in the management of resources, thereby enhancing good governance in the public sector.

4. Technical Quality of the Auditor-General's Annual Report

The office of the Auditor-General tabled its report within the prescribed timelines as stipulated in _ Public Finance Management Act (PFMA). The report is concise and outlines the activities performed by the AG's office during the period under review. However the following technical shortfalls in the annual report were noted:

(a) The achievement of objectives and the AG's performance cannot be effectively measured as there are no performance indicators and targets to measure it against.

(b) The strategic plan (2006/07) and annual report (2006/07) do not provide the mission statement of the Auditor-General's office.

(c) Within the focus area Auditing, the following sub-focus areas were not planned for in the strategic plan:

         Audit Quality: The audit quality intends to measure the quality of AG's audit work.

 

         Timeliness: Timeliness accounts on the time taken by AG to complete the audit work. This measures AG's compliance with the prescribed timelines

 

4.1 Recommended Questions and Comments

         The committee should ascertain the reason why the Auditor-General prioritised and felt necessary to conduct audit quality and timeliness as not specified in strategic plan

 

5. Programme Performance against key strategic objectives and planned outputs

The Auditor-General reported as follows during 2006/07 financial year.

5.1 Programme 1: Auditing

6.1.1 Sub-Programme 1: Audit Quality

6.1.1.1 planned Outputs

Audit quality was not reported for in the strategic plan and no performance indicators and/or

planned outputs were specified. However the following targets were provided in the annual report

         Excellent performance 70%

 

         Good performance 30%

 

         Poor performance 0%

 


6.1.1.2 Reported Achievements

The AG indicated that annual quality control is important in determining whether the audits are conducted in terms of the International Standards on Auditing. This quality review process is reported to have been conducted by the Independent Regulatory Board for Auditors (IRBA).

The IRBA together with AG's quality review component conduct reviews on work performed by both AG's own and contracted-out work. The following performance levels were reported by the AG during the period under review:

Performance Level

 

Achievement Level

Excellent performance


Good Performance


Poor Performance

 

75%

 

10%

 

15%


6.1.1.3 Observation

Excellent Performance: Seventy five percent (75%) performance reflected in performance levels implies that the quality of AG's audit work was excellent. This further indicates that 75% of the audit reports produced by the AG were of a high quality. The level of performance in the quality of services provided by the Auditor-General as reflected in the report has improved. Excellent performance programmes improved by 3% as compared to the previous financial year.

Good Performance: Ten percent of AG's audit work was of a good quality. The Auditor-General however did not perform well in this performance category during the 2006/07 financial year. The performance levels show a decline of 1 % as compared to the previous year's statistics.

Poor Performance: The 15% outputs reflected in this category is worrying, as it raises concerns on the quality of audit work provided to some of the AG's clients. This implies that 15% of the reports produced were of a poor quality. Improvement still needed in this level to ensure that no poor quality is provided to the clients. The root cause for this level of performance should be identified and addressed accordingly.

Furthermore, in providing an effective oversight to the work of the Auditor-General, the Committee should consider requesting and analysing the results of the quality review performed by both the Independent Regulatory Board for Auditors in future. This report will assist is noting the areas of concern in the AG's work.

6.1.1.4 Recommended Questions and Comments

         Who assessed the overall performance of AG's quality as reported in the annual report and what kind of instrument was used to conclude on the performance of AG.

 

         How often does the IRBA conduct an independent quality review of AG's work. The Committee requests that this report be made available to it for scrutiny.

 

         What kind of action(s) is the AG taking to minimise/ eliminated poor performance in its work?

 

6.1.2 Sub-Programme 2: Cost of Auditing

6.1.2.1 Planned Outputs

The Auditor-General identified the following as the key drivers for audit work and the cost for each was envisaged for the period under review in the strategic plan as follows:


Key cost driver

Envisaged figures

People


Contract work


Subsistence & Travel

 

1530 staff complement at a cost of R306, 6 million

28% of AG's work amounting to R248 million

R37, 8 million was budgeted


6.1.2.2 Reported Achievements

The Auditor-General over-spent on audit staff costs as actual costs exceeded the budgeted figures by R16 million: The reason for this excess was provided to be unbudgeted recovery overtime, various contractors and temporary staff.

The Auditor-General over-spent on contract-work as contract work exceeded budget by R53 million. The explanation for the excess .is reported to be as a result of employee vacancy of more than anticipated 10%.

