Reputation promise

SCoAG 30 September 2008 Page 1

Reputation promise

The Auditor-General has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector, thereby building public confidence.


Content

1. Budget Assumptions2. Projected Income Statement3. Income statement commentary4. Overhead5. Overhead commentary6. Audit Income movement7. Net surplus as % of Audit Income8. Strategies to achieve a net surplus of 6%9. Training and development10.Sensitivity analysis11.Debtors current position12.Suggestions of improving cash collections


Budget Assumptions

No limitations applied to tariffs Budgeted for anticipated headcount rather than predefined

vacancy percentage Tariffs determined by applying mark-up factor of 2.22 to direct

costs. Available hours reduced from 2025 to 2009 per head Tariff increases impacted by market related salary increases. Recovery rate percentage reduced from an average of 70% to

68.7%


Projected income statement

Actual Forecast Budget Forecast Forecast

31 March 2008 31 March 2009 31 March 2010 31 March 2011 31 March 2012

Rm

AUDIT INCOME 1,108.9 1,369.7 1,706.7 1,928.7 2,179.4

Own hours 648.8 796.9 1,124.5 1,270.7 1,435.9

S&T recoverable 42.3 60.3 74.8 84.6 95.6

Contract work 417.8 512.5 507.4 573.4 647.9

DIRECT AUDIT EXPENDITURE 829.8 1,024.0 1,129.0 1,264.7 1,429.1

Personnel 370.6 451.7 546.8 617.9 698.2

S&T recoverable 41.9 59.8 74.8 73.4 83.0

Contract work 417.3 512.5 507.4 573.4 647.9

CW % of audit income excl S&T 39% 39% 31% 31% 31%

Gross income 279.1 345.7 577.7 664.0 750.3

Own hrs gross profit 278.2 345.2 577.7 652.8 737.7

Gross margin % of audit income 25% 25% 34% 34% 34%


Income statement Commentary

• FC 08/09: skills shortage results in the increase in contract work and hence reduction in gross profit to 25%

• B 09/10 is based on available and achievable resources• 35.1% increase in own hours rates• Salary expenditure inflationary increase of 15%


Overhead

Operating cost

Staff Remuneration – support

Other personnel expenditure

Contract Work –Irrecoverable

Accommodation

Liaison

Professional Assistance

Technological Services

Auxiliary Services

Other

Forecast

08/09

368,950

135,090

28,447

19,601

41,928

17,363

54,805

26,451

11,621

33,644

Budget

09/10

493,905

198,017

35,521

18,120

47,970

29,142

79,737

32,616

14,468

38,314

Movement

Budget

124,955

62,927

7,074

(1,481)

6,041

11,779

24,932

6,165

2,846

4,670

%

34%

47%

25%

(8%)

14%

68%

45%

23%

24%

14%


Overhead commentary

• Increase in overhead is mainly driven by support service increase in staff numbers and a 15% budgeted salary increase compared to 7% the previous year.

• The increase in professional assistance is as a result of re introduction of compulsory technical training for audit staff


AUDIT INCOME MOVEMENT 2008-09 vs. 2009-10 BUDGET

•Audit income grows 32% versus PY. The increase in own hours is largely attributable to increase in tariffs..CWC increase is due to 8.2% shortfall in own hours capacity.

Budget

31 March 2009 31 March 2010 Movement

Own Hours

Available hours 3,628,800 3,607,056 (21,744) -1%

Recoverability 70% 69% -2%

Recoverable hours 2,550,771 2,476,333 (74,438) -3%

Average Tariff 336 454 118 35%

Value (R’m) 857 1,124.00 267.0 31%

Contract Work

Recoverable hours 896,113 1,038,387 142,274 16%

Average tariff 411 488 78 19%

Value (R’m) 368 507 139 38%

S&T Recoverable

Value (R’m) 67 74 7 10%

1,292 1,705 413 32%


Net Surplus as % of Audit Income

Forecast

31 March 2009

Budget

31 March 2010

Budget

31 March 2011

Budget

31 March 2112

Net Surplus / ( deficit)

(34,4) 66 86.8 93.3

Net surplus as % of Audit Income

(3%) 4% 5% 4%


Strategies to achieve a net surplus of 6%

Reduce contract work to less than 30% of Audit income Develop and retain key skills Introduce control measures to reduce the escalation of overhead

cost.


Training and development hours

Available Hours

Training Hours

%

Business executives

38,171 3,059 8%

Operational leaders 6,027 483 8%

Senior managers 261,170 20,930 8%

Audit managers 679,042 68,276 10%

Auditors 807,618 114,172 14%

Trainee accountants

1,815,028 302,064 17%

Total 3,607,056 509,784 15%


Debtors current position

• The collection of debtors remains a major challenge especially with local authorities and provincial governments whose average debtors’ days have increased by 39 and 13 days respectively. (Refer to table below)

• The poor payment history by local authorities is putting strain on cash flow.

2006 / 07 2007 / 08Local authorities 44% 83 122Provincial government 25% 21 34National government 16% 4 3Statutory entities 13% 81 50

Debtors Days% of Debtors

value

Debtor Group


Suggestions of improving cash collections

• Building relationships with Provincial Premiers and Director Generals. This would enable a quick and favourable response if Section 23(5) of the Public Audit Act (PAA) were to be invoked. This section states that a relevant Provincial Treasury may after consultation with the Auditor-General direct that audit fees recoverable from an auditee be defrayed from a vote on the provincial budget identified by the relevant provincial treasury.

• Letters of demand sent to auditees ( after 60 days) should be copied to the relevant Provincial Treasury , as an early warning flag of a potential debt which could end up being paid by the Provincial Treasury.

• Business Units which have assigned a Senior Manager as a debtors’ champion have proven to be more successful in cash collections than those who have not assigned one. The debtors follow up processes in these BU’s are similar and most important achieve results. These good practices should be rolled out to other Business Units.

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