External Auditor Appointment feedback; Auditor-General SA Budget and Strategic Plan 2011/12: analysis report

The Chairperson outlined the agenda and noted that without a quorum decisions on adoption of minutes and oversight reports would not be possible. He urged the Committee Secretary to ensure that the Committee was represented by a multiparty quorum at the meeting the following week, which would be the last meeting before Parliament resumed in January.

Auditor General of South Africa (AGSA) Presentation
Mr Peter Moyo, Chairperson: AGSA Audit Committee, outlined the process to date for appointment of an External Auditor. The tender had been advertised and two tenders had been received by 27 October 2010 when the Audit Committee met to consider tenders. The Audit Committee resolved that the tender process be suspended and re-advertised with more clearly stipulated criteria, in the Business Day and Sunday Times with a closing date of 10 November 2010. The Audit Committee would reconvene on 11 November 2010 to evaluate bids and recommend appointment of an external audit firm to SCoAG. An appointment had to be made by the end of November to enable the firm to commence work immediately after the Audit Committee approved the external audit coverage plan at a special meeting in early January 2011.  Failure to stick to this timetable would compromise the audit process of AGSA, which would be an untenable situation. AGSA required SCoAG to approve the proposed process and the contingency plan to re-appoint Moore Stephens audit firm if no suitably qualified alternate firm was identified. One of the audit committee members had planned to retire at the November meeting, but because audit plans had to be confirmed in January, she had been requested to stay on until the process was complete.

Discussion
The Chairperson asked what guarantee there was that there would be a suitable candidate for SCoAG to be able to appoint an audit firm by the end of November.

Mr Moyo replied that by 11 November, should there not be a suitable candidate, Moore Stephens would be approached for re-appointment. If SCoAG approved the procedure, AGSA would contact Moore Stephens to ask if they would consider being re-appointed.

Ms J Sosibo (Whip, ANC) asked what would happen if Moore Stephens refused to stand for re-appointment.

Mr Moyo said that it was important that the firm appointed meet the criteria and not have conflicting interests. He hoped that Moore Stephens would agree to the proposal, although challenges existed around appointment of Moore Stephens too. Should there be no suitable qualifiers, as in the past, the Audit Committee would invite firms to attend a workshop to create interest.

Ms S Tsebe (ANC) said that time frames were important and that late recess commenced on 26 November and that before then, all issues with adequate documentation could to be addressed and approved with a quorum.

The Chairperson said that if necessary a special sitting of the Committee may be necessary during the last week of Parliament if a multiparty quorum was not able to meet with AGSA before then. After the 19 November it would be a futile exercise as the House would be in recess.

Mr John Biesman-Simons, AGSA Audit Committee Member, added that the Office of AGSA would struggle to meet its obligations if a quorum did not approve appointment of an external audit firm by the end of November.

Analysis of Auditor-General’s Strategic Plan and Budget for 2011/12 Financial Year
Mr Mbuyiselo Hlekiso, Parliamentary Researcher, highlighted target concerns in the strategic plan but Mr Kimi Makwetu, AGSA Deputy Auditor-General, clarified that data driven in the three year Strategic Plan and Budget (previous Blue Book) was not within the control of AGSA and not relevant to the 2011/12 Strategic Plan and Budget.  He cautioned that AGSA would have other global commitments and physically could not afford more time to engage on the Strategic Plan and Budget in the current calendar year.  If necessary, representatives from AGSA may need to accommodate further engagement with SCoAG. The Chairperson said that the actual understanding of the Draft Report by SCoAG would be completed that day and AGSA would verify that the content of the Draft Report was an accurate reflection of intent for consideration and finalization of the Draft Report by SCoAG the following Friday.

Mr Terence Nombembe, Auditor-General, outlined the two important statutory matters for SCoAG approval of the Strategic Plan:
(1) approval of the updated tariff schedule – adoption by Parliament may require guidance
(2) approval of the Audit Directive – scope of standards by which the auditors of public entities need to audit.
Should these matters not be finalized before Parliament closed for recess, a session for consideration of these two important matters should be scheduled to take place immediately after the recess.

