SCoAG Update -Auditor General Consideration of alternate Funding Options

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SCoAG Update -Auditor GeneralConsideration of
alternate Funding Options

• April 2008

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Content

• Primary Funding Options under consideration
• Retain and Improve existing model
• Chapter 9 allocation
• Way Forward

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Primary option 1 Retain and improve existing
model

• Option retains auditee billing and collection
  mechanism whilst addressing constraints which
  have been introduced to the tariff model over
  time. The following changes are required
• Remove all tariff caps currently restricting
  recoverability.
• Introduce additional tariff intervals for high
  cost staff.
• Reduce recoverable hours to realistic historic
  levels.
• Re-introduce tariff model symmetry.
• Revise allowable surplus margin from 3 to
  between 4 and 5.
• Determine tariffs based on the new relationship
  between direct audit staff costs and overheads
  .including a revised surplus margin.
• Recognise realistic vacancy estimates in the
  tariff determination process.
• Above would require an estimated 14.9 once-off
  adjustment to tariffs in financial year 2009/10.
• Revise billing and collection processes including
  a more active Treasury role.

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Primary option 1 Retain and improve existing
model cont/.

• Advantages
• Interaction between auditee and AG maintained in
  fee negotiation process.
• Linkage between service receipt and payment is
  maintained.
• Enables flexibility in application of external
  contract work.
• Recognises changed AG cost structure.
• Aligns AG tariffs with audit industry, approach
  albeit at lower rates.
• Disadvantages
• Effective cross subsidisation of poor paying
  auditees by paying entities.
• Rates will increase by an additional 14.9 as a
  once-off adjustment. Thereafter normal cost
  increases will apply.
• Significant management effort and focus on fee
  collections is retained.
• Increased bad debts from local authorities
  resulting from higher audit charges.

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Primary option 2 Chapter 9 allocation

• Option is aligned to the recommendations
  contained in the Report of the ad hoc Committee
  on the Review of Chapter 9 and Associated
  Institutions dated 31 July 2007. The commission
  was chaired by Hon. Prof. AK Asmal.
• The reports recommendations include
• The budgets of all Chapter 9 institutions should
  be part of Parliaments Budget Vote.
• The above process should be negotiated with
  National Treasury and should afford the
  institutions adequate opportunity to motivate
  their budget submissions directly to National
  Treasury before decisions on the budget
  allocations are taken.
• the programme within Parliaments Budget Vote
  for these institutions would still fall under the
  Public Finance Management Act and would be
  subject to accountability and audit arrangements
  common to other organs of state.

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Primary option 2 Chapter 9 allocation cont/.

• Advantages
• The effort associated with debt collection is
  avoided enabling audit staff focus on primary
  area of responsibility.
• Process aligned to global best practice.
  Universal international practice allows for
  centralised responsibility of AG funding.
• Disadvantages
• Dependency of approval of the budget by National
  Treasury.
• Additional scrutiny and possible impingement on
  independence.
• The additional monitoring and reporting
  requirements of the PFMA need to be complied
  with.
• Possible loss of focus on cost controls and the
  achievement of efficiencies.
• Potential additional funding requirements
  (brought about by say additional vacancies /
  contract work) will need to be separately
  requested and motivated.
• Removes the linkage between the entity for whom
  the work is undertaken and the entity responsible
  for payment. This may have a negative impact on
  the auditees approach towards the cost effective
  completion of the audit.

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2. Way forward

• The preferred funding option will be recommended
  after completing the following
• Interact with National Treasury at DG level
• Engage with SCoAG
• Receive input from the SAI Global Working Group
• Engage with IRBA
• Discuss and evaluate all options at AG EXCO
• The final recommendation will be made to SCoAG at
  the June 2008 meeting