Road Accident Fund 2020/21 Audit Hearing Deferred; with Minister

Meeting report

Opening Remarks by the Chairperson
The Chairperson started the meeting by alerting the Committee that some Members were attempting to connect but had network challenges due to the “perennial headache” that is loadshedding. He greeted and welcomed all the attendees. There had been some correspondence and other engagements that had prompted the meeting with the Road Accident Fund (RAF) audit report.

The Chairperson mentioned that the Committee planned to finalise the application for physical meetings. The virtual meetings were not adequate.

The Chairperson asked the Minister of Transport, Mr Fikile Mbalula, to give opening remarks.

Minister’s Remarks
Mr Mbalula greeted attendees. He said that he wrote to Parliament on 4 November 2021, tabling reasons for the delay in the tabling of the annual report.

In the letter, he wrote about RAF audited financial statements which were not concluded and were the reasons for the delay. Earlier this year, he corresponded with the Parliament providing reasons for his inability to table the annual report of the RAF for the 2020/21 financial year. This was a consequence of the impasse between RAF and the Auditor-General (AG) on the audit of the previously mentioned fiscal year. Subsequently, he submitted an update report for the 2020/21 financial year, which was tabled before Parliament on 30 March 2022.

The AG has since published the RAF audit report in terms of mandating prescripts. He further said that the Committee would appreciate knowing that the RAF declared a dispute with the AG and approached the courts to seek a judicial review of the AG’s findings. The review application is currently before the court.

Minister Mbalula said that as the executive authority of the RAF, he is mandated by law to ensure that the annual report and financial statements fairly present the state of affairs of the public entity, its business, its financial results, its performance against predetermined objectives, and its financial position as at the end of the financial year.

The accounting authority of the RAF contends that the dispute with the Auditor-General has a material effect on its ability to meet requirements of section 55(2)(a) of the PFMA. This is the crux of the matter. The implications of an incorrect classification of the business of the RAF – as an insurance scheme instead of a social benefit – may have a knock-on impact on whether the report tabled before Parliament fairly presents the business and financial results of the entity.

Minister Mbalula said he was under no illusions that accountability is the key tenet of South Africa’s democracy, and that organs of state are always bound by this imperative. This understanding has always informed the RAF’s approach on the matter. The existing fault-based system was the subject of the 1998 White Paper on the Road Accident Fund.

There was an investigation by the Satchwell Commission. In its final report, the Commission described the system as unreasonable, inequitable, unaffordable, and unsustainable. Based on the Commission's findings and recommendations, Cabinet approved the Road Accident Benefit Scheme policy on 7 September 2011, effectively replacing the 1998 White Paper on RAF. 

This policy provides a scheme of structured and defined benefits to those seriously affected by road accidents, in accordance with social insurance principles and not liability insurance principles.

This is a national policy, which unambiguously needs the RAF to integrate the social insurance provided by the Fund into the country's overall social security system.

The chairperson of the RAF Board, Mr Thembelihle Msibi, was requested by Minister Mbalula to lead the RAF presentation with the permission of the Chairperson.

The Chairperson thanked Minister Mbalula and asked the RAF delegates to give their presentation.

He asked for the correspondence, including the SCOPA legal opinion they sought on the matter, to be circulated to Committee Members.

Briefing by Road Accident Fund (RAF)
(The Chairperson of RAF had network challenges. The CEO was requested to give the presentation.)

The CEO of RAF, Mr Phutjane Letsoalo, greeted attendees of the meeting.

The RAF always wants to make sure that it accounts properly. That is what has been at the core of the RAF's dispute with the AG. In the presentation, one needs to look at the dispute from the point of view of what is being agreed, and disagreed, on.

The RAF and AG are in consensus that GRAP 19 does not apply to the RAF. GRAP 3 would also be detailed in the presentation.

Mr Letsoalo gave a full guideline of the presentation (see attached).

There was an interjection by a Member during the CEO’s explanation.

Mr R Lees (DA) said he was disturbed by the emphasis placed on a dispute between the RAF and the AG, and the technicalities involved. He was uncomfortable getting involved in a complicated dispute and the fact that the Members had been informed about the dispute was “essential”. He asked the Committee to consider whether it was a topic in which the Committee should get embroiled. He had views about the publishing of the annual report, but he said this was going to engage with later. 

