Report of the Ad Hoc Committee on the Annual Report of the Auditor-General 2004 – 2005, dated 30 March 2006:
Introduction
The Ad Hoc Committee on the Auditor-General met on 28 November 2005 to consider the Annual Report of the Auditor-General 2004/05. In its preparation for the hearings, the Committee had submitted 39 questions to the Auditor General for reply which was effected by a detailed response to each question at the hearing.
The AG identified 32 projects to align policies, guidelines and procedures to the PAA, of which 31 have been completed and reviewed by Exco, with one outstanding viz. the establishment of a stakeholder relationship with the parliamentary oversight mechanism. By the end of March 2006, after the strategy meeting in February, the Auditor General will have approved the 21 projects which he is required to do by law. The Office undertook to forward to the Committee a document outlining the four or five policies that related to the oversight Mechanism of which the standards of auditing were a critical part.
Recommendation 1: The Ad Hoc Committee notes with appreciation, the ATC, dated 27 March 2006, announcing the establishment of the Standing Committee on Auditor General .
Recommendation 2: The Auditor General must submit a written report to Parliament detailing the implementation plans of all the 32 projects that were identified for the alignment of the Office with the PAA.
The Mpumalanga Legislature has not considered 83.3% of the Audited Reports of the Provincial Government. SCOPA has not considered 13 of the 34 annual departmental reports that it had received in 2004. The national elections and the heavy workload of SCOPA had contributed to the problem. It appears that these reports will be reviewed together with next year’s annual reports.
Recommendation 3: Once the Oversight Mechanism is set up, it should take procedural and legal advice on what (if any) mechanisms are available to any legislature for dealing with the non-consideration of audited reports and whether the Mechanism has any role in this regard given its interest in ensuring that the reports of the Auditor General are reviewed by appropriate legislature.
The Auditor General confirmed that the Office did have an approved Code of Ethics which also addressed the expectations contained in the PAA. The Advisory Board had not yet had sight of the Code as it had met only once.
45% of the total contract value, equalling R75 million, was awarded to the Big Four; 35% went to the medium firms, equalling R59 million and 20% equalling R34 million went to small firms. The size of the firm is based on the number of partners and trainee accountants that were employed at the enterprises.
Guidelines for contract work were set in consultation with the audit firms, SAICA and the BEE Commission in 2001. Black Economic Empowerment has a 70% rating and Quality Control has a 30% rating. In Gauteng and KwaZulu Natal, 50 points have to be scored in order to be considered, whereas in North West and Limpompo 33 points must be scored and in the rest of the country 40 points are required. The differences are due to the scarcity of auditing firms in certain provinces. Work is not contracted out if there are conflicts of interests and for certain key audits such as SARS and National Treasury. The awarding of contracts was done in an open and transparent manner. Audit Controllers form the AG’s Office monitored the work of each contracted firm and did quality control reviews. The Office did assist contracted audit firms to improve the quality of their work but they were not re-appointed in instances of continuous poor performance. The PAA was amended to enable the AG to audit public entities if it elected to do so; external auditors were appointed in other instances. In the latter case, they were audited to the Office’s standards. In Provinces where there were small pools of accounting firms, no firm would be allowed to audit a department if they had done accounting work for that department.
Whereas in 2003/04, when only 17 (6%) of municipalities had submitted their financial statements timeously, the situation has improved with 148 (52%) of municipalities having submitted on time. The AG’s Office is obliged to report to Parliament those municipalities that have failed to submit their financial reports on time. The quality of reporting will also be checked.
Recommendation 4: as per Recommendation 3.
Lack of financial management capacity, especially with regards to systems of internal control and staff competencies, attitudes (perception that it is a low priority), the burden of outstanding financial statements, the migration to new accounting standards and weak oversight were the main reasons underlying late submission. Project Consolidate was aimed at improving financial management at municipal level.
All National Departments submitted their financial statements on time and 97% of Provincial Departments. Eastern Cape (Health) and KZN (Finance Consolidated) did not submit on time.
Recommendation 5 as per recommendation 3
Special Audits / Reports are very often requested by the auditee. Only those reports that are requested by Legislature or by the public, or that have high public interest, or that reveal significant findings, are tabled.
Recommendation 6: A detailed list should be provided in future annual reports of all Special Investigations that were tabled.
Poor selection criteria were mainly responsible for the poor results of this pilot project in 2004. More stringent criteria and the limitation of service providers to only one provider should improve results. The AG’s Office is progressively shifting its bursary focus to towards more stringently selected full-time students.
The MQF was introduced in 2000 and included the Recognition of prior learning. The introduction had led to a higher labour turnover as permanent staff who had previously been classified as auditors were now reclassified as trainee accountants. Staff had also left to become internal auditors in government and better remuneration had led to a higher turnover of chartered accountants. This had a serious impact on the operations of the Office, and even affected financial performance as the high level of vacancies led to more work having to be contracted out on a short-term basis.
Recommendation 7: The Ad Hoc Committee regards these as very serious problems as it notes that the Office even had to temporarily relax its MQF requirements as well as reset its entry qualification requirements to graduate instead of post-graduate level because the market is experiencing an under-supply of appropriately qualified trainees. The Office of the AG should place an even greater emphasis on the training, retention and recruitment of appropriately qualified staff.
An average of 42% overall satisfaction of auditees was recorded for the year in question; this was a decline from the previous year. The AG has initiated a process for understanding these results in response to feedback from auditees. The results of the survey apply equally to the work performed by the AG’s Office and to the work performed by private audit firms.
Recommendation 8: The Ad Hoc Committee recommends that the AG urgently review its survey methodology and its implementation to establish whether accurate and reliable feedback is being obtained. Secondly, that the Office share with the committee its understanding as to why stakeholder satisfaction appears to be declining. Thirdly, the Committee would like to have benchmarks for auditee satisfaction set, based on international experience. These matters should be regarded as priority.
13. Quality Assurances
Quality control results show a decline from last year, with disturbing increase to 39% from 20% for poor performance from the last year and a decline in good results from 47% to 30%. This is very worrying. The AG has identified a number of root causes of the problem. Peak audit periods still had conflicting non-audit related responsibilities which diverted focus from the main task at hand. This was compounded by inadequate project management of the audit process throughout the year that caused bottlenecks during peak audit periods. There were inconsistent methods of work and insufficient levels of training for management with regards to audit review requirements. These matters are to be addressed in this current year and adequate budgetary allocations are to be made in this regard. The AG’s office is of the view that the implementation of the MQF would also assist in addressing this problem and that results should be seen by the end of 2006.
Recommendation 9: This is a matter of great concern to the Ad Hoc Committee and should be one of the points of most intensive engagement by the Committee (or its successor) with the Office of the Auditor General.
14. Retention of Surplus
Once the 2006/07 budget has been considered by Parliament, the application will be made for the retention of 2004 and 2005 surpluses. This should be finalized by the end on March 2006.
Report to be considered.