6.1.2.2 Observation

Personnel and contract work costs decreased gross contribution (difference between income and direct cost) of the Auditor-General to 27% during the period under review. It is then. not clear as to why the personnel costs and contract work cost increased within the same financial reporting, as contract work was suppose to substantiate the lack of human capital.

6.1.2.3 Recommended Questions and Comments

         The Committee should ascertain whether it is possible to have an increase in the personnel costs and contract work costs within one financial year.

 

         Is the excess shown in expenditure for personnel costs and contract work above associated with the delays in finalising audit work? If yes whose responsibility is to compensate for the delays in meeting the deadlines?

 

         If the employee vacancy rate was 16% during the period under review how did personnel cost go up?

6.1.3 Sub-Programme 3: Timeliness

6.1.3.1 Planned Outputs

Planned outputs and targets were not projected in strategic plan. However, the report reflected 95% target of audit reports to be finalised within the prescribed deadline for financial statement submitted on time.

6.1.3.2 Reported Achievements

The Auditor-General finalised some of the audit work within the prescribed regulatory timelines. The table below reports on the number and percentage of institutions audited within set timelines.

 

Organisation

Submitted within legislated dates

Completed within statutory deadlines

 

Number

Percentage (%)

Number

Percentage (%)

PFMA organisations

315

91%

284

90%

Other PFMA organisations

79

72%

75

95% '

MFMA organisations

259

67%

109

42%

 

As per the above table, the Auditor-General delayed completing the audit work of 185 organisations that submitted their financial statements within the PFMA / MFMA prescribed timelines.

The reasons for the delays were cited to be:

 

         Audit capacity constraints to deal with the finalisation of such backlogs.

 

         Material changes to annual financial statements. This was to ensure that the information is accurately provided in the financial statements.

 

         Delays in the submission of supporting documents

 

6.1.3.3 Recommended Questions and Comments

         The Auditor-General mentioned capacity constraints as one of the issues that resulted in delays in finalisation of the audit work. Has the participation by the AGs office in the international audits impacted on AG's ability to complete the audits on time?

 

         What plan has the AG set in 'place to ensure that such backlogs in the future are addressed and to ensure that the legislative obligations are observed and complied with?

 

         What is the average lime- period that the AG waits for supporting documents to be provided by state organisations?

 

         Why are supporting documents not obtained during the period in which the audit project is in progress?

 

6.1.4 Sub-Programme 4: Auditing of Performance Information

6.1.4.1 Planned Outputs


Nothing was reported by the AG for auditing the performance information in its strategic plan. This however is the requirement of section 20 (2) (c) and 28 '(1) (c) of the Public Audit Act. The Audit report however, reported the target of 100% compliance with predetermined audit coverage milestones.

6.1.4.2 Reported Achievements

A phased approach was adopted in auditing performance information, with phase-one being implemented during the 2006/07 financial year. Phase-one entailed obtaining an understanding of the entity and its environment, including its internal controls relating to performance information and determining the level of performance reporting. The- AG reported 100% achievement in compliance with the predetermined audit coverage milestones. The first phase of the auditing of performance information project is reported to be completed.

6.1.4.3 Observation

The 100% compliance with predetermined milestones symbolises a satisfactory performance in this area. However, the Committee might need to ascertain the methodology used to conduct the audit of performance information. This might also relate to the methodologies to be used in implementing the future phases.

6.1.5 Sub-Programme 5: Performance Auditing

6.1.5.1 Planned Outputs


In the strategic plan, the Auditor-General committed to allocating 7% of resources for performance audits during the period under review. This meant that 7% of the audits to be conducted by the AG' will entail performance auditing. .

The following audit themes were identified for 2006/07 financial year as per strategic plan:

         Allocation of low-cost housing to contractors and the control over these projects

 

         Investment in infrastructure

 

         Transfer payments

 

6.1.5.2 Reported Achievements

The Auditor-General utilised 6% of its resources amounting to R51, 8million in performance audits. It is reported that the performance audits were carried out as part of regulatory audit processes.

The focus area of these procedures focused on:

         Human Resource Management

 

         HIV/Aids initiatives

 

         Supply Chain Management

 

6.1.5.3 Observation

More focus was not paid to performance audits, as it is reported that performance audits formed part of regulatory audits during the period under review. The desired objectives were not achieved as performance audit themes as per the strategic plan were not audited.

