I am pleased to present the 2005-06 strategic plan for my office. In this period the Public Audit Act is coming into effect and the implications for myself as well as my office are both exciting and challenging. As a result I have also looked closely at the stakeholders' expectations of the audit product and have tried in this plan to provide an overview of the developments proposed.

There is a government-wide drive towards focusing on implementation and service delivery. These requirements are being set by, amongst others, the President himself. This is reflected in the Programme of Action driven by the Presidency. At this stage my office is working to identify mechanisms by which we can contribute to the success of such projects.

The key factor in the success of any programme is reflected in the transparency and accuracy of the information provided to stakeholders. My role in this regard is to add credibility to the information provided, through independent validation of data. The main challenge here lies in providing credibility to information pertaining to "non-financial" or service delivery aspects of organisations.

Traditionally, the role of the Auditor-General has been viewed in terms of financial information. However, the growing expectations of stakeholders require a broader assessment of public sector entities. In this regard, the challenge is to provide "value- adding" through increased specialised audits, while maintaining the quality of the regularity audits, without increasing our fees.

Regularity audit currently employs over 95% of the resources against 5% employed for specialised audits. The target is to increase specialised audits to 7% for the 2005-06 financial year.

Themes and audit focus areas

In line with the above the office will gradually increase the range of specialised audit work during the next few years. The focus areas and audit themes currently under consideration for the 2005-06 period are set out in the table below:

Performance and value-adding audit approach

During the medium to long term, the office will focus on the implementation of the performance and value-adding audits on a structured and incremental basis. At this stage a number of methods of value-adding audits are available.

These include:

Assessment of economy and efficiency:

This relates to value-adding work conducted by financial auditors during their fieldwork whose findings form part of the audit report that is published in the entity's annual report.

An integrated audit report:

In this case specialised auditors are involved in assisting the financial auditors with special focus areas or investigations during the course of the audit. The findings of this audit are either included in the annual report or published separately.

A specialised performance audit:

Fully-fledged specialised audits undertaken independently of the financial auditors. A Separate report will be provided to management and legislators, where applicable.

The nature and type of a value-adding audit depend on various factors. These include:

Previous audit work conducted

Nature and extent of audit resources available

Extent of progress with development of processes and systems at the audited entity

During the course of next year I will be continuing my interaction with all key stakeholders to better define and refine our expectation with regard to the role my office can usefully play in strengthening the government service delivery priorities.

S A Fakie

2,Overview by the Deputy Auditor-General

The 2005-06 financial year will be my fifth year as accounting officer of the Office of the Auditor-General and will focus on building on our strategic focus as well as achieving efficiencies from initiatives that have been implemented.

The strategic focus of the Office of the Auditor-General (OAG) is set out in our Siyanqoba document, a Zulu word meaning "we are conquering"

The strategy, which was launched in July 2001, links the vision and mission to the overall purpose, values and independence of the OAG. Important to these links is the strategic focus on People, Product and Process, as well as the six key success factors {communication, change management, training, quality control, project management and corporate governance) that are the measurable cornerstones of this strategy in ensuring a healthy financial position for the OAG.

The OAG is conquering the challenges it faces as it evolves towards being the world-class provider of public sector audit services and related value-added services.

The strategic focus in the 2005-06 budget is primarily in the following areas:

2.1 People

• The correction of our audit teams' structure or span of control to ensure optimal utilisation of resources. Focus is also placed on the affirmative action profile of these teams.
• Organic growth in our trainee accountant schemes, which will also contribute, to capacity building of designated groups within the profession.
• The continuing updating of our staff's competencies through the investment in training.
• In addition to the above, emphasis is also placed on the greater understanding and enthusiastic achievement of the strategic goals of the office, by all staff.

2.2 Process

• The restructuring of the corporate services support unit towards a service delivery unit which will allow the core audit business to focus on delivering the audit product.
• The development of an integrated maturity model for the OAG, which will enable our internal processes to be benchmarked for efficiency and effectiveness.

