Road Accident Fund & South African Airways 2017/18 Annual Report, with AGSA input

Public Accounts (SCOPA)

04 May 2022
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary


In a virtual meeting, the Committee was briefed by the Auditor-General of South Africa on the audit outcomes of the Road Accident Fund and South African Airways. The Road Accident Fund had been given a disclaimed audit because it used the International Public Sector Accounting Standards 42 (IPSAS 42). However, IPSAS 42 conflicted with the General Recognised Accounting Practice when it came to the timing of recognising claims liability; further, it was not approved for use by the Accounting Standards Board. The impact of the change in accounting policy had been to reduce the Fund’s claims liability from R272bn in 2018/19 and R330bn in 2019/20 to R27bn in 2020/21. The Fund had challenged the Auditor-General’s opinion and the dispute had become protracted, but the Auditor-General had eventually published its audit report after the Fund’s legal attempt to prevent publication had failed. The Fund was still attempting to have the audit findings set aside.

Members of the Committee sought clarity on the range of acceptable accounting standards, the progress of ongoing litigation between the Auditor-General and the Fund and its implications for the Committee’s work, how the Fund had come to use an unrecognised accounting standard, whether the Auditor-General had been aware of this fact, and observed that regardless of which accounting standard was used, the Fund was still bankrupt.

The Auditor-General eventually completed the 2017/18 audit for South African Airways in February 2022 after it had been delayed due to business rescue proceedings. South African Airways had received a qualified opinion, while its subsidiary Mango had received a disclaimed opinion based on doubts about statements of its Going Concern status. The Auditor-General presented a timeline of key events leading up to the sale of a controlling 51% stake in the airline to Takatso Consortium. The Zondo Commission had highlighted a number of irregularities which required further action by the South African Airways board and law enforcement agencies. However, because the state would now be only a minority shareholder, the airline would no longer be governed under the Public Finance Management Act, and irregular, fruitless and wasteful expenditure would no longer need to be disclosed. A way of ensuring that the Auditor-General could still enforce accountability would need to be found.

Members of the Committee questioned the Auditor-General’s basis for commenting on the agreement between the Department of Public Enterprises and Takatso on the sale of South African Airways, given that it claimed it had not been allowed to see the agreement. They sought clarity on the role that the Auditor-General and Parliament would play in overseeing affairs at the airline when it was no longer a state-owned enterprise, and argued that the airline’s directors had been trading recklessly during the years between 2017/18 and the conclusion of the audit for that year.

Meeting report

Briefing by the Auditor-General of South Africa (AGSA) on the Road Accident Fund (RAF) audit outcome

Introductory Remarks
Ms Madidimalo Singo, Acting Business Unit Leader: National B, AGSA, explained that National B was a business unit within AGSA that oversaw the transport portfolio, which included the Road Accident Fund (RAF). AGSA would brief the Committee on the audit outcomes of the RAF from 2017/18 to 2021/22 with a focus on the most recent outcomes. There had been a general regression in the audit outcomes in this period. One of the reasons was a change in how the RAF had been accounting for the provision of claims, which are claims that arise from accidents in the RAF environment, for which it became liable. AGSA would take the Committee through the processes that had been followed to resolve the difference of opinion between AGSA and the RAF. Another reason for the regression was the material non-compliance in preparing financial statements and procurement and contract management prescripts. Lastly, there was an issue with the RAF's assumptions. She said it was important to reflect on the process that AGSA followed during the audit. It had tried to ensure that it had provided sufficient opportunity for the RAF to present its case. AGSA would take the Committee through the dispute resolution processes that the RAF had opted to follow and the outcome thereof. Some matters could not be discussed, however.

Quality of financial statements as a result of the change in accounting policy
Mr Vinay Ramballi, Senior Manager, AGSA, explained that the disclaimed opinion in 2020/21 had been driven by the change in the RAF’s accounting policy for claims liability. It used the International Public Sector Accounting Standards 42 (IPSAS 42). However, AGSA had found that IPSAS 42 conflicted with the General Recognised Accounting Practice (GRAP) when it came to recognising claims liability. AGSA’s understanding of the RAF Act was that liability arose immediately when an accident occurred, but under IPSAS42, it understood that the RAF only incurred a liability when an offer had been made to a claimant. Further, IPSAS 42 was not included in the list of accounting standards in Directive Five. The change in accounting policy had been to reduce the RAF’s claims liability from R272bn in 2018/19 and R330bn in 2019/20 to R27bn in 2020/21. The RAF had approached the Office of the Accountant General (OAG) to dispute AGSA’s disclaimer. The dispute became protracted and with no legal basis to continue delaying the finalisation of the audit, AGSA issued the audit report on 21 December, in which it concluded that the RAF’s use of IPSAS 42 had resulted in a material misstatement in the financial statements, leading to the disclaimer.