6.1..5.4. Recommended Question and Comments

         The Auditor-General to give clarity as to whether the performance audits were conducted as stand alone audit projects.

 

         What made the AG's office deviate on the planned performance audit themes as identified in the strategic plan.

 

         Were deviations communicated to the relevant monitoring bodies for their advice and information?

 

         Were funds budgeted for planned performance audit themes shifted to other programmes/themes during the period under review?

 

6.1.6 Sub-Programme 6: Regulatory Audits

6.1.6.1 Planned Outputs

The Auditor-General identified three focus audit themes for regulatory audit and committed in the strategic plan to conduct those during 2006/07 financial year. Ninety three (93%) of the AG's resources was to be allocated to regulatory audits.

The themes for regulatory audits were identified as follows:

         Human Resource Management

 

         Supply Chain Management

 

         Investment in the public infrastructure

 

         Subsistence & traveling

 

6.1.6.2 Reported Achievements

Ninety three percent (93%) of the AG's resources was utilised for regulatory audits as per the strategic plan. However, there is no clear indication on whether all the themes identified during the budget planning were audited, and the number of regulatory audits conducted during the period under review is also not reported on.

6.1.6.3 Observation

The achievements and the work done in regulatory audits are not clearly accounted for. The report reflects human resource management, supply chain management and HIV/Aids initiatives as the themes in which regulatory audits focused on. There is no mention of investment in infrastructure and subsistence & travelling as anticipated in the strategic plan.

6.1.6.4 Recommended Questions and Comments

         What resulted to the AG deviates from its strategic plan in relation to the performance audits?

 

         What is the reason for regulatory audit work not being performed in the public infrastructure investment and substance and travelling as committed in the strategic plan and budget document?

 

6.1.7 Sub-Programme 7: International Audits

6.1.7.1 Planned Outputs


Ten international audit projects were planned to be conducted in the 2006/07 budget and strategic plan document. The annual report also reported that income of not more that 5% was targeted for during 2006/07 financial year

6.1.7.2 Reported Achievements

The AG has reported an income of R18, 2 million from the international audits. The income was earned as a result of audits conducted of the United Nations and its funds and programmes, the United Nations Industrial Development Organisation and the International Centre for Genetic El'!gineering and Biotechnology.

6.1.7.3 Observation

The Office of the Auditor-General reported an income of R18, 2 million from international audits. However, the expenditure incurred for international audits is not clearly reported. The comparison of income received and expenditure incurred would assist in evaluating the financial performance of international audits.

6.1.7.4 Recommended Questions and Comments

         In what way did the international audits contribute in the AG's financial performance during 2006/07 financial year?

 

         Did the allocation of human resources to international audit result in the capacity constraints experienced in conducting local audits? What mechanisms were set in place by the AG to ensure that international audits did not impact negatively on its ability to fulfil its local constitutional mandate?


7. Budget and. Financial Performance

7.1 Budget Resources and Expenditure

The Auditor-General identified the following areas as crucial for 2006/07 in the Budget and Strategic Plan report:

         Auditing: This related regulatory and performance auditing.

 

         Cost drivers for audit operations: People, contract work and subsistence and travel were highlighted to be key cost drivers fro audit operations.

 

         Core business support: This related to the restructuring of Corporate Services.

 

         Core business resources: Accommodation and capital expenditure were identified as core resources of AG.

 

         Core business investment: Professional assistance and reputation and stakeholder management were identified to be the crucial activities.

 

7.1.1 Projected income

The income statements were projected in the budget and strategic plan document to reflect a net surplus of R11 million during 2006/07 financial year. These income levels were determined using a 10% employee vacancy rate assumption.

7.1.2 Projected Funding Requirement

The funding schedule categorised the funding to the following requirements:

 

         Employee liabilities and reserves for special audits

 

         Working capital

 

         Capital expenditure

 

         Hosting of prestigious events

 

The above mentioned categories resulted in a total of R213, 8 million being required during the 2006/07 financial year.

 

7.2 Financial Performance

The Auditor-General projected in the budget a surplus of 1 % income during 2006/07 financial year. The following assumptions were made in budget and strategic plan documents regarding anticipated changes in financial performance:

 

         4% increase in rates.

 

         Salary expenditure inflationary increase of 5, 5%.

 

         Overhead expenditure inflationary increase of 5%.

