SCoAG update - Finance Turnaround Plan 31 March 2008

1. SCoAG update - Finance Turnaround Plan31 March 2008 Deputy Auditor-General Kimi Makwetu

2. Content • Background • Financial Management Capability • Finance Turnaround Plan • Project status • Monitoring and control • Conclusion

3. 1. Background • An Acting CFO was appointed and a finance turnaround project was mobilised in July 2007 as a result of the deteriorating performance of the financial management unit. • The financial management unit performance issues arose primarily as a result of inadequate leadership. • The diagnostic phase was performed during August to October and the weaknesses and areas of exposure identified. Key risk areas identified during the diagnostic were actioned in parallel to the diagnostic. A detailed turnaround plan was finalised in December 2007. • The Audit Committee has been appraised of the turnaround project findings, status and way forward in August 2007, November 2007 and February 2008. • This report summarises the current project status and way forward for SCoAG.

4. 2. Financial Management Capability (1 of 2)STRATEGIC ALIGNMENT • The vision of the AG is‘We are the independent world-class provider of public sector audit and related value-added services’. The constitution requires that the AG audit and report on accounts, financial statements and financial management of the government. • The AG has adopted the Financial Management Capability Model* (FMCM) as the de facto standard for assessing the adequacy of financial management of the government. • Consequently, it is an imperative that the AG demonstrates leadership at financial management best practice in terms of its own business. • The generic goals of the FMCM are: • To ensure that management have support for decision making; • To ensure the availability of timely, relevant and reliable information, both financial and non-financial; • To contribute to managing the risks to the organisation; • To help the organisation make efficient, effective and economical use of resources; • To establish a supportive control environment; • To enable the organisation to comply with authorities and safeguard its assets. • These goals are achieved by establishing 25 key financial management processes or practices and ensuring compliance thereto. The FMCM separates these 25 financial management processes into 4 levels. Each level and relevant set of processes is a building block for the next level up. * - source – Financial Management Capability Model Auditor-General Canada, 1999. Adapted for AG SA.

5. 2. Financial Management Capability (2 of 2)FINANCIAL MANAGEMENT FRAMEWORK • The AG has committed overall to achieving 75% level 2 and 25% level 3 of CMM by the end of the 2008 performance year. • The FMCM framework comprises 5 levels of maturity: • The finance turnaround diagnostic identified that although the AG has established Level 2 Control practices (and a number of Level 3 Information and Level 4 Managed practices) a number of the Level 2 practices had regressed and require renewed compliance focus and improvements. * - Note that the AG has introduced one additional level for purposes of auditing the government and hence assesses 6 levels of maturity. This new level, Level 2, is called the Developmental level and represents a transitory stage before achieving full ‘control’ status.

6. 3. Finance turnaround plan. (1 of 4)2008 PERFORMANCE MANAGEMENT • The finance turnaround plan has been developed based upon the results of the diagnostic performed in the second half of 2007 and the AG strategic requirement of achieving capability maturity of level 5 within the foreseeable future. World-wide experience has shown that it takes at least 4 to 5 years to progress from Level 1 to Level 5. • The objective for the 2008 performance year is to close the gaps and achieve level 2 – Control status. • The 2008 plan comprises 99 milestones distributed across the People, Product and Process dimensions. These milestones are under-pinned by a detailed plan for each dimension. The detailed plans have been work-shopped and agreed with the managers and staff in Finance. These milestones and plans form the core of the Finance business unit balanced scorecard and all finance staff individual performance contracts. These milestones are included in the Chief Operating Officer and Chief Financial Officer 2008 performance contracts.

7. The short term objectives are as follows: • Ensure Finance has competent long-term senior leadership and operating effectively by July 2008. • Ensure Finance has competent interim management operating effectively by February 2008 and overlaps with the long-term appointments. • Ensure finance staff are committed to realistic and measurable targets which under-pin the turnaround plan by the end of April 2008. • Ensure hygiene motivational issues are addressed including clear line-of-sight, job related pay, communication and performance management training for managers by August 2008. • Develop AG wide risk/internal control culture implementation plan by June 2008 3. Finance turnaround plan. (2 of 4)2008 OBJECTIVES & MILESTONES - PEOPLE

8. The short term objectives are as follows: • Deliver improved funding model and budget 2010-2012. • Deliver improved and relevant monthly financial reporting and forecasting to the AG executive management. • Deliver unqualified 07/08 AFS by 30 June 2008. • Deliver improved finance policies and establish service level agreements. • Establish improved executive and Audit Committee risk/internal control reporting by June 2008. 3. Finance turnaround plan. (3 of 4)2008 OBJECTIVES AND MILESTONES - PRODUCT