The Chairperson said he was waiting to see the explanation provided because he shares that outlook. Parliament’s own legal advice was that the sub judice rule was not applicable in this matter. Therefore, SCOPA was well within its mandate to proceed with the hearing. 

That was the outlook which led to the scheduling of the meeting. However, the meeting was not meant to be a court hearing.

The RAF had framed three categories on the matter. The Committee wanted to hear them and not the disputes. The audited report had been tabled and it is before Parliament. SCOPA had not received any indication of its withdrawal.

He asked for RAF to proceed with the presentation.

The CEO said the RAF's 2020/21 annual report had not been tabled because of the disputes. He asked for guidance from the Chairperson on how he should proceed. The RAF planned to brief SCOPA on the reasons for the disputes. The RAF wanted to show the rationale and the nature of the dispute.

Issues of fruitless and wasteful expenditure and irregular expenditure were not the cause as the RAF and AG had agreed on the findings and engaged on these.

The Chairperson said SCOPA’s own legal guidance and advice was that the sub judice rule does not apply. The Parliament had received an audited report from the AG that had prompted the meeting. It was fair to hear the RAF’s own thinking and point of view. Therefore, a high-level explanation of the salient points was necessary. After the points had been made, the Committee would then decide.

Background: Mandate of the Entity
The RAF is a social benefit entity formed in terms of the Road Accident Fund Act of 1996. It is a National Public Entity (Schedule 3A of the PFMA).

(See attached for the background to the Audit Outcomes)

Change of Accounting Policy
Section 55(1)(b) and (2)(a) of the PFMA empowers the accounting authority to prepare financial statements in accordance with generally accepted accounting practice and to ensure that such statements fairly represent the state of affairs of the public entity, its business, its financial results, its performance against predetermined objectives and its financial position as at the end of the financial year concerned.

This is what had led to the dispute.

One of the key deliverables and priorities for the Board was the investigation of the escalating liability estimated at R330 billion as at the end of the 2019/20 financial year. During the investigation of the liability, management discovered that its escalation coincided with an accounting policy adopted in the 2013/14 financial year. This accounting policy was formulated using IFRS 4, which is accounting for insurance contracts.

Mr Letsoalo emphasised that RAF had no insurance contracts to talk about.

At the core of this accounting policy change was the obligating event for accounting for claims liability and, ultimately, whether the RAF is in the business of insurance or a social benefit fund. A dispute surrounding this matter arose between the AGSA and the RAF during the audit of the 2013/14 financial year.

The RAF management ultimately conceded under threat of a qualified audit report. The RAF is in fact a social benefit scheme and therefore does not have any insurance contracts. It is simply not an insurance company or involved in the insurance business. Furthermore, it does not fall within the definition of an insurance fund in terms of the Insurance Act 18 of 2017. The Prudential Authority, the RAF’s regulator, maintains that the RAF is fundamentally a social benefit fund.

Consultation with the ASB
The Road Accident Fund, after consultations with the AGSA, approached the Accounting Standards Board (ASB) intending to further investigate the rationale for the change in accounting policy in the year 2013/14 as the AGSA had indicated that the then accounting policy was a result of the directive, through a letter, from the ASB.

A meeting between the ASB and the RAF occurred in January 2021, in which the CEO of the ASB stated that the 2013/14 letter was not authoritative, but that entities should consider the application of IFRS 4 to identify insurance-like activities. To this effect, the ASB issued a letter to the RAF in February 2021.
 
The RAF was, up until this point, under the impression that it was obliged to apply IFRS 4 to its Annual Financial Statements (AFS). Had the ASB indicated that the letter was authoritative, the RAF would not have proceeded with the change in accounting policy.

This consultation culminated in the RAF starting a process, as expected at the end of every financial reporting period, to assess the accounting policies to prepare financial statements that give fair representation of the financial position of the RAF.

Development of New Accounting Policies
The RAF considered the available GRAP Accounting Standards and other international accounting standards as allowed by GRAP 3 to identify an accounting standard which best represented the economic substance of the transactions.