2.3 Product

• The continuous review of our standards and procedures through product innovation to ensure that the mandate in terms of the soon to be promulgated Public Audit Act is Fulfilled.
• A gradual change in the traditional product mix from a predominant focus on regularity audits towards performance audit.
• Ensuring that the deadlines in terms of the Public Finance Management Act and Municipal Finance Management Act are met within the requisite quality standards.

2.4 Stakeholder relationships

The success of the GAG will only be realised if all the stakeholders and role players declare it to be successful.

The image of the OAG in the eyes of the stakeholders and role players will also indicate the success of this strategy. The desired image is that of an OAG known and recognised as an independent and professional entity which behaves consistently with its values and delivers top quality products to its key external stakeholders.

2.5 Conclusion

It is my belief that the budget for the 2005-06 financial year supports the OAG's development towards providing quality audit and related value-added services in the management of resources, thereby enhancing good governance in the public sector.

The strategic plan provides details of our priorities for the year ahead. Read together with the detailed budget document, the plan provides insight into the performance areas of the OAG as well as the costing of the related activities.

I would like to thank the Auditor-General for his guidance and my executive team for their support during the strategic planning and budgeting process.

Terence M Nombembe

Deputy Auditor-General

3.1 Legislative mandate

The Constitution of South Africa, Act No. 108 of 1996

The Auditor-General is mandated by section 188 of the South African Constitution to audit and report on the accounts, financial statements and financial management of:

• Ail national and provincial state departments and administrations;
• All municipalities; and
• Any other institution or accounting entity required by national or provincial legislation to be audited by the Auditor-General.

In addition to these duties, and subject to any legislation, the Auditor-General may audit and report on the accounts, financial statements and financial management of:

• Any institution funded from the National or a Provincial Revenue Fund or by a municipality; or
• Any institution that is authorised in terms of any law to receive money for a public purpose.

The Auditor-General must submit audit reports to any legislature that has a direct interest in the audit, and to any other authority prescribed by national legislation. All reports must be made public. The Auditor-General has the additional powers and functions prescribed by national legislation.

In addition, section 216 of the Constitution requires that the Auditor-General must report to Parliament in cases where the National Treasury has stopped the transfer of funds to an organ of state owing to serious breaches of financial controls or transparency, and wishes Parliament to renew such a decision.

The Public Audit Act

The Public Audit Act has been passed by both houses of Parliament and is awaiting the signature of the State President. This act will replace two acts, namely the Auditor-General Act, 1995 (Act No. 12 of 1995) and the Audit Arrangements Act, 1992 (Act No. 122 of 1992), as the governing legislation for the activities of the Auditor-General and his office.

In terms of the Public Audit Act, a new parliamentary governing body is to be established to provide oversight over the office. The Act also empowers the Auditor-General to establish an advisory board to assist him with guiding the business of the office.

The Executive Committee (Exco) is chaired by the CEO, who is also the Deputy Auditor- General (DAG). Exco is comprised of five corporate executives and is constituted to assist the CEO in managing the business of the OAG. Four of the corporate executives are responsible for the auditing functions in the office and one is responsible for core business support.

Exco has outlined its primary focus of work in four areas. Those areas are:

• To consistently scan the external and internal environment so that the GAG'S strategic positioning and outcomes are regularly refined, strengthened and protected;
• To provide effective leadership in the day-to-day performance management of the office;
• To inspire the people of the OAG to deliver enthusiastically on the organisational goals; and
• To account to its primary stakeholders on the performance and achievements of the office.