Irregular Expenditure, Going Concern status and management representation letter
Mr Ramballi said that additional irregular expenditure of R93m had been detected. It related to one award that had not been done regarding the Preferential Procurement Policy Framework (PPPF). He observed that even according to the RAF’s preferred accounting policy, it was still in a current liability position. Thus it was uncertain whether the entity would be able to meet its obligations in the foreseeable future. AGSA’s position was that this uncertainty and the RAF’s plans to mitigate it had not been adequately disclosed. A further basis for the disclaimed opinion was that AGSA had not received the management representation letter required in the GRAP.

Audit finalisation
Mr Ramballi said that the finalisation had been delayed by the dispute about the appropriateness of using IPSAS 42. In concluding the audit in December, AGSA had requested engagements with the Audit Committee and for RAF to provide adjusted financial statements and written representations, as mentioned earlier. These were not provided promptly; hence, AGSA had finalised the audit without these inputs. AGSA issued a courtesy letter to the RAF on 21 December 2021, reminding it of its responsibility to table the audit report as part of its annual report. AGSA then concluded and published the audit report 31 March 2022.

Litigation by RAF against AGSA
Mr Ramballi reported that the RAF served a notice of motion on 15 January 2022 in two parts. In Part A, the RAF attempted to interdict AGSA from publishing the audit report, and in Part B it attempted to have the audit report set aside. AGSA had successfully opposed Part A, although the RAF had filed an application for leave to appeal and was drafting its answering affidavit to part B.

Key focus areas, drivers of internal controls and recommendations to the Committee
Mr Ramballi summarised key focus areas of the audit report. These included the reasons for the disclaimer and information technology  (IT) system vulnerabilities that had led to a malware attack. He drew attention to AGSA’s view that intervention was required concerning oversight responsibility, reporting and compliance. AGSA also did not believe that the courts were suitable for resolving technical accounting disputes. AGSA recommended that the Committee follow up with the RAF on actions taken and planned to resolve the audit findings and avoid similar problems in future, and on filling key executive vacancies.

The Chairperson reported that the Committee had been cited as a respondent in an RAF-related litigation process before the courts. A briefing by Parliamentary Legal Services would be scheduled. He explained that the matter would have no adverse implications for the Committee as it was merely cited as a respondent.

Mr S Somyo (ANC) observed that any policy permissions dealing with matters such as accounting treatment would have to arise out of a formally authenticated accounting standard by the OAG, an entity of National Treasury (“Treasury”). He said it would be useful for the Committee to hear from Treasury on this matter because AGSA did not develop accounting standards.

The Chairperson replied that Treasury was not represented in the meeting but it would be included in the meeting of 17 May 2022.

Ms Singo explained that accounting standards were set by the Accounting Standards Board (ASB). AGSA followed these standards when conducting audits. Treasury’s involvement in the RAF case was limited to its assistance in the dispute process, and AGSA could only audit the information made available to it.

Mr B Hadebe (ANC) asked whether the RAF had given reasons for switching to the IPSAS 42 standards. Was it entirely up to an entity to choose its standards? Could AGSA clarify what Directive Five entailed? What was the feedback from the OAG that the RAF had disagreed with?

Ms Singo replied that Directive Five was issued by the ASB, and it instructed entities on appropriate accounting standards depending on the type of entity. The accounting officers of the RAF had been within their rights to choose an accounting policy, but they could not adopt a standard that had not been made available for use through Directive Five.

Mr Ramballi explained that the reason given by the RAF was that the change was to achieve a fair representation. The OAG had also concluded that the use of IPSAS 42 was inappropriate.

Mr Hadebe asked AGSA to clarify the contents of Part A of the RAF’s court action, which the AGSA had successfully opposed, and any aspects of Part B that were not sub judice.

Ms Singo explained that Part A had attempted to interdict AGSA from issuing the audit report on the RAF and that AGSA had successfully opposed it. Part B related to the merits of the audit report, and AGSA was in the process of responding to it.

