REPORT OF THE AD HOC COMMITTEE ON THE 2005/06 BUDGET OF THE AUDITOR-GENERAL

Date: 10 February 2005

A. Introduction

The Ad Hoc Committee considered the Strategic Plan and the Budget of the Office of the Auditor General – OAG (for the year 2005/06) on 4 February 2005. A letter of apology from the Auditor-General, who is abroad on official business, was tabled and accepted. The Chief Executive Officer (CEO), Mr. Terence Nombembe, represented the Office of the Auditor-General. The following persons were also present from the Office of the Auditor-General: Mr. Cobus Botes, Mr Adiel Kamedien, Ms Zanele Keto, Ms Nkhopotseng Hlasa, Ms Amanda Jitsing and Mr Paul Savel.

B. Issues Considered

1. Tariffs

The 2005/06 budget of the Auditor-General refers to the projected funding requirements based on a 4% increase in tariffs. The Ad Hoc Committee noted that the OAG has a projected 2.4% increase in the deficit for its funding requirement, notwithstanding a 4% increase in tariffs. The OAG is still working on improving its performance to meet its funding requirements. Anything less than a 4% increase in the tariff would not make the OAG function efficiently. The OAG is anticipating a 3-year rise in spending to bring it up to maximum operational efficiency; thereafter it would be comfortable with lower percentage increases in future years.

The Ad Hoc Committee is of the opinion that a 4% increase in tariffs represents a realistic financial plan for the Office of the Auditor-General. This increase falls within government’s inflation target of 3% to 6%. However, the Ad Hoc Committee will carefully monitor the retention of surpluses in the future.

2. The Retention of Surplus

In its report on the Annual Report (2003/04) of the Auditor-General, the Ad Hoc Committee noted that the Ministerial approval was granted for the retention of the 2003 surplus, but the Minister had yet to approve the retention of the accumulated surplus for 2004. The retention of the surplus was necessary in order to fund the Office’s ongoing programmes for the next three years. It is only in 2007/08 that no surpluses will 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 OAG in collecting cash from its auditees.

The Ad Hoc Committee is of the opinion that the retention of the projected surplus represents a realistic financial plan for the Office of the Auditor General. The Ad Hoc Committee recommends that the future Oversight Mechanism deal with the principles underlying the retention of any surplus by the Office of the Auditor-General as a matter of policy.

3. Performance Bonuses

The Ad Hoc Committee wanted to establish what informed the awarding of performance bonuses in the OAG. The CEO indicated that the bonuses were driven mainly by the variable pay policy employed by the OAG. The policy starts from the premise that the OAG does not budget for bonuses but instead it pays bonuses out of the surplus generated and the efforts of the staff in performing their respective tasks. The staff qualifying for performance bonuses as calculated by the executive committee in the OAG in December 2004 received an average of 20%. This would vary based on the level of performance. The overall financial cost would be R11m, which would be paid directly from the surplus.

The Ad Hoc Committee is of the opinion that R11 million for performance bonuses represents a realistic financial plan for the Office of the Auditor General. The Ad Hoc Committee recommends that the future Oversight Mechanism should look at the goals and targets on which the awarding of the performance bonuses is based.

4. Discretionary Personnel Expenditure Allowance

The Ad Hoc Committee wanted to identify the terms of reference used by the Audit Committee in defining the awarding of the personnel expenditure allowance for the OAG.

The CEO indicated that the discretionary personnel allowance was only used in some years but not in others. The allowance was most used 3 years ago, when the OAG made major adjustments in staff salaries to bring them in line with market related salaries. For the past two years there was no reason for the awarding of the allowance, but in the future years, the Office of the Auditor-General might need to make use of the allowance because of its conscious decision to conduct a thorough and an intensive survey of salary trends in the market for the purpose of staff retention and to ensure that the OAG’s compensation levels were not out of line with those paid by competitors.

The overall increase would be 7.5%, 4% of which is related to the salary adjustments and 3.5% to the once-off payment to adjust funding that the OAG might require for improving corporate services efficiencies.

The Ad Hoc Committee is of the opinion that the 7.5% increase represents a realistic financial plan for the Office of the Auditor-General and recommends that the discretionary spending as a principle be considered by the future Oversight Mechanism.

5. General Comments

The Ad Hoc Committee proceeded to do a detailed analysis of the budget figures. It noted the continuing shift from contracting out research to in-house auditing, with a changing composition of the audit teams to include more trainee accountants. This would lead to more trainee accountants gaining more experience on the job and the reduction in auditing costs. The Ad Hoc Committee was assured that the involvement of trainee accountants would not lead to increased hours. The policy underlying contracted work would have to be reviewed at some stage. At present, general practice is to award at least 20% of audit work to firms.

The emphasis of the OAG was still on regulatory auditing; performance auditing was still not a main driver of the OAG’s work and accounts for only 7.5% of the work of the OAG. This figure would need to be reviewed at an appropriate time. Increased auditing costs would emanate from the requirements of the Municipal Finance Management Act (Act no 56 of 2003 – the MFMA)). This would amount to R12.183 million and this exercise would provide more exposure to the trainee accountants. An increase in the scope of the audits, arising out of a consistent implementation of compliance procedures and the fraud and error auditing standard required by the South African Auditing Standards, will lead to an increase of R16.530 million.

Five value-for-money audits will be undertaken focusing on human resource management, an assessment of the Information and Communication Technology (ICT) implementation, the housing subsidy process, and supply chain management at all national and provincial departments.

The termination of the World Health Organisation (WHO) audit and the reduced exchange rate has led to an expectation that a surplus will not be realised on this account. Insourced contract work shows a small variance of about 2.35% over the previous year. The capital expenditure budget is due to increase by 114% with increased spending on regional equipment, networks and systems taking up the bulk of the increases.

 

The Ad Hoc Committee is of the opinion that the strategic plan and the budget of the Auditor-General for the financial year 2005-6 represents a realistic financial plan of the Office of the Auditor-General.