The Chairperson agreed that should SCoAG not be ready to adopt the Draft Report the following week, they would adopt the Draft Report in January. He asked if there were areas of the AGSA presentation that had not been covered completely in the previous meeting.

Mr Makwetu said that in the meeting two weeks prior to the current meeting, the five goals in respect to financial targets had been articulated and that the audit directive, which had no substantial changes, had been highlighted. AGSA was ready to engage on questions and clarification which may have arisen on those matters.

Ms Tsebe asked if the completed Draft Report could be received before the following Friday. The role of SCoAG was to approve the Draft Report with a quorum. AGSA had played its role.

Mr Makwetu suggested that Point 3.1 of the researcher’s analysis be ignored and clarified that any Strategic Plan of previous years was superseded by the current year Strategic Plan. The researcher said that two questions were highlighted during analysis of the Strategic Plan and Budget for 2011/12 Financial Year.

Point 4.2 on page 8 of the analysis: “Whether AGSA would borrow money in 2011/12 to cover the variance of R 5. 9 million finance charges between 2010/11 and 2011/12”.
Mr Makwetu replied that the finance charges were not for borrowing of money from other institutions. The buying of large quantities of laptops was conducted through a purchase agreement with Standard Bank and since Standard Bank made the money available, interest was paid on the installments. This was normal operational activity of purchasing with a loan agreement.

Ms Sosibo asked why purchases were not paid directly in cash.

Mr Makwetu said that while cash was in AGSA hands, interest earned was offset by the interest paid. In this manner of operating, AGSA reduced the risk of inadequate laptop supply while the supplier engaged with the bank, and at the same time the lifespan of AGSA’s cash flow was enhanced.

Point 4.2 on page 9 of the analysis:  “Whether bad debts would involve writing off some of the debtors as R4.2 million expense was for bad debts provision”.

Mr Makwetu said that bad debtors were not written off, but were indeed chased. However, in the experience of auditees, realistically 20% of debts were not paid in a financial year. For the purpose of finance figures, it was necessary to provide for the amount of R4.2 million bad debt for the current period. The accumulated debt amount on the balance sheet was R30-35 million.

The Chairperson asked to what extent AGSA had succeeded in securing outstanding payments to maintain debt at a fairly low level.

Mr Makwetu replied that of the total income, the bulk of institutions audited were consistent with payments. There were no problems with generating income from National Departments and Public Entities. Also, of the 10-12 Provincial Departments audited, AGSA was comfortable with collecting fees. Problems were defined around isolated Municipalities – the Northern Cape, North West Province and to some extent, the Eastern Cape. Provision was made for bad debts and every effort was made to receive payment of audit fees. In some instances, Provinces were able to assist with payment where Municipalities were unable to pay. A combination of experience, provision for debt and accessing and intervening in specific cases enabled AGSA to effectively maintain debt at the lowest possible level on an annual basis.

The Chairperson said that bad debt risk was a concern and that AGSA’s financial sustainability going forward was noted in a positive light.

Mr Makwetu added that AGSA aimed to create sufficient transparency on the balance sheet of the financial statement - debt projection was an indication of prudency - and failure to obtain the debt impacted on AGSA’s ability to achieve its mandate.

The Chairperson concluded that the analysis document would be refined. Once in true reflective Draft Report format, SCoAG would recommend, possibly by the following Friday 12 November, approval of the Annual Report, the Strategic Plan, Tariffs and Audit Directives as Draft Resolutions for decision by the House. He requested that the documents be collated and translated into a Draft Report of SCoAG together with Draft Resolutions for the House and circulated to the Office of the AG for comment by Tuesday 9 November and a refined document be circulated by Thursday 11 November for a meeting on Friday 12 November.

Mr Nombembe supported the process outlined by the Chairperson.

The Chairperson concluded that scheduled adoption of minutes; the Draft Report for the House on the Remco issue; and oversight reports could not be concluded that day due to lack of quorum. Members had the deadline of the following Tuesday for any additions or subtractions to the reports to allow adequate time for consideration of adoption the following Friday.

The meeting was adjourned.