This it does through the following committees:

• The Strategy and Balanced Scorecard Committee, which monitors the overall performance of the OAG against its strategic goals, including the management of the relationship with all key stakeholders;
• The Finance Committee, which monitors and oversees the financial performance of the office;
• The Risk Management Committee, which oversees the office's risk management priorities and monitors the effectiveness of related internal controls;
• The People Management Committee, which places emphasis on the effective and equitable formulation and implementation of people management practices;
• The Information and Communications Technology (ICT) Steering Committee, which oversees the formulation and effective implementation of the ICT strategic goals; and
• The Audit Product Committee, which monitors and oversees the adherence to innovative and quality auditing standards as well as the timely completion of audits and the progress of specialised audits.

4. Service delivery

The office's service delivery environments consist of the auditing function as well as the core business support functions, whose focus areas are described in detail below:

Regularity auditing comprises financial auditing and compliance auditing. During the 2005-06 financial year the Auditor-General plans to conduct the following audits in compliance with the Public Finance Management Act, 1999 (Act No. I of 1999) (PFMA) and the Municipal Finance Management Act, 2003 (Act No. 56 of 2003) (MFMA):

Financial auditing focuses on the auditing of financial statements to enable the auditor to express an opinion as to whether or not the financial statements fairy present, in all material respects, the financial position of the entity at a specific date. The financial statements are the responsibility of the accounting officers while it is the responsibility of the auditors to audit these statements and express an audit opinion.

b) Compliance auditing

This relates to an independent external evaluation of the extent of the entities compliance with applicable legislation, regulations, policy control measures, procedures, motivation and authorisations. Non-compliance by the entity with laws and regulations may materially affect the financial statements.

Regularity audits are conducted in accordance with Statements of South African Auditing Standards (SAAS). Those standards require that an audit is planned and performed to obtain reasonable assurance that the financial statements are free of material misstatement. An audit should include the following basic principles:

• examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
• assessing the accounting principles used and significant estimates made by management, and
• evaluating the overall financial statement presentation.

4.1.2 Performance auditing

Performance auditing focuses on evaluating the measures implemented by management to ensure that allocated resources are procured economically and used efficiently and effectively. The primary objective of performance auditing is therefore to confirm independently that adequate management measures for the planning, co-ordination, control and evaluation of the procurement and use of resources exist and are efficient and effective.

It therefore provides management, Parliament and other legislative bodies with information, by means of a structured process, on shortcomings in management measures and examples of the effects thereof.

Information systems auditing as a support function for regularity audits, focuses on evaluating the adequacy of general and application controls in the information technology environment.

Support is also provided to functional auditors in the form of computer assisted audit techniques (CAATs).

4.1.4 Special investigations

A special investigation is an independent, cost-effective reviewing and reporting process carried out to assist in the prevention, detection and investigation of economic crime in the public sector. It is mainly comprised of an objective assessment of the measures instituted by accounting officers and all relevant role players to prevent and detect economic crime, but it can also include an economic crime investigation where deemed appropriate and necessary. The term economic crime in this context collectively describes the various crime categories, including fraud, forgery and uttering, theft and other contraventions of applicable statutes such as corruption.

4.1.5 Sustainable development auditing

Sustainable development auditing is an integral part of an independent external audit with the purpose of expressing an opinion on the annual financial statements and reporting on other matters required by Generally Accepted Government Auditing Standards (GAGAS) and the mandate of the Auditor-General.

These matters include:

• Cases where the use or custody of assets is, or may be, to the detriment of the state-
• Cases where management measures are inefficient or ineffective;
• Matters which should, in the public interest, be brought to the attention of the legislature concerned; and
• Non-compliance with legislation and other requirements where it could influence reasonable presentation in the financial statements.

4.1.6 Auditing of performance information

The PFMA and MFMA require that the financial statements and annual report of certain entities should disclose its performance against predetermined objectives. The office is currently conducting research on the standards by which this area will be audited and reported on. It is envisaged that this will result in a separate audit opinion being expressed on the entities report of performance against predetermined objectives.

The office also provides support to the various standing committees on public accounts at national and provincial level as part of its audit reporting responsibilities.

