South African Express Airways Annual Report 2010/11

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Public Enterprises

30 April 2013
Chairperson: Mr P Maluleka (ANC)
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Meeting Summary

The Committee met to receive a briefing by the South African Express Airways (SA Express) on its 2010/11 Annual Financial Statements. The Annual Financial Statement had been withdrawn and redrafted after a call from an anonymous whistle-blower exposed irregularities within the organisation.

The organisation reported that the irregularities were caused by accounting errors, tax issues and a disclaimed opinion on the financials and greatly damaged the reputation of the company. SA Express had also experienced liquidity challenges and cash flow problems. There was lack of internal controls and prevailing low staff morale. SA Express had identified weaknesses in oversight of controls as the root cause to the adjustments made. All accounting policies were reviewed by KPMG and found to be aligned to the International Financial Reporting Standards but it was however discovered that internal controls to enforce policies were not in place. Skills were reviewed and vacancies were filled. The forensic audit had been concluded and no fraudulent acts by any member of staff were found. The cases were closed.

Currently with the new Board of Directors and new auditors, there was increased board oversight and an improved relationship and oversight with the Office of the Auditor General. A new Chief Financial Officer had been appointed, the business process had been reviewed and cost containment initiatives had been commenced. There was improved monthly reporting between management and the Department of Public Enterprises, improved cash flow management and internal controls.

The new SA Express board was instructed to correct all misstatements and accounting errors in the financial records. This meant that the financial statements had to be redrafted. This process was discussed with the auditors and agreed to. However, after the materiality of the revision was known, the auditors became unsatisfied with the adjustments. All the changes not accepted by the auditors were contained within the Audit opinion and the Annual Report.  

The entity provided the Committee with an income statement outlining the impact of adjustment and the statement of financial position. The statements provided to the Committee stated the previously reported amounts, the redrafted value and the variance between the two amounts. In 2010, the redrafted amount of SA Express’s total assets was approximately R1.1 billion as against the previously reported amount of R1.6 billion. In 2011, the redrafted amount of the total assets was approximately R1.1 billion as against the previously reported amount of R1.9 billion. In 2011, the total liabilities of SA Express were total of approximately R474 million which was less than what was initially reported.

During the discussions that followed, Members expressed serious concerns about the manner in which SA Express was being run. Members said that the report on SA Expresses’ financials was the worst that they had seen in Parliament. They asked questions about the strategies put in place by the new board to ensure efficient and productive management, the bonuses paid to senior executive and the responsibility of the Chief Executive Officer for the scandals at SA Express.

Members also wanted to know if any staff member or group of people had benefited from the situation at SA Express. The Committee insisted to get a firm date as to when the 2011/12 financial statements and annual reports were going to be tabled in Parliament. The Chairperson said that the new Board of SA Express had the duty to resolve the crises which had been experienced in the past. It was clear from the presentation that the entity was in a serious crisis situation.

SA Express assured the Committee that the 2011/12 financial statements were going to be completed by July 2013.
 

Meeting report

Briefing by the South African Express Airways (SA Express)
Mr Andile Mabizela, Chairman, SA Express, presented an overview on the past and present situation at the organisation and an update on the audit.

Past and Present Situation at SA Express
Mr Andile Mabizela, Chairman, SA Express, reported that in the past, a withdrawal and restatement of SA Express’s Annual Financial Statements (AFS) 2010/11 had been authorised. This was due to accounting errors, tax issues and a disclaimed opinion on the AFS and greatly damaged the reputation of the company. SA Express had also experienced liquidity challenges and cash flow problems. There was lack of internal controls and prevailing low staff morale.

Currently with the new Board of Directors and new auditors, there was increased board oversight and an improved relationship and oversight with the Office of the Auditor General. A new Chief Financial Officer had been appointed, the business process had been reviewed and cost containment initiatives had been commenced. There was improved monthly reporting between management and the Department of Public Enterprises, improved cash flow management and internal controls.

Audit Update
Mr Inathi Ntshanga, Chief Excutive Officer, SA Express, provided the Committee with an audit update. The 2010/11 AFS had been completed and tabled. The 2011/12 AFS was being completed as the audit was being completed and the Audit Report was going to be tabled in Parliament by July 2013. The process had been delayed due to past aircraft structures that needed to be reviewed and included in the AFS. The 2012/13 AFS was on track as per the Public Finance Management Act (PFMA) requirements.

