Report of the Ad Hoc Committee on the Auditor-General on the Budget and Strategic Plan of the Office of the Auditor-General 2006/07, dated 30 March 2006:
The Ad Hoc Committee sat on the 29 November 2005 to consider the Budget and Strategic Plan for the year 2006/07. The Committee does not have the constitutional or legal statutory power to effect amendments via approval from the House; its powers in this regard are purely advisory. In this capacity it makes recommendations to the Office of the Auditor-General which is then approved by the House. The Office of the Auditor-General was represented by Mr. S. Fakie (Auditor-General) and Mr. T. Nombembe (Deputy Auditor-General).
In his introduction, The Auditor-General stated that the new Public Audit Act (PAA) has provided strategic direction to the Office of the Auditor-General (OAG) and that it will be fully implementable by the end of March 2006. The Budget and Strategic Plan of the Office reflects these developments and is directed towards improving the quality of service, greater cost-effectiveness and expanding its focus on performance auditing. A value adding audit methodology had been developed that combined elements of performance auditing with regulatory auditing. 7% of the Office’s resources will be allocated to specific performance audits, which will be increased in the medium and long-term on a structured and incremental basis. Three themes have been identified for the coming year viz. allocation of low cost housing projects to contractors and controls over these projects, infrastructure investment and transfer payments. The regulatory audit process will continue with the previous year’s themes (investment in public infrastructure and human resource and supply chain management), and three further themes will be added: asset management personnel expenditure and transfer payments. Additional focus areas will be HIV/AIDS in provincial health departments and government spending on subsistence and traveling. The Office is due to undergo a major transformation of its corporate services structure, from a model based on functional divisions to one based on a process-driven corporate services model, a process that will last 18 months.
The budget represented a 23% increase in income over last year, totaling R875,5 million and a 30% increase in the expenditure budget. A deficit of R63,9 million for the funding of the office was sustainable as this amount was lower than net working capital total of R72,9 million. There are several assumptions underlying the budget. Firstly, there is a proposed tariff increase of 4% with the total estimated audit costs amounting to 0:21 % of total state expenditure. Last year it stood at 0.17%. Secondly, the inflationary increases for salaries are set at 5.5% and for overheads expenditure it is set at 5%. Furthermore, due to staff shortages, there will be an increase in work that is contracted out amounting to a 37% increase over forecasted figures for 2005/06 totaling R248 million in 2006/07 of which R58 million will be used to accommodate the 10% vacancy assumption. This amount is fully recoverable. Irrecoverable contract work amounts to R8,1 million.
There are certain key ratios that ensure that expenditure should not exceed certain norms: each unit has a 30% margin on all of its activities, contracted work stands at 20% of the total audit work of the Office, overhead costs must not exceed 10% and staff vacancies should remain below 10%. The industry norm for vacancies is presently 15 to 20% because of the insufficient supply of qualified candidates in a highly competitive market.
Comment 1. The Committee endorses the annual tariff increase of 4% as it falls within the governments’ recommended guidelines for inflation, and it falls within the three year period of raised spending that was endorsed in last years’ budget. The actual percentage also remains constant from the previous year.
Comment 2. The Committee endorses salary increases of 5,5% as it lies within the acceptable inflation range.
Comment 3. The Committee notes however that the above percentage increase excludes the discretionary personnel allowance of 4% of normal staffing costs that would be activated in the event of the market repositioning of salaries. The Committee recommends that the future Oversight Mechanism address the merits of retaining this item in the budget.
This years’ budget was mainly driven by the major shifts in corporate restructuring. The new Corporate Services will consist of five business units viz. Strategy, Governance, Special and Strategic Projects, Operational and Transactional Management, and finally, the Reputation and Stakeholder Management Unit. The key cost drivers will be a large increase of appropriately qualified staff at senior levels, and a significant reduction of staff at a general administrative level. The budget for corporate services will increase from R57,8 million that was budgeted for the previous year to R88,6 million for the present year. Contract work will only be done under special circumstances in this unit. The restructuring will only be completed by November 2007.
Comment 3. The Committee congratulates the OAG on this timely and much-needed initiative, which if successful, will considerably improve the quality of service delivery from the OAG by relieving senior executives of non-core responsibilities, enhancing corporate governance, and fine-tuning strategic planning and project management. The committee looks forward to regular progress reports and the completion of the process by November 2007.
4,7% of the total expenditure budget , translating to an amount of R40,1 million, is spent on professional assistance for staff. The OAG has a total of 668 trainee accountants out of a total projected audit personnel complement of 1,500. This ratio reveals the extent to which the OAG is affected by the industry-wide shortage of skilled personnel in these fields and also the commendable role that the OAG is playing in nurturing the profession.
Comment 4. The Committee notes the remedial steps taken to improve pass rates and looks forward to improved examination performance of candidates. The Committee also wishes to congratulate the OAG for its focus on training staff, thereby helping to alleviate critical skill shortages in South Africa. As noted in its comments on the Annual Report, the Committee anticipates improved recruitment and retention practices.
Given the escalation in auditee dissatisfaction, the OAG will develop a Reputation Index with baselines for the measurement for all key stakeholders; this will be in place by end of March 2006. A special Committee will be set up to manage stakeholder satisfaction requirements and projects. An amount of R11,2 million is allocated for these activities. An international benchmark is yet to be set with regards to this kind of expenditure against total expenditure.
In 2005/06 no performance bonuses were paid out due to the change in the performance review cycle from 1 April 2005 to 31 March 2006 to 1 January 2006 to 31 December 2006. Traditionally performance reviews happened at peak of the audit period, making heavy demands on management. Staff were content to forego bonuses in 2005/06 in order to effect the permanent change in the performance cycle review, in the interests of relieving workloads at pressured moments in the auditing cycle. With the change in the performance year, a review and audit of the OAG’s performance for 2005/06 will not be possible and this will result in a technical qualification of the audit report. In the meantime, the R11 million budgeted for performance bonuses will be rolled over into the following year, for which an amount of R15,8 million has already been budgeted. A performance review will cover the two years.
Comment 5. The Committee condones the change to the Performance Review Cycle given that the Public Audit Act is just one year into implementation, and that an unintended consequence of that Act was a coincidence of a peak of the audit period with the period of the performance review; and recommends that the future Oversight Mechanism urgently advise on an option for regularizing this arrangement for the future and to report by mid- May at the latest.
The Committee is satisfied that it has enquired into the relevant aspects of the budget and strategic plan for the year 2006/07. It is mindful of the considerable achievements as well as the enormous challenges facing the OAG and of the critical importance of its work for sustaining accountability in a democratic South Africa. In this regard it has noted the considerable work-load of the Office in terms of regulatory audits alone and is encouraged by the incremental increases in performance auditing. Major challenges will lie in the achievement of sustained improvements in the quality of audits performed, attaining acceptable levels of auditee satisfaction, the training and retention of suitably qualified staff, progressive increases in performance audits and the roll-out of the ambitious reforms of the corporate services division. The Committee wishes the Auditor-General and its staff well in its endeavours.
Report to be considered.