Mr Hadebe asked whether any aspect of Part B might interfere with the Committee’s ability to discuss the contents of the report, since it sought to dismiss some of the findings. Were there parts of the report that were sub judice?

Mr Walter Bhengu, Senior Manager: Corporate Legal Services, AGSA, replied that since the report had been published, no part was sub judice, and the Committee was free to engage with any part of it.

Mr A Lees (DA) noted that the RAF has been bankrupt for many years. The fact that there was now a legal dispute about the extent of the bankruptcy was quite ludicrous. What legal costs had AGSA incurred in defending itself against this ridiculous action by the RAF? The RAF was evidently wasting taxpayers’ money on court actions instead of focussing on its core function. Did AGSA have an idea of what the RAF was hoping to achieve? The best that could happen would be a change in some figures on a bankrupt balance sheet.

Mr Bhengu estimated that the total costs to date were about R500 000.

Mr Lees was also disappointed that AGSA had not made stronger recommendations to the Committee.

Ms Singo replied that AGSA had realised that it was important that the Committee exercise thorough oversight over the RAF’s affairs, particularly concerning its Going Concern status. It would also be important that the Committee look at the action plans to address AGSA’s findings.

Ms N Mente (EFF) said that the RAF’s disclaimed audit opinion indicated something was fundamentally wrong. Had AGSA noticed any red flags that could have predicted the regression from the clean audit in 2019/20? Had there been any indication that the RAF would change its accounting standards? She accepted the explanations AGSA had provided but still struggled to understand how an entity could go from a clean audit to a disclaimer virtually overnight without anyone picking up any warning signs. It suggested a lack of understanding between the relevant entities. The RAF’s financial difficulties were well-known but there ought to be a relationship between the RAF, AGSA and Treasury when it came to auditing.

Ms Singo replied that the disclaimer in 2020/21 resulted from the change in accounting policy. In 2019/20, AGSA had been very comfortable that RAF was actually accounting for the provisions claims in terms of accepted accounting standards. Changes to the accounting policy had been discussed at the start of 2020/21 and AGSA had engaged RAF management on what the change would mean. She agreed that it looked like a complete turnaround, but the change in accounting policy was at the core.

The Chairperson agreed that the complete turnaround of the RAF’s audit result was interesting. Had there been a change in the personnel conducting the audit in 2020/21?

Ms Singo replied that the only change to the team had been at leadership level, where Mr Nicholas Mokwena had joined.

Follow-up discussion
Ms Mente asked whether AGSA had only found out that the RAF was using IPSAS 42 when it arrived to do the audit. Had there been no red flag indicating that the RAF was changing its accounting standards? Could AGSA confirm that it did not recognise IPSAS 42 as an appropriate standard?

Mr Nicholas Mokwena, acting Business Unit Leader: Transport Portfolio, AGSA, replied that AGSA had been engaging with the RAF management on the change in accounting policy since June 2021 to prepare financial statements. Management was allowed to change the accounting policy but it had to be done following the prescribed reporting framework, and AGSA’s responsibility was to evaluate the appropriateness of a change in accounting policy. AGSA did not believe the change was appropriate, hence the disclaimed opinion. There had been engagement with the RAF management and AGSA was well aware of the matter at hand. It was just that AGSA and the RAF were not finding each other.

Ms Mente maintained that it was not yet clear whether, before it conducted its audit, AGSA had been aware that the RAF was going to prepare its financial statements according to a standard recognised internationally but not by the ASB. Had it advised the RAF that it was using an unrecognised standard, and if so, what had the RAF’s response been? It was important for the Committee to know this before it engaged with the RAF.

Ms Singo replied that AGSA had engaged with the RAF as soon as it decided to use IPSAS 42. AGSA had advised the RAF that this standard was not available for use, and this engagement was at the core of the dispute.

Ms Mente asked whether AGSA had written to the accounting authority and the executive authority of the RAF about the difficulty in using an unrecognised accounting standard, even after having been advised not to use it. If so, what had its response been?

Ms Singo replied that AGSA had engaged with the accounting authority, management and the audit  committee. AGSA had been very clear about the appropriateness of the accounting policy that had been adopted and the resulting consequences. AGSA had also sensitised the executive authority about finalising the audit process and proceeding to table the audit report. This was reflected in the briefing document presented to the Committee.