 

         Increased contract work to accommodate 10% vacancy rate on audit staff.

 

In 2006/07 financial report, the office of the Auditor-General reflects a R1.8 million deficit as per its income statement.

The reasons for deficit are cited to be the result of the following:

         Vacancies resulted in the lower recovery rate and higher contract work.

 

         Other income: balances in the investment account were higher than originally anticipated, which contributed to the increase received of R3 million compared to the budgeted amount.

 

         A saving of R11.6 million was achieved on other expenditure, as a result of under-spending on course fees and study assistance, savings on planned information communication technology which were not fully implemented and deliberate cost-saving plans and strict control to reduce stationery costs.

 

7.2.1 Observation

Higher figures realised in the investment account and the savings achieved on other expenditure were supposed to impact positively in the financial performance of AG, thus increasing the surplus.

7.2.2 Recommended Questions and Comments

To what extent did the increase in investment account and savings in other expenditure contributed in the deficit of R1.8 million as reflected in financial statement?

 

7.3 Expenditure Analysis

The analysis of financial statements revealed deviation in the following planned outputs with actual outputs that impacted on the financial performance of Auditor-General.

 

 

Budget 06/07

Actual 06/07

Item

Amount in R'000

Amount in R'000

Income

 

 

Own hours

578,348

549,545

Contract Work

248,046

299,872

Subsistence & Travel recoverable

49,100

34,200

Interest received

8,197

11 ,940

Expenditure

 

 

Personnel costs

306,600

454,292

Contract work.

248,046

314,483

Subsistence & Travel

49,100

42,1 00

Finance Charges

1,055

1,889

 

7.3.1 Contract work

7.3.1.1 Contact Work Income

The office of the Auditor-General reported generated income amounting to R300 million through contact work in its financial statement. The contract work income was generated as follows:

Type of Income

Amount in R000

Local services

229, 743

International Services

129

Total

299,872

 

7.3.1.2 Contract Work Expenditure

The expenditure associated with contract works was reported as follows:

 

Type of Expenditure

Amount in R'000

Contract work irrecoverable

13,282

Contract work recoverable

301,201

Total

314,483

 

An income from contact work recoverable is reported to be included in the revenue section of the financial statements. The income of R300 million as reflected in note 13 of financial statement does not seem to correspond with the inclusion of R301 million contract work recoverable income, with a R1 million difference between contract work income and contract work recoverable income.

In comparing the contract work income (R300 M) with contract work expenditure (R314, 5 M), it appears that contract work accounted for a R14, 5 million loss in 2006/07 financial year.

7.3.1.3 Recommended Questions and Comments

         What would be the reason for contract work to account for R300 million income if amount from contract work recoverable (R314, 5 M) is included in the revenue section?

 

         In the opinion of Auditor General, did the contact work generated more income or contribute to the deficit reported during the 2006/07 financial year? If it contributed to the deficit, what are .the future plans of the AG regarding contract work?

 

         Contract work shows expenditure of R314, 5 million as compared to contract work expenditure of R249 million for 2005/06 financial year. Does this increase reflect the decrease in AG's human capital?

 

         Where did the AG get funds to finance the excess amount R53 million shown in contact work?

 

7.4 Personnel Costs

Personnel costs show significant increase of R76 million as compared to the previous financial year. Furthermore, audit staff costs exceeded the budgeted amount by R16 million during 2006/0-7 financial year.

7.4.1 Recommended Questions and Comments

         What are reasons for such huge increase in the personnel expenditure during2006/07 financial year?

 

         Does an increase in personnel expenditure symbolise the increase in staff and/or the decrease in the contract work needed to provide audit services?

 

         How did the AG raise funds for excess amount of R16 million shown in the audit staff costs?

 

         Do the financial deviations reflected in the financial statement suggest that AG's office is not adequately planning for its resources during the budget process? If this is the case, what is it the AG is planning to do in ensuing that the budget is properly planned to substantiate its services?

 

8 Human Resource Information

8.1 Employment Equity

8.1.1 Planned Outputs

The office of the Auditor-General set out to implement the next phase of their affirmative action plan, with an attempt to transform the AG's employee profile to reflect the demographics of the country. .