Apart from the mandate given to the Auditor-General by section 188(1) of the Constitution (see p. 9), section 51 of this PFMA states that the accounting authority for a public entity must ensure that the public entity has and maintains -

effective, efficient and transparent systems of financial and risk management and internal control.

This provides the mandate for the AG to focus specifically on financial management.

Following extensive research conducted by the OAG an approach for auditing financial management has been adopted. This approach essentially involves evaluating institutions against predetermined levels of financial management in terms of the financial management capability model. This will allow for assessing over time whether financial management is improving within an entity and allowing for the entity to be benchmarked against other entities.

In the initial stages this may lead to an increase in the audit resources to assess financial management. However, being able to assign reasons for shortcomings in the financial management process (and therefore in terms of internal controls) will be of considerable value to the entity. It will identify the cause of underlying problems in the entity that have given rise to audit reporting issues. Furthermore, it will assist the auditee in focusing resources that will eventually enable the auditors to rely on systems and thus reduce the audit resources required in the medium term.

4.1.9 Key cost driver's for audit operations

The key cost drivers for the executions of the various audit functions are the following:

The office strives to provide its audit service through a professionally qualified and experience workforce and is structured along similar lines as the audit firms in South Africa. The office envisages an overall audit staff complement of 1537 persons at a total cost of R264 million in its various offices around the country. The efficiency of audit staff is measured by way of productivity ratios consisting of the gross profit margin and recovery rates that are determined annually in advance by the Executive Committee of the office.

(b) Contract work

In order to strategically and efficiently manage its resources throughout the year, the office utilises the services of private audit firms to supplement its resources during peak periods such as the PFMA deadlines. In addition, the office also utilises these firms in areas where it is logistically impractical or costly to use its own staff. The office will also utilise the services of private audit firms in specialised areas where the office may not have the appropriate experience or skills to conduct specific types of audits. The total cost of contract work is expected to be R162 million. For this relationship to remain meaningful a minimum of 20% of audit work conducted by the office is set aside for the firms.

(c) Subsistence and travelling

An inherent part of the audit function is to perform a substantial part of the audit at the premises of the auditee. Many of these auditees, particularly the local authorities, are located some distance away from the nearest regional office of the Auditor-General. As such, subsistence and travelling expenditure for travelling to and from these various auditees is paid to staff members on a reimbursement basis. The total cost of subsistence and travelling is expected to be R39 million.

4.2 Core business support

The office continuously strives to implement and maintain processes that are efficient, cost-effective and supportive of effective decision-making. Equally important to the office is the extent to which we utilise information and communications technology as a catalyst to drive the efficiency and effectiveness of our processes. We have also embarked on a long-term knowledge management programme to infuse knowledge sharing as a culture within the office.

To support the above the office has begun a restructuring exercise to create a service delivery model based on the following service units:

These units would focus on scanning the environment in which the OAG operates and identifying areas for the strategic consideration of the Executive Committee.

Both areas provide transversal, advisory services, underpinning the processes of stakeholder management and core service delivery. Each facilitates effective and integrative planning with the consistent application of norms and standards in service delivery. In addition the Governance unit focuses on policy design, development and maintenance. The secretariat and the risk management function would also reside in this unit.

4.2.2 Special and Strategic Projects

This unit would be tasked with delivering value-added and project-based solutions to the product and service delivery requirements of the OAG.

4.23 Operational and Transactional Management

Traditionally known as the "engine-room" of corporate support, this unit would deliver established processes, procedures and well-defined norms for the execution of all transactional activities. The transactional areas include human resources, information technology, finance and communication.

4.2.4-Stakeholder Management

The unit facilitates and integrates the management of the OAG's relations with internal and external stakeholders to ensure the consolidation of value in respect of brand, image and reporting in a measurable and consistent way.

4.2.5 Key Cost drivers - other operating costs

The key drivers to support the above units are the following:

(a) Accommodation and technological services

The office strives to provide an office environment that is consistent with our image a; professional service provider to the public sector. To this end our staff are housed offices around the country that reflect this. The total cost of office accommodation for the 2005-06 year is anticipated to be R26,8 million for its entire staff complement of 1 773.