Mr Hadebe observed that the RAF had decided to change to another accounting standard after receiving a clean audit in 2019/20 and had explained the change by saying that it wanted to achieve a fair representation. Had the clean audit not given a fair representation? What was the fair representation that the RAF had not achieved when it received a clean audit? What were the reasons for excluding IPSAS 42 in Directive Five? What were the consequences, if any, for willingly and knowingly choosing accounting standards not approved in Directive Five, and what body would be responsible for effecting these consequences? The Committee should recommend that such consequences be mandated if they were not already.

Mr Mokwena replied that in the prior years, financial statements were fairly presented hence it was able to issue an unmodified opinion. In the current year, AGSA held the view that the financial statements were not fairly presented hence it issued a disclaimed opinion. IPSAS 42 had been excluded from Directive Five because the ASB was still determining the appropriate accounting standard for entities like the RAF.

Ms Singo replied that she was not aware of a particular regulatory body tasked with effecting consequences for using an unrecognised accounting standard. However, she thought that it was safe to say that there was a responsibility on those charged with governance to engage the RAF and reach an understanding of its reasons for using IPSAS 42. The duty of AGSA was to issue an opinion, and it was then up to the oversight structures to interrogate the opinion and take the necessary actions.

Ms N Tolashe (ANC) asked for confirmation of whether IPSAS 42 was acceptable according to South African accounting procedures.

Ms Singo clarified that IPSAS 42 was an internationally recognised standard but had not yet been recognised by South Africa’s ASB for use by entities like the RAF.

Ms A Beukes (ANC) asked if there were any ongoing engagements between AGSA and the RAF other than the legal battle. She was concerned that the two entities would be unable to rebuild their relationship through a legal battle.

Ms Singo acknowledged that the two entities needed to continue working together despite the challenging nature of the 2020/21 audit process. They had resolved to rebuild the relationship.

The Chairperson observed that there was a lot to digest. It had become clear that a clean audit did not translate into service delivery. It was now incumbent on the RAF to explain itself before the Committee.

Ms Tolashe said that the Committee should take it upon itself to find a way to resolve the issue between AGSA and the RAF. There seemed to be no co-operation between the two entities.

Briefing by AGSA on the South African Airways (SAA) Audit Outcomes
Ms Zolisa Zwakala, Head of Portfolio Regularity Audit, AGSA, recalled that SAA had been in business rescue from December 2019 until April 2021. This had led to the audit for 2017/18 being paused. It was eventually concluded in February 2022, which explained why the presentation was a bit dated by regular standards. The past four years of financial statements were due by the end of May 2022.

Mr Fhumulani Rabonda, Deputy Business Executive, AGSA, presented a timeline of key events leading up to the sale of a controlling 51% stake in SAA to Takatso Consortium. The SAA Group had been earmarked for implementation of AGSA’s expanded mandate concerning material irregularities. Although no material irregularities had been identified yet, the Zondo Commission had highlighted a number of irregularities which required further action by the SAA board and law enforcement agencies. However, because the state would now be only a minority shareholder, SAA would no longer be governed under the Public Finance Management Act (PFMA), and irregular, fruitless and wasteful expenditure would no longer need to be disclosed. Ensuring that AGSA could still enforce accountability would need to be found. He summarised the findings of the 2017/18 audit, in which SAA had received a qualified opinion while its subsidiary Mango had received a disclaimed opinion based on doubts about statements of its Going Concern status. He discussed irregular, fruitless and wasteful expenditure, which had not been fully quantified by SAA management, and the reasons and root causes of SAA’s qualification. AGSA recommended that SAA develop an effective action plan to address root causes and take note of the 2017/18 findings when preparing financial statements for subsequent years.

Mr Lees said that the Committee had known for a long time about the sad state of affairs at SAA. He recalled that the Committee had previously received financial statements from each of SAA Group’s subsidiaries, whereas now the Group’s statements were presented in consolidated form. He suspected that Mango had had to go into business rescue because it was not a going concern, but because of reasons tied up with the sale of SAA to Takatso. Did AGSA accept that the SAA Group was a going concern in 2017/18?

Ms Zwakala said that AGSA was required to look into the future of an entity for at least 12 months when assessing whether it was a going concern. There were many uncertainties at Mango and AGSA had to evaluate the initiatives SAA was putting in place to mitigate them. These had been described in detail by SAA in Notes 50 and 51. In its audit report, AGSA had drawn attention to the fact that there were still some uncertainties around SAA’s Going Concern status but also noted the initiatives being implemented to respond to them. When it came to Mango, she noted that COVID-19 had had a deep impact on the airline industry and that it had already been in business rescue when AGSA had prepared its report.