8.1.2 Reported Achievements

The AG reported that the employee profile reflected 84% of the employees from the target group (African, Coloureds, Indians, White females and people with disability) and 16% of the employees from non-target groups (White males)

The employment equity report reflects the following:

 

 

African %

White %

Coloured %

Indian %

Disability %

Male

26%

16%

3%

4%

0.60%

Female

24%

16%

4%

4%

0%

 

8.1.3 Observation

The office has improved in addressing the equity in terms of statistics, however, improvement is still..f1eeded in recruiting people living with disabilities. Furthermore, the employment equity report does not clearly account for representivity by level of positions.

8.1.4 Recommended Questions and Comments

         Is there any plan in place to recruit female people with disabilities, and if yes how long will it take for AG to address this concern?

 

         How many managerial employees appear in AG's employee profile, and how are the targeted groups represented in the managerial levels?

 

8.2 Broad-based black economic empowerment

8.2.1 Planned Outputs

In contracting the audit work, the Auditor-General committed to appoint audit firms that show black economic empowerment, and that contributes to the transformation of auditing profession.

The criteria that the AG used to evaluate audit firms included the percentage black management and ownership of audit firms, employment equity, skills development, affirmative procurement and corporate social investment.

8.2.2 Reported Achievements

Audit work was contracted to audit firms that show 70% of BEE status and 30% of quality control. The procurement of AG's services complied 100% with the Broad Based Black Economic Empowerment (BBBEE).

8.2.3 Observation

Auditor-General performed well in addressing the imbalances experienced in the auditing profession. This shows AG's commitment to the economic transformation of the country.

8.3 Employment and Vacancies

8.3.1 Planned Outputs


The Auditor-General anticipated a 10% vacancy rate in the strategic plan, with a total staff compliment of 1783.

8.3.2 Reported Achievements

The staff turnover increased by 16, 1 % during the year under review. Turnover was seen at manager and assistant manager levels.

8.3.3 Recommended Question and Comments

         The AG to clarify whether the root cause for this turnover has been identified or whether AG regards its retention policies not to be adequate enough to prevent the movement/ loss of skills

 

8.4 Skills Development

8.4.1 Planned Outputs


Skills Development of the AG was centred in the trainee accountants and continuing development programmes. The trainee accountant programme has 668 participants, with an intention to nurture them to be professionals.

The continuing development programme caters for fully qualified professionals to maintain their membership and keep with the latest development of the profession. The funds were allocated for these programmes with an amount of R40, 1 million being set aside in AG's budget.

8.4.2 Reported Achievements

A growth in the number of qualified professionals was reported during the period under review. Hundred and twenty nine (129) staff members passed their professional examinations as follows:

         37 Chartered Accountants

 

         88 Registered Government Auditors

 

         4 Certified Information Systems Auditors

 

Ninety four percent (94%) of the participants in the trainee accountant programme were from the target group.

The statistics shows that 55% of white males registered as professionals with only 45% registered from the target group during the period under review.

8.4.3 Observation

With regards to the trainee accountant programme, there is no indication as to how many participants professionally qualified as a result of this programme. The outcomes of this programme are not clearly indicated and accounted for.

More support still need to be provided to the target group, in ensuring that AG produces professionals as per the demographics of the country.

The actual costs incurred in developing skills during the period under review amounted to R34, 6 million as compared to R40, 1 million budget.

8.4.4 Recommended Question

         Is it possible for the AG to reflect on the number of professionals produced through the trainee accountant programme?

 

8.5 Cases of Misconduct and Actions Taken

The Office of the Auditor-General reported material losses amounting to R404 000 during the period under review. These losses are related to the theft of computer equipment.

The AG does not provide the reasons for these losses and whether any person/s was held responsible for such losses.

8.5.1 Recommended Questions

         What was the reason for the loss of computer equipment?

 

         Is there any computer that was lost due to .the negligence from officials, if yes was there any action instituted against such an official?

 

         The loss of computer equipment is recurring in the AG's office with previous year's reports showing losses in the same equipment class. Does this imply that the control environment over computer assets in AG's office is inadequate and or ineffective?

 

         What is the AG's plan, if any, to ensure that the loss of computer equipment does not appear in the financial statements in future?

 

9 Conclusion

The attention of the Select Committee on Auditor General is drawn on the matters reported and raised above. The recommended questions are provided for consideration by the Committee and clarity should be provided by the AG where necessary.

Reference list

         AG's Budget and Strategic Plan for 2006-07

 

         AG's Annual Report for 2006-07

 

         AG's Annual Report for 2005-06