Auditor General Annual Report 2006/7: briefing

STANDING COMMITTEE ON THE AUDITOR GENERAL
15 October 2007
AUDITOR GENERAL ANNUAL REPORT 2006/7: BRIEFING

Chairperson: Ms B Hogan (ANC)

Documents handed out
Auditor General Annual Report, 2006 –07
Analysis of Annual Report for the Auditor-General for the year end 2006/07

Audio recording of meeting [Part 1] [Part 2]&[Part 3]

SUMMARY
In the afternoon session of the meeting Committee members were given the chance to ask question and raise concerns brought about from the AG Annual Report.

The topics that were discussed were Employment Equity and Black Economic Empowerment, Learning and growth as secondary focus areas and operational excellence.
Members were concerned with the large loss of trainee accountants to the private sector and issues around debt collection.

MINUTES
In the afternoon session of the briefing by the Auditor General to the Standing Committee members were given the opportunity to question issues brought up by the presentation of their Annual Report.

The topics that were discussed were Employment Equity and Black Economic Empowerment, Learning and growth as secondary focus areas and operational excellence. Members were concerned about the high turnover of trainee staff where they were lost to the private sector and the loss incurred by the AG.

Discussion
Mr Nene commended the Auditor General on the effort they made in compiling this report. In terms of Employment Equity and target groups there were some areas of concern especially with regards to disability. He said that there was an outcry from disabled people that they were neglected. He asked for clarity on this issue.

Mr Terence Nombembe (Auditor General) said that there was currently a project underway by the Employment Equity Team to deal with strategies to deal with the issue of disability in the office. This was done with the realisation that as an audit practice they could not have undefined disability-criteria for the kind of work that they did. This project was to define the type of disability criteria they should consider in order to address it in a systematic matter. This exercise should be complete in a few months and he hoped that it would be included in the coming strategic plan. He felt that then they would have an idea of how they were going to work towards disability targets. He said that the figures that were in the report were a ‘stroke of luck’ and were not driven by a particular strategy.

Mr Stevens said that the AG did very well especially on the issue of gender equality. He also noted that there was a rise in the number of African employees but there was no change in the number of coloured and the Indian employees had gone down. And in the category of disabled people, employees were all male. He asked what basis they use to come up with the targets of 80% of employees of target groups and 20% of non-targeted groups. He pointed out that they had overshot the targets and the out come was a ratio of 84% to 16% but if this was better than the 80% to 20 % ratio then 100% to 0% would be ideal. He asked what the actual targets were and what point they were trying to reach.

Mr Nombembe said that with regards to the gender and race split there was a more defined target that was reached through extensive research that lead them to the 80% to 20% target. The fact they had overshot the target, he felt, was an indication of the effort that was put into reaching the target. When it came to putting in this target it was an average target based on over compensation on the trainees’ and management side and both were to the wrong extremes. He said that the target was a minimum and there was no ideal for where it should stop.

Mr Thembekile Makwetu (Deputy Auditor General) added that their key focus was to build a ‘qualitative 80-20’, From time to time the number of people coming through their environment, because of the nature of the training contract, come in for a very short period of time and then leave. From within that base of trainee accountants they were focused on driving issues of retention and start growing the leadership from within. The big challenge was that they were unable to retain people who had learnt and grown in that environment. Large number of those who left were Black. They were trained, work for three years then go and work elsewhere. He felt that they lost out on quality and the cost of auditing as well as the earlier investment in their training. When they start to mature in the auditing environment they tend to leave. He felt that it was the right approach to develop the AG’s management capacity from the 84% from within the AG’s ranks. The potential was there but the focus was not there. He said that if you were to drill down into the qualitative aspect of the make up of this you would have a predominantly white senior management and there was balance that was needed to be struck over the next few years.

Eddie said that there was a great problem with the fact that many Black professional were in great demand in the private sector. He asked what percentage of trainees was being lost.

Mr Nombembe said that an interesting aspect was that those who had moved to the private sector had ended contacted the AG for opportunities.

Mr Johnson said that any effort being made, within the industry that sought to bring about a strategy that worked to bring up the numbers. Even a strategy that would include government, for example, Thutuka.

Mr Nombembe answered that co-ordination was happening through Thutuka, where the focus was to grow a pipeline of people in the system. He said that there was a recent session held by the trustees of Thutuka (where the AG was represented) and the Vice-Chancellors of the universities that dealt with this question specifically. There may e many people that could come into the system but the universities did not have sufficient capacity to absorb that large number. He said that the phenomena that was occurring all the firms put together did not have the number they need in order to train accountants because of the shortage at varsity level. There were interesting commitments that would culminate in involving the relevant to government departments.

Mr R Mahlaba (ANC)said that the work done through the report showed commitment and success. He asked what was the quality of service that was provided in terms of contract work.

Mr Nombembe said that they did monitor the quality of the contract work in two ways. One was the actual assessment of the technical audit work. Two, which was less formal, through the reputation index and surveys where the stakeholders gave feedback on the firms that the AG sent out He said the information they received from these survey was valuable and they did act on the feedback. He said that in instances where they had sent firms the understanding of the business was not at an ideal level.

Mr E Trent (DA) mentioned the retention strategy. He asked if they had a specific policy that was spelled out with goal and deadlines or were there just general interventions.

Mr Makwetu said that, as part their on going engagement with this issue, they had come up with a plan n their offers that dealt with skills transfer amongst other things. They wanted to found out why people left. They found that the main issues were that people felt that they were not getting enough experience or exposure in this environment to increase the chances of future employability. He said that it did not have much to do with what people earned but more the relevance of the employees in a future job market.

