Cape Town - urgent action was needed to deal with the increasing strain being placed on the finances of the office of the auditor-general, Shauket Fakie, it emerged yesterday.

This was largely because of the serious financial difficulties faced by municipalities, which make up 29 percent of the office's total debtors for audit fees.

In a report tabled in parliament yesterday, Fakie said his office was also starved of permanent capital, with shortfalls totalling R41.5 million in 2000/01 and expected to rise to R50.1 million in 2001/02 before falling back to R41.4 million in 2002/03.

One result of this was that staff shortages had forced the office to make increasing use of outside auditors, though planned in-house training programmes were expected to bring this down over the next few years.

The R447.6 million budget for 2001/02 and R522.8 million for 2002/03 should be viewed, Fakie said, "against the background of continuing problems with administration in many local authorities, the ongoing difficulties in certain provinces and central government departments, and the accompanying increase in audit risk.

"The serious financial difficulties experienced by local authorities put the cash resources of the office under tremendous pressure. If financial assistance for the payment of audit fees by the relevant local authorities is not considered urgently, the office will not be able to conduct the relevant audits, which will have an adverse effect on the accountability process."

The amount due from audit fees of government departments and entities had grown steadily in recent years, hitting R303 million in 2001/02, or 68 percent of income, and was expected to be R398.3 million in 2002/03, or 78 percent of income. The office was, however, expected to show a surplus of R15 million in both years, which had to be used to repay R30 million loan from the treasury, amount other things.

Interviewed later, Fakie said he was starting to take "some serious legal action" to recover the outstanding audit fees, but further help was needed from the treasury.

In its comments at the end of the report, the audit commission warned that the funds set aside for personnel expenditure "may be inadequate to sustain the payment of appropriate market-related" pay in 2002/03, "which is necessary to retain and recruit competent personnel".

It had decided that, if necessary, the provision for staff could be increased by a further 4 percent and audit fees adjusted.

In addition, R2.5 million should be included in the budget as a provision for audits and investigations "in respect of which the recoverability of the cost may not be possible".

Fakie said his office needed a major upgrade of its service levels, ways of working and technology "in order to remain a relevant player that continues to fulfill its constitutional mandate".

The office also had to be developed into a "more professional audit office, which will not only be able to compete in the audit market but will also provide an effective audit and value-added service".

To this end, he planned to continue with a research project to map out the way forward to meet strategic goals on training, information technology and products. Last year R9.1 million was set aside for this project, and another R5.2 million would be spent this year.

With acknowledgements to Lynda Loxton and Business Report.