Mr Ntshanga said that SA Express was committed to meet all regulatory and statutory deadlines.

Analysis of 2011 Financial Situation
Mr Zanele Ngwenya, Chief Financial Officer, SA Express, told the Committee that the following major corrections had been made to the 2011 AFS:
-aircraft values
- rotable values
- current asset values
- revised estimates and accounting treatment for maintenance and assets

He said that the root causes of these errors included:
-non-compliance to accounting policies and procedures- human error
- lack of integrated systems
-skill and staff shortages
- lack of controls oversight.

Mr Ngwenya said that SA Express had taken corrective measures such as the improvement of accounting policies and procedures, improved internal controls, filling of vacancies with skilled staff, training programmes and induction to up-skill existing staff and a review of the information and technology systems to ensure that they supported and integrated the value chain of the business.

Mr Ngwenya provided the Committee with an income statement outlining the impact of adjustment and the statement of financial position. The statements provided to the Committee stated the previously reported amounts, the redrafted value and the variance between the two amounts.

In 2010, the redrafted amount of SA Express’s total assets was approximately R1.1 billion as against the previously reported amount of R1.6 billion. In 2011, the redrafted amount of the total assets was approximately R1.1 billion as against the previously reported amount of R1.9 billion. As at the 2010/2011 financial year, the total liabilities of SA Express totalled approximately R474 million which was less than what was initially reported. 

Mr Ngwenya outlined the issues relating to the withdrawal of the financials and the events that followed. After an anonymous call to the AG’s hotline, the financial statements were withdrawn. SA Express had identified weaknesses in oversight of controls as the root cause to the adjustments made. All accounting policies were reviewed by KPMG and found to be aligned to the International Financial Reporting Standards (IFRS) but it was however discovered that internal controls to enforce policies were not in place. Skills were reviewed and vacancies were filled. The forensic audit had been concluded and no fraudulent acts by any member of staff were found. The cases were closed.

The new SA Express board was instructed to correct all misstatements and accounting errors in the financial records. This meant that the financial statements had to be redrafted. This process was discussed with the auditors and agreed to. However, after the materiality of the revision was known, the auditors became unsatisfied with the adjustments. All the changes not accepted by the auditors were contained within the Audit opinion and the Annual Report.  

Synopsis of the 2010/11 Financial Year
Mr Ntshanga provided a synopsis of the 2010/11 financial year. During this period, there was a revenue growth of 4.40% and increased passenger carries of 1.01%. The fleet comprised of 27 planes with a load factor of 63%. The revenue per available seat per kilometer was 1.04c and on time performance had improved.

As at March 2011, SA Express had 1019 employees and the demographics were 57% black and 43% white of which 36% were female and 64% male.

Mr Mabizela told the Committee that corrective measures had been taken and the new board was committed to reviving SA Express.

Discussion
The Chairperson said that the new Board of SA Express had the duty to resolve the crises which had been experienced in the past. It was clear from the presentation that the company was in a serious crisis situation.

Ms N Micheal (DA) said that it was good that things at SA Express were being fixed. After the crisis, the Board of Directors took the responsibility for the scandal. However, it was important to know how much of the responsibility was taken by the CEO. It had been noticed that the previous CEO had been paid bonuses during the 2010/11 financial year. Why was the previous CEO getting bonuses? How far did the restatements at SA Express go and were the previous auditors who were used in the past being sued? Who was responsible for the approximately R40 million lost in the Congo Express programme? When would SA Express be asking for government assistance, guarantees and/or more money and how much was it going to ask for?

Mr Mabizela replied that the scandal was triggered by the whistle blowing event in September 2011. The current SA Express Board replaced the resigned board at the advent of the forensic investigation. The responsibility of the CEO was related to his role and responsibility. The external audit firms had concluded their findings and no fraud had been identified. The cleanup was still in process.
On the bonuses paid to the previous CEO, the bonuses were accrued from 2009/10 and other personal performance bonuses. No bonuses had been paid to her for the 2010/11 financial year.
On the restatements, it was a continuous issue and it had been agreed that it should be taken as far back as possible. The answer could not be given immediately but a better response was going to be given in the 2012 report.
The external audits went as far back as 2007 and it had to be established if the current evidence was available to the auditors at the time when the initial audits were done.