Mr Nombembe said that all this would be included in the HR strategy to deal with current challenges that they were having.

Mr Young asked what the chances were of an employee being able to do an MBA course through the office of the AG.

Dr Woods asked if they if they were satisfied that the outsourced audits were complying with their standards of reporting. He added that he got the impression that the AG audit reports compared to the outsourced audit reports were different. The outsourced audit reports they did not raise compliance issues.

Mt Nombembe said that was the case in the past until they had issued a directive on the standards that needed to be complied with for the audit. His office needed to have an exercise that would check that all the firms that were doing work in the public sector were complying fully with the directive.

He then asked if the AG had done its own audit would the report have been as clean as the report done by BDO.

Mr Nombembe answered yes. No organisation could have everything done 100% but it was the significance of the issues that counted.

Mr D Gumede (ANC) then referred to the auditing of performance information and the strategic plan of the AG. He said that nothing was reported by the AG for auditing purposes which was reflected in the strategic plan as required by section 20 (2c) and 28(1c) of the Public Audit Act but the Committee did have a report that had the actual report which was budgeted for. He asked for an explanation for this?

He then asked how the AG came to identifying the milestones identified in the report and what the milestones were.

Mr Nombembe said that they were in the strategic plan but they failed to provide the details of what their achievements entailed.

The Chairperson said that the information in this section of the report did not assist the Committee to evaluate performance effectively as they did not know what the AG had 100% compliance with.

Mr Nombembe answered that the strategic plan had the details of the milestones up until 2010 where they expected to have issued an audit opinion on performance information for departments. Because of the different levels of readiness they were doing it in phases.

Dr Woods referred to the report where it stated that Section 13 of the Act which required that the AG determine the standards to be applied to such audits but it also said that the standards could only be determined after consultation with the oversight mechanism. They had not seen their plan for performance auditing not the standards. He asked to be taken out of the darkness.

Nr Nombembe said that it was included in the directives that were issued and the committee as asked to comment on it. He said that there would have been a process of consultation with the Committee before the directives would have been tabled. He was unsure as to when it was formalized.

The Chairperson said that the Committee may have been left out with regards to the standards of performance information auditing. She felt that it was a serious omission and she did not recall receiving any directives on performance auditing. She felt that these lapses in corporate governance were happening far too often. But she stood to be corrected as it may have been overlooked.

Dr Woods asked if the departments that the Office of the Auditor-General audited paid for the services.

Mt Nombembe said that they did.

The Chairperson then said that the committee would be dealing with the issues of performance auditing and performance information auditing. It would be set for discussion for the coming year.

Mr Stevens mentioned that the Committee needed to be consulted before any standards could be issued.

The Chairperson spoke on the section of the report dealing with learning and growth. She said that table proving information on the issue did not give details on the AG training programmes. She asked for more information on the AG investment in learning.

Mr Nombembe said that the manner in which they positioned learning and growth in the report was based on the ultimate qualifying statistics. It was people who had finished their studies not those who were still in the pipeline.

Dr Woods asked for more explanation on the methodology used for measuring performance. As he felt that the methodology was subjective.

Mr Nombembe said that the methodology was self assuring. They intended to encouraged the management team to take responsibility for control and not depend on auditors to tell inform them of the status of their control environment. They did have an objective way of confirming that what managers said on a monthly was authentic. Auditors did validate to authenticity of the self assessments. They had, till the present, picked up very little deviation between the independent or self assessment results.

In terms of the details of what happens, it was a simple process of defining what the control procedures should be and then identifying what questions management should respond to monthly to confirm that they had complied with established controls.

Dr Woods pointed that there was a fair amount of jargon referring to the system the AG used. The public, who this report was aimed at, may not understand. He could not figure out whether the team assessed did well or badly. He suggested that the section should be described in a more ‘friendly’ way.

Dr Woods said that he was under the impression that Corporate Services had a number of problems and this may have been very disruptive to the organisation. He asked for feedback to assure the Committee that that important division of the AG had been restructured.

Mr Nombembe answered that the AG had a clear milestone that by November 2007 they needed to have learnt all the lessons emanating from the restructuring of Corporate Services. They had gone back and re-modified that structure to the point where they were happy with their current structure and comfortable that it would deliver. If it did not perform now, it was a case of personalities and not structural defect which was the case before.

Mr Makwetu added that they had aligned functions in corporate services. They looked specifically and critically at the key functions within corporate services and tried to pull together those that worked well together as part of their servicing of the audit process. It was reflected in the report that there was now a permanent Chief Operations Officer that would purely be looking after Corporate Services. This person would now be ensuring that the information and communication technology, finances and human capital areas were geared towards providing services to the organisation as a whole and the audit business in particular.

Mr Johnson asked whether the Committee had committed any resources to the restructuring of corporate services.

Mr Nombembe said that he could not recall a specific number related to restructuring.

The Chairperson pointed that the AG was, amongst others, a key institution of democracy. And it made a huge contribution and their job was a contribution to social responsibility.

Mr R Mahlaba (ANC)asked where they put the issues of debt collection. He asked if there was a clear plan on debt collection. He also asked how much money was owed to the department.

Mr Makwetu said that they had tried many options to maximize the collection of debts. They had, in their most recent bilateral with National Treasury, highlighted their challenges with regards to outstanding debts. National Treasury has offered to assist the AG.

The Chairperson pointed out that the Committee was very pleased with the appointment of a Deputy Auditor General.

She then said that they would now draw up their annual report and then engage with the AG’s strategic plan and budget on the 31 October 2007. Then they would approve both reports on the Annual report by the 7 November 2007.

The meeting was adjourned.