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
|
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
|
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