Mr Ntshanga said as CEO, he took responsibility for everything. The big issues were on the way forward and how to improve the company going forward. In addition, he stated that the Congo Express programme had started in 2010 and had closed down after 14 months.

Mr A Mokoena (ANC) said that there were very discouraging aspects about the SA Express management as raised in the briefing. The accounting inaccuracies were too many. How could SA Express deliver on its mandate with such inaccuracies?

Mr Mokoena recalled that an SA Express aircraft was said to have hit an animal on the runway, a claim had to be submitted to the Airports Company of South Africa (ACSA) for not properly maintaining the airport and the runway. It was important for SA Express to outline what it had learned from the Congo Express failure. SA Express should not repeat the mistakes it had been making.

Mr Ntshanga replied that SA Express had claimed for the damage from its insurer and the insurer would then claim from ACSA.

Mr K Dikobo (AZAPO) asked if anybody had benefited from the mistakes which were made. Was there any group of people who had benefited from the crises? His position was that the situation was not just errors. It was wrong for cases to be closed when there were such inaccuracies. The general perception was that people could make mistakes and government will bail the company out. How sustainable was SA Express?

Mr Ntshanga replied that as per the results of the investigations, no staff member, individual or group of individuals had been seen to have benefited from the situation at SA Express. The sustainability of SA Express was linked to the performance and leadership of the new board and also to the guarantees which were going to be sought from government.

Mr C Goloto (ANC) addressed three issues. Firstly, he hoped that the new CFO would bring stability and change to the organisation. Secondly, he asked how much money was needed for guarantees. Lastly, he asked about the SA Express voyager programme- did it have a different programme or were the miles aligned to SAA miles?

Mr Ntshanga replied that the voyager programmes were in collaboration with SAA. There were current discussions with SAA on the prices and worth of the miles. In addition, he replied that SA Express had applied for a guarantee of 1.1 billion. SAX had a Nedbank loan worth 200 million.

Dr G Koornhof (ANC) said that this was the most “condemning” auditing report he had ever seen in Parliament. It was a sad day for a state owned entity to receive such a disclaimer. The presentation was a 2010/11 report so the 2011/12 report had to be gotten as soon as possible so that progress could be established. National Treasury had requested monthly reporting to its monitoring team. Was this reporting being done? All the causes of the failure were due to internal faults and not external faults. Had anybody been found guilty? Were there any disciplinary actions, fines or sanctions?  It looked like maladministration in SA Express had no consequences.
On bonuses and incentives, had any senior managers or board members received any bonuses?
What was the implementation strategy and had any meetings been held with the National Treasury in this regard. Could SA Express allow the Committee to prepare a list of corrective measures for the entity?

Mr Zanele replied that the 2011/12 report was going to be tabled in the Committee in July 2013.
SA Express was working with the National Treasury and a policy review and due diligence had been concluded. This had been submitted to NT. SA Express had monthly meetings with the Department of Public Enterprises (DPE) in which NT also participated. SA Express welcomed the assistance from the Committee to help with proposals for improvement.

Mr Ntshanga said that investigations had been done and internal disciplinary action had been taken. There was a continuation of other investigations as it was discovered that the problems were not only financial. There were more issues of competence than issues of negligence. Training had also been taken seriously.
In 2011, no short term bonuses were paid to management after the financial crisis. There were no bonuses paid out. Any bonuses received were for past years and previous assessments. Non-executive directors did not receive bonuses. Management also did not receive any bonuses.

Ms G Borman (ANC) addressed the issue of Congo Express and asked what the challenges and barriers were in operation. How far back did SA Express had to go to get a proper audit and had the auditors been changed?
Could SA Express assure the Committee that all its vacant positions were going to be filled with competent people?
Was the rumor that there was going to be a merger of Mango, SA Express and SAA true?

Mr Mabizela replied that positions had been filled and by competent people. Training was however being taken seriously. There was the competence issue and this was caused by the movement of people within the company without the relevant induction and training. He said that SA Express could not speak on the merger as the matter was at Cabinet level.

The meeting was adjourned.
 

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