9. The short term objectives are as follows: • Resolve relevant high and moderate risk audit findings before 07/08 financial year end. • Achieve 100% level 2 – Control status in terms of processes and compliance by the end of the performance year. • Improve audit finding and diagnostic relevant processes and standard operating procedures by end of the performance year. • Ensure stability of financial systems throughout the year by actively participating in and influencing the Peoplesoft ERM upgrade. 3. Finance turnaround plan. (4 of 4)2008 OBJECTIVES & MILESTONES - PROCESS

10. 3. Project status. (1 of 3)OVERALL AND PEOPLE Overall status: • Overall progress and momentum is good. Actual percentage complete is 15% versus planned completion of 17%. The slight delay is due to later start of additional resources than planned. The critical path remains on track. People status: • This is the most critical component of the turnaround plan and receiving significant focus. The new structure has been approved and a full complement of 5 senior leadership (4 interim and 1 long-term) has been secured until end July 2008. The senior leadership includes the Acting CFO and Senior Manager Process (both CA’s) contracted in mid 2007. • A competent long-term CFO has been recruited, after a rigorous selection process, and will join on 1 May 2008. The Acting CFO will perform a controlled hand-over during May and longer, if required. The recruitment of the 3 long-term senior managers is well progressed. The recruitment of the 6 vacant manager positions has also commenced. • The 2007 balanced scorecard and performance ratings is well progressed and ready for audit.

11. 3. Project status. (2 of 3)PRODUCT Product status: • The funding model project sanctioned by SCoAG at the end of October 2007 has been mobilised. A position paper has been developed and agreed with internal stakeholders. The Minister of Finance and DG National Treasury has been briefed in principle. A pre-liminary review has been held with certain technical specialists in NT. A cash advance request has been submitted to NT and further follow-up will be scheduled during April. Refer to a separate detailed report on this matter. • The rolling forecast practice has been further rolled out in the AG. The latest rolling forecast for 2007/08 indicates that previous forecast deficit of R16.5m will be reduced to break-even or a small surplus as a result of operating and capital expenditure cost cutting started in October 2007. • A major focus is on ensuring that an unqualified/unmodified 2007/08 AFS is delivered by the end of June 2008. Initiatives started in the second half of 2007 (e.g. Balance sheet cleanup and resolving prior year audit findings) have made significant progress towards ensuring that the AG financial statements and accounting records and controls are in a good state for the year-end audit. Recent internal audits have indicated a significant improvement trend and management is confidant that the Annual Financial Statements will remain unqualified.

12. 3. Project status. (3 of 3)PRODUCT and PROCESS Product status (continued): • Improved financial reporting to the AG executive management is progressing per plan. • The Audit Committee had raised significant concerns at the November 2007 update. The Audit Committee was provided a detailed status update in February 2008 on the finance turnaround and management was complimented on the progress made to date. Process status: • 44 audit recommendations were made by internal and external audit in prior years. Significant focus has been placed on resolving the significant risk findings. 70% of all findings have been resolved to date and one remaining significant risk finding will be resolved during April. The remaining findings mostly relate to improving processes and standard operating procedures and these are planned to be addressed during the second half of the performance year. • A significant focus is on enhancing early warning risk and internal control Executive and Audit Committee reporting.

13. 5. Monitoring and Control • Weekly and monthly status updates are provided to the CFO by the Finance senior management. • A monthly Steering Committee, chaired by the DAG, comprising the Chief Operations Officer, Head of Auditing, Chief Financial Officer and Head of Human Capital reviews the status and risks relating to the finance turnaround project. • A monthly status, risks and issues report is presented to the Executive Committee. • The status of the finance turnaround project is a standard agenda item for the Audit Committee. • The status of the finance turnaround project is a standard agenda item for the Standing Committee of the Auditor-General.

14. 6. Conclusion • The Finance turnaround plan is detailed and clearly identified accountability for delivery. • The plan has been shared and is well understood by the Finance management, staff, the DAG, COO, Head of Auditing, the Governance unit, the Strategy unit, the Human Capital unit, the internal auditors and the external auditors. • The plan, although requiring significant effort and focus, is not complex. • The recruitment and handover to the long-term senior management will take place in a staggered and phased manner. The interim management will be released in a phased manner as knowledge transfer takes place and project momentum is protected. • Executive management is confidant that the turnaround approach and plan will ensure long-term financial stability for the AG.