Where there was no GRAP standard applicable to the transactions of an entity, GRAP 3 allows the management to formulate accounting policies from accounting standards issued by other accounting standard-setters, namely the International Public Sector Accounting Standards Board (IPSASB) and the International Accounting Standards Board (IASB) that promulgate International Public Sector Accounting Standards (IPSAS) and International Financial Reporting Standards (IFRS) respectively.

GRAP 3 prescribes the order of application of Accounting Standards as follows: First the standards of GRAP, then IPSAS, and finally IFRS.  

As an appropriate GRAP standard could not be applied, the RAF management turned to the IPSAS standards issued by the IPSASB, per the preference stipulated in GRAP 3. IPSAS 42 on social benefits issued in 2019 was identified as an appropriate accounting standard that would reliably reflect the transactions of the RAF.

A new accounting policy was formulated using the IPSASB’s new standard for social benefits, IPSAS 42. This was done in line with the GRAP 3 standard that provides management with authority to apply its judgment in formulating an accounting policy.

Prior to the approval of the Annual Financial Statements by the Board of the RAF and submission to the AGSA, the AFS was subjected to an independent review by an independent accounting firm to ensure its management had correctly applied IPSAS 42 in the AFS. The AFS was submitted to the AGSA for audit in May 2021.

Dispute with the AGSA
On 25 June 2021, the AGSA issued a finding that disagreed with the new accounting policy that the RAF had adopted, and recommended the continued application of IFRS 4. The RAF management responded to the finding, providing the AGSA with all the technical considerations it used to arrive at the newly formulated accounting policy.

The AGSA however, concluded that the new accounting policy was inappropriate, despite the RAF’s management’s explanations and requests for the AGSA to obtain an external review opinion. This resulted in a dispute between the AGSA and RAF on this technical aspect of the audit which is a material disagreement.

Matters of Disagreement
The AGSA retained the view that the RAF performed insurance activities and that IFRS 4 was appropriate for the AFS. This view was maintained, despite the RAF’s clear demonstration that this was not the case and that the PA, the regulator of the RAF, considered the RAF a Social Benefit Fund.

The AGSA expressed the view that liabilities for claims against the RAF should be recognised at the date on which the accident occurred, even though management clearly demonstrated the fact that the RAF does not incur liability until a claim is registered with the Fund and found to be valid in accordance with all the requirements of the RAF Act.

The AGSA expressed the view that IPSAS 42 conflicted with the Conceptual Framework for General Purpose Financial Reporting as the application of the standard resulted in liabilities being recognised only when the claim had met the requirements of the RAF Act and not at the date on which the accident occurred.

The AGSA at no point responded to the technical considerations put forward by RAF management. They were merely overruled.

Dispute Resolution Process Followed
In accordance with the dispute resolution process recommended by the AGSA, the RAF management referred the matter to the Office of the Accountant General (OAG) in the National Treasury for mediation in July 2021.

Repeated engagements occurred between the RAF and the OAG where the technical aspects of the dispute were discussed, and representations made. The AGSA was not present at these engagements and the OAG assured the RAF that engagements between the OAG and the AGSA were taking place.

RAF management also requested the AGSA’s technical report on the matter for the report to be considered. The AGSA however has not provided this report to date.

In December 2021, the AGSA issued a letter to the OAG indicating that the audit would be finalised within a week, regardless of whether the dispute resolution process was complete. As such the AGSA did not allow the dispute resolution process to be completed before issuing the audit report for the 2020/21 financial year.

Mr Letsoalo concluded his presentation and asked if the Committee had questions.

The Chairperson asked if the dispute had been submitted to the Supreme Court of Appeal.

Mr Letsoalo said that RAF sent an interdict application for judicial review in April 2022. The review application is still before the North Gauteng High Court. As the hearing was taking place, the AG had not submitted its answering affidavit. The AG had to submit its answering affidavit on 27 May 2022. In accordance with uniform rules, the AG could get barred from mounting any future defence as it was not adhering to what a review application should entail.

The RAF had a judicial meeting in June 2022, where the AG said the matter would be heard in October 2022. This would happen if only AG adheres to its timelines.

