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Standing Committee of AG 31 October 2007, Cape Town

Standing Committee of AG 31 October 2007, Cape Town. Budget 2008/09 Executive summary Acting CFO: S Boyd. Content. Purpose Income statements and balance sheets 2007 to 2011 Audit income Overheads Capital expenditure Funding Way forward. 1. Purpose.

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Standing Committee of AG 31 October 2007, Cape Town

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  1. Standing Committee of AG31 October 2007, Cape Town Budget 2008/09 Executive summary Acting CFO: S Boyd

  2. Content • Purpose • Income statements and balance sheets 2007 to 2011 • Audit income • Overheads • Capital expenditure • Funding • Way forward

  3. 1. Purpose • This is an executive summary presentation of the budget component of the AG strategic plan and budget for 2008/09. • To obtain SCoAG support for the AG budget for 2008/09. • As highlighted in the AG Strategic Plan and Budget 2009-11 the on-going funding challenge requires completion of research and analysis into an appropriate way forward for the AG and the government. • To obtain SCoAG support through appropriate resolutions for specific issues and risks including arrear debtors, tariff increases and on-going funding. • To understand any SCoAG concerns or requirements and action appropriately within the AG.

  4. 2. Income statements and balance sheets 2007 to 2011 (1 of 2)INCOME STATEMENTS • FC 07/08: Skills shortage continues to hamper financial results for 2007/08. Write-offs provision of R2m & doubtful debts provision increased by R8 m. Cost reduction actions of R15m in place. • B 08/09:Major focus on recruitment and setup of new audit business units to achieve 2008/09. • B 08/09: Overheads normalising below 30% in 2009 . Pre-liminary results from benchmarking shows within middle of the range. • B 08/09: 1% surplus (vs 3%) due to mainly BE, SM and general 4% per annum cap. • B 10-11: On-going focus to reduce contract work towards 20% in 2010 and 2011

  5. 2. Income statements and balance sheets 2007 to 2011 (2 of 2)BALANCE SHEETS • Balance sheet growth driven by audit income and staff growth as well as inherent business model. Special Audit Services Fund increase request assessed however overall funding requires resolution first.

  6. 3. Audit income (1 of 3)OWN INCOME 2008/09 VS 2007/08 • Audit income grows 28% versus PY. In terms of Own Hours Income 55% of this increase is due to increased hours and the 45% is due to salary increases of 7% and a general tariff increase of 4%. The increased hours is covered in more detail on the next slide. • In terms of Contract Work the increase is due to increased AG vacancy rate assumption, increase in hours as a result of similair drivers to own hours, increased pre-issuance activities and use of more senior staff than in prior years. CW tariff negotiations in progress.

  7. 3. Audit income (2 of 3)AUDIT HOURS • Overall main drivers for increased audit hours is driven by expanded existing audit coverage (risks and scope), new audits and performance auditing. The additional 2 working days, reduced span of control, additional audit business units and recruitment focus will provide the capacity. • Stabilisation of increases due to expanded existing audit coverage not expected until both parties management at CMM level 4. • Efficiency capability being established. Will include focus on efficiency improvements for 2010 and 2011. *

  8. 3. Audit income (3 of 3)AUDIT RATES • Movement in tariff intervals due to 7% salary increases, planned recruitment at market levels (i.e. high end of tables) and promotions. Overhead factor in the tariff formula at 207% materially consistent with prior year at 206%.

  9. 4. Overhead • Increased overheads largely driven by increased audit activity (28% increase Y on Y) and strategic imperatives (e.g. stakeholder reporting, leadership development, audit technical support, improved financial controls and systems, performance incentives, improved technology maintenance and tools and improved capability maturity). • SAICA research and analysis initiative pre-liminary results show international SAI overhead % of audit income between 25% and 35%. AG 28% slightly below median. SAI’s in benchmark are predominantly developed economies, with mature democracies and minimal investments in transformation. • New costs in 2008/09 include the performance incentive provision of R9m and once-off costs of R5.3m, mostly for ICT initiatives, and R3.6m for Afrosai conference. Excluding these costs the year on year increase reduces to 16%. • Increased focus on service quality and efficiencies planned for 2009. Benefits expected to materialise in 2010 and 2011. Efficiency objective will be to maintain capacity and produce more as the audit business grows. • Detailed analysis provided in notes in Annexure 1 of budget and strategic plan.

  10. 5. Capital expenditure • R50.1 million planned for 2008/09 versus R39 million for 2007/08. Represents a 29% increase. • Main drivers include: • New Gauteng and Brooklyn II premises furniture requirements. • General under investment in technology during past 3 years. R5m under spend in 2007/08. Technology refresh of out-dated country-wide regional servers. • Refer to Annexure 1 and note 19 for further details.

  11. 6. Funding (1 of 3) FUNDING STATEMENTS 2007 - 2011 • Business going concern funding statement format purpose to motivate retention of actual surplus. Actual deficit 2006/07 and forecast deficit for 2007/08. The AG requires approximately R63 million cash (including capital and interest) in 2007/08 to meet operating expenditure, capital expenditure and reserve requirements. • Statement does highlight funding deficit issue. Funding model requires re-examination.

  12. 6. Funding (2 of 3)‘STAND-ALONE’ FUNDING MODEL FOR 2008/09 • Significant mismatch between timing of inflows and outflows create cash flow problem. • Current model does not adequately cater for: • working capital requirements • managing contract work • capital expenditure and reserves for known future liabilities. • If the current model remains, the 8.3% vacancy rate is achieved and debtor patterns remain the same the AG will experience cash shortfall of some R89 million.

  13. 6. Funding (3 of 3)INITIAL PROPOSALS FOR CONSIDERATION • There appear to be a number of options available for consideration. Results, when finalised by the end of the year, of the SAICA/AG tariff and funding initiatives need to be taken into account. Possible options are: • Allocate audit budget to relevant treasury. AG recovers audit fees from relevant treasury. AG paid proportionately in advance at start of ‘planning’ and ‘fieldwork’ stages. ‘Reporting’ (20 - 30%) paid within 30 days of final invoice. AG tariffs increased to fund Capex and Reserves, after interest received. • Allocate Corporate Services, Reserves and Capex budget to AG. AG tariffs reduced to exclude Corporate Services. Increase tariffs for working capital funding costs, after interest received. • NT quarterly cash advance for operating expenditure. Increase tariffs to fund Capex and Reserves, after interest received. • Increase AG tariffs for working capital, capex and reserve funding. • Allocate audit budget to AG. Auditees’ note value of ‘service without charge’ in financial statements.

  14. 7. Way forward

  15. Appendices

  16. Gross profit contribution by band of staff • BE’s create a deficit. • 39% of AG gross profit contributed by AMs.

  17. Budget 2008/09 sensitivity analysisGross profit contribution by head and level of vacancies per band of staff • BE and SM contribution per head diminishing every year as a result of the tariff cap. • Current vacancy rate for AM is 20%.

  18. Budget 2008/09 sensitivity analysisSensitivity analysis of impact of vacancy rate assumption changes • Failure to achieve the 8.3% budget vacancy rate assumption will significantly impact the bottom line. • If the current vacancy rate of 14.6% remains in 2008/09 the surplus of R8.4 million will change to a deficit of R13.4m.

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