(b) Stakeholder relationship

In order for the office to maintain independent but sound working relationships with all stakeholders in the audit process (staff, auditees, public accounts committees and audit firms), it embarks on various relationship-building events throughout the year. This will also enhance the image and branding of the office. The total cost of these activities is R7,4 million.

(c) People development

In line with our strategic focus to ensure that all our staff are professionally qualified and trained to perform their various functions, the office has set aside an amount of R33 million towards professional assistance. This amount includes the amounts for study assistance, internal and external training for all eligible staff members. The office's investment in professional assistance includes time sacrificed to the value of RIOO million for 2005-06 (2004-5: R67m). The main drivers for the increase are the increased number of staff and the alignment of training days and study leave days with the industry norms.

(d) Support staff costs

The provision of effective and efficient support to the core business requires that the support units are appropriately staffed. The restructuring, which focuses on achieving a service delivery model, will require that the existing skills and competencies be mapped to the requirements of the new structure. The budgeted amount for the 2005-06 year on staff remuneration for the support business units exclusive of the discretionary allowance is R55 million.

4.3 Performance bonus

In addition to the normal staff salaries the office makes provision for an annual performance bonus, that is variable by nature and payable to staff who have demonstrated extraordinary performance during the year. The performance bonus is determined and regulated through the "variable pay" policy, which is reviewed on an annual basis by the executive committee and approved by the Auditor-General.

As the performance bonus is driven by the effort put by business units in achieving specific set targets towards the net surplus and cash reserves of the office, the funding thereof is normally based on the available net surplus and cash at the end of the year. As such this provision is normally not included in the detailed budget but determined after the year end financial' results and the balanced scorecard results have been audited.

Details of the variable policy and its application to the office will be further elaborated upon during the presentation of the budget to the Parliamentary Ad-hoc committee.

4.4 Discretionary personnel expenditure allowance

Historically a discretionary allowance was granted by parliament at a level of four percent (4%) of normal staff costs. This has been done in recognition that personnel expenditure provision budgeted for may not be adequate to sustain the payment of appropriate market-related remuneration for a specific budget period. In keeping with this practice and the fact that the compensation policy of the office provides for annual market positioning on the Ad-hoc Committee is expected to consider specific approval of the four percent (4%) discretionary allowance for the 2005-06 budget period as well.

In addition to the above an amount of about R12.0 million (3.5% of staff costs) is expected to be spent as part of enhancing the service delivery within the core business support. However, the certainty of the exact requirement and duration is dependent on the conclusion of the corporate services restructuring process. In this regard it is essential for the Ad-hoc Committee to consider and grant specific approval of this provision on a discretionary basis.

The preliminary budget is based on the increase of the 4% of the office's tariffs for the 2005-06 budget period. However, the Ad-hoc committee is expected to further guide the office on the most optimal tariff increase in order for the office to maintain its surplus and cash reserves at an acceptable level. The analysis of the projected income statement and funding requirements below seeks to provide a detailed medium-term impact of the tariff increases under different scenarios i.e. 0%, 2% and 4%.

a) Projected income statement

The projected income statement reflects the net surplus in percentage terms that the office expects to realise under each of the tariff increase scenarios. With respect to each of these scenarios (0%, 2%, and 4%) the projected medium-term percentage net surplus is expected to be in the region of 4%, 5% and 7% respectively.

The projected funding requirements' schedule seeks to categorise the funding requirements that originate from the office's balance sheet in three distinct parts, namely:

• reserves and staff liabilities;
• working capital; and
• capital expenditure.

The sum of these items is compared to the cash reserves to determine the medium-term surplus/deficit on funding. From the analysis below, it is expected that the office's funding requirements would be fully covered on a sustainable basis from the 2006-07 budget period. This is expected to be case in respect of all the tariff increase scenarios.