Mr Rabonda added that AGSA had issued individual audit reports to each entity and there was a responsibility to table these reports in Parliament.

Mr Lees asked on what basis AGSA was commenting on the agreement between the Department of Public Enterprises (DPE) and Takatso, given that it claimed it had not been allowed to see the agreement. How did AGSA know that Mango was excluded from the sale, for instance? It was both incredible and disappointing that AGSA had accepted that it would be precluded from seeing the agreement. Could AGSA provide legal reasons? It was known that Treasury was unhappy with certain aspects of the agreement, yet AGSA seemed comfortable in letting things take their course.

Ms Zwakala denied that AGSA was comfortable about not having seen the agreement. There were also other documents accompanying the transaction that AGSA did not have. However, there was no reason for AGSA to think it would not be provided with the agreement in due time. If the Committee wanted to see it before then, perhaps it could engage with DPE?

If the agreement was signed, Mr Hadebe asked AGSA to give more explicit detail on what it would no longer do in terms of the PFMA and its mandate. What outstanding matters could the Committee continue to pursue? He appreciated that AGSA had tried to explain in the presentation but was not crystal clear. The Committee needed to know exactly where it would still have work to do and the areas that would fall outside its mandate once the agreement was signed. Would it still be possible to pursue matters outstanding from before the agreement?

Mr Rabonda replied that the PFMA had applied to SAA when it was a state-owned entity (SOE). Although the state would no longer have a controlling stake in the company, it would still hold 49% of the shares and this asset still needed to be overseen. The sale did not mean that AGSA and the public sector would simply wash their hands of the asset. However, he could not give details of how oversight would be done before the agreement was finalised.

Follow-up discussion
Mr Lees pointed out that AGSA had accepted SAA’s assertion of its Going Concern status in 2017/18 based on developments that had taken place in 2019 as well as the unseen agreement that gifted 51% of the company’s shares to Takatso. Had it conducted the audit at the proper time, these events would not have taken place yet and it would therefore have been unprofessional for AGSA to have accepted SAA’s assertion. Would AGSA agree with the conclusion that SAA’s directors had been trading recklessly in the three years between 2018 and 2021?

Ms Zwakala agreed that AGSA’s opinion might have been different had the 2017/18 audit been conducted at the proper time. There have been various significant developments since then. AGSA was not silent on the problems at SAA in its report, and she maintained that AGSA had been vigilant. She noted that both the PFMA and Companies Act applied to SOEs like SAA, and other entities like the Companies and Intellectual Property Commission (CIPC), responsible for drawing attention to potential reckless trading at SOEs. They might give directors a chance to explain the situation. She admitted that it was a complex question.

The Chairperson noted that the situation at SAA was a headache that did not subside.

Mr Hadebe observed that the outstanding SAA audits would still have to be finalised and the Committee would be obliged to exercise its mandate in this regard. Would the new shareholders be the ones responsible for this going forward? As things stood, the Committee knew that the SAA board would have to account before the Committee and its accounting authority, but what would happen after the sale?

The Chairperson agreed that this was a pertinent question. The Committee and AGSA would need to focus on the sale agreement, which should provide the roadmap and the kind of due diligence to arrive at the decision to dispose of 51% of SAA even in the absence of almost four years of audit outcomes. This was a critical element and was why SAA’s financial management matters had been such a headache. Continued patience would be necessary as the Committee peeled this onion because it was uncharted water for everyone. Could AGSA clarify what would be done about the outstanding audits?

Ms Zwakala replied that there were at least three years of outstanding audits. AGSA would complete these audits and table the reports to the Committee as usual, although the 2022 audit would only cover the fraction of the year during which SAA was still an SOE. AGSA was engaging with DPE on its role once the sale was concluded. These details had not yet been fully finalised.

Closing Remarks
The Chairperson thanked AGSA for the briefings. He observed a degree of evolution in the auditing space and Parliament’s oversight role concerning SAA and the RAF, but the Committee was equal to the task. A draft report on the follow-up oversight to Eskom was scheduled to be adopted on 11 May 2022. This visit had followed on from the fact that Eskom had fulfilled just nine of the 23 recommendations the Committee had made during its 2019 oversight, leaving little reason to wonder why the load shedding situation was as bad as it was.

The meeting was adjourned.

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