The Chairperson asked for the AG’s input.

AGSA input

Ms Madidimalo Singo, Acting Business Unit Leader: National B,  AGSA, said that AG concluded the audited report for the RAF within the PFMA cycle. The process ended in dispute. In May 2022, the AG briefed SCOPA about the audit outcomes. Further, SCOPA had filed responding affidavits and these were filed in the first week of September 2022. The differences around the issue of accounting policy led to the matter being submitted to the courts.

The AG’s stance is that the ASB is the regulatory authority determining the accounting standards public entities should comply with. The AG has a responsibility to audit using accounting standards set by ASB. The ASB has not adopted the new standards used to develop the accounting policy. However, the ASB issued guidance on accounting standards that would apply to entities such as the RAF. As a result, the AG had to audit according to the accounting standards offered to RAF as guidance.

The audit report had been done to ensure that the financial statements fairly represent the affairs of the RAF. This had been done in accordance with the guidance of the ASB.

The AG wished not to further deliberate on the matter as it was a legal matter going through court proceedings. In due course, matters surrounding the disputes would be ventilated in the courts. The AG would acknowledge the conclusions made by the court about the disputes.

As a constitutional entity, the AG exists to ensure that there is accountability and oversight. The audit report was completed with utmost care. Tabling of the RAF audited report was aligned with enabling accountability and oversight. The process throughout had been guided by the appropriate accounting standards. The RAF may have had different views, but that would be ventilated in court.

The Chairperson reiterated that the Committee was a separate arm of the state, and that the merits and demerits of the dispute were substantive. However, the Committee wanted to have its own opinion. As the hearing was taking place on the audited report disputes, the sub judice rules did not apply.

He then allowed Members to engage in a discussion.

Discussion
Mr S Somyo (ANC) thanked the Chairperson for the opportunity and said that the RAF report had a lot of information about the dispute. This might have been a way that the RAF wanted to bring context about the disputes to the fore, particularly the areas of disagreement. As the matters were sub judice, the Committee should let the courts deal with such matters. This would help the Committee not circumvent the actual jurisdiction, per se. The Committee should go ahead with dealing with elements that require the Committee’s attention. Matters such as accounting practice and the practical aspects of failure or lapse of the board.

During the phase of the Committee’s own analysis of the report, there had been areas which the Committee thought were pertinent to the financial management. The Committee could therefore deal with those aspects. Some aspects required a physical meeting. The Committee would then engage with the Board. If the Committee’s reliance was away from the accounting entity, it would somehow seek to navigate away from the accounting practice that Parliament had set, which stipulated that the Board should remain accountable.

The CEO highlighted the matters. The Committee’s views were that the Board should come before the Committee and explain further the understanding and its findings. The Committee had a lever to consider the practical instances of accountability and lapses that relate to practices in the entity, which the AG would have identified in its report. 

He proposed that there should be a physical meeting where the RAF and the AG would be present. The focus would be on matters of concern as identified by the AG. The Board must be present as that would ensure accountability standards are maintained.

The Committee should focus on matters that the AG had raised. Lastly, the Board must be present at the physical meeting.

Mr B Hadebe (ANC) greeted all the attendees. As a Member, he had a lot of questions that he would have loved to ask. Some questions were on the audit outcomes into which the RAF did not delve.

There were general agreements which related to irregular, fruitless and wasteful expenditure. However, RAF did not say anything about that during its presentation. The presentation was cut short and ended on the status of the court proceedings. This indicated that the RAF did not consider the audit outcomes as stipulated by the AG. The presentation was incomplete, and it did not make sense to engage in an incomplete process, where it would be difficult to find answers.

The matter in dispute is still in court; how would a physical meeting assist as some discussions are postponed until the court's proceedings? What if the courts take too long to make a ruling? What would happen to the pertinent matters that require urgent attention? There were material differences and disagreements between RAF and the AG. It would have been convenient for Members to have an opportunity to ask clarity-seeking questions. Especially in the entire process of amending the policy, understanding the dispute resolution process and the outcome thereof.

Ms B Van Minnen (DA) thanked the Chairperson for the opportunity. She agreed with her colleagues. To proceed with the questions seemed futile. There is an inherent risk around postponements. The Committee had no idea how long the court proceedings would take. The physical meeting would be better served once the Committee had clarity on what is happening with court proceedings. Members had been adamant that there was a need for resumption of in-person meetings. The Committee could not be thorough enough through a virtual meeting, especially on a matter that was so delicate.

The Chairperson said that the matter was of extreme seriousness, because, in certain aspects, it sets precedents which Members may not find desirable for oversight, and which may delay oversight. South African courts are overwhelmed and under-resourced. The speed at which, at times, court processes move is never in the collective interests of justice, oversight and accountability. Particularly in the space of public financial management. The Committee had been overtaken by events. An audit report was in dispute and another one was coming out. Adding to the matter that had not reached a resolution.

A parliamentary venue was secured for a physical meeting and the date for the physical meeting was set to be 20 September 2022. Matters that are not in dispute would be discussed. Work must continue. During the meeting, the court processes would be discussed. The Committee would also consider whether it would not be in the interest of Parliament to enter this matter as an amicus curiae. The matter sets a precedent in motion that audit outcome management is inconsistent. This could open the floodgates of disputes and negotiated outcomes. That would mean that the AG and the Parliament would be in a difficult position. Certain clarity questions need to be posed about the audit outcome management. The Committee was in the hearing about a disclaimed audit outcome. The Chairperson referred to the disclaimed audit outcome incident as “the worst of the worst”. Without casting any aspersions, disputes and all court processes must not become the default position of entities and departments to try and circumvent processing or accounting for audit outcomes.

The Chairperson said that this did not in any way presuppose an aspersion on the Road Accident Fund, but it was a general principle of caution in terms of what the Committee must guard against. He urged the Committee to consider that as carefully as it would assert parliamentary authority in parliamentary oversight. By considering the principle, the Committee would also learn how to deal (in future) with matters of similar nature. He iterated that there might be more disputes of a similar nature, unless the Committee create the parameters now.

There are issues that the Committee could not discuss during the meeting, but the Chairperson suggested that it would be best to deal with matters then, noting that there had been some developments on the matter as the AG submitted more material documentation to be scrutinised which might have an impact on the outlook that the RAF had. While the Committee would be waiting for 20 September 2022, it would be looking at what it can and cannot deal with which might have progress on the matter as it stands.

Mr Somyo supported the Chairperson’s suggestion. He suggested that Members would appreciate the presence of the OAG in the next meeting. Any finalisation of the audited report ought to be based on the accountant general’s signature on the preferred standard at the issuance and finalisation of the report.

There had been “technical” issues that had been raised which would be more concrete with a signed letter from the OAG. The RAF said there had not been any signed letter from the office. If there had been one, the Committee would appreciate being furnished with such as it would confirm the actual signing of the audited report.

Mr Hadebe agreed with Mr Somyo. The ASB must also be present, which was mentioned in the presentation by the RAF. There must be delegates from the OAG as well. The Committee received communication that the matter was resolved on 4 December 2021. National Treasury must be present to give a more detailed report because the report the RAF provided was simply inadequate.

The OAG is located within the Department of National Treasury; therefore, it must be present in the scheduled physical meeting. Other matters would be dealt with in the physical meeting, including the AG delegates. It would be prudent if the AG could also have sight of the presentation by RAF and respond to some of the matters that had been mentioned. All the role players implicated in the presentation must be present in the physical meeting.

The Chairperson asked  Minister Mbalula, the Board and the executives of the RAF to take a cautious approach on the matter as it contains complex variables at play.

The Committee affirms that the audit opinion of the AG holds insofar as the Parliament is concerned.

The audit opinion provided sufficient basis for the Committee to proceed. However, the Committee did not want to prejudice the court processes. The court processes provide an opportunity for the RAF, the AG and the Parliament to structure audit outcomes management for the country. It is an exercise which must be embarked upon, and the Committee would consider all the material variables.

The meeting of 20 September 2022 would be structured but not limited to: matters that can be dealt with, necessary stakeholders and plans of making sure that the meeting is not an adjudication on the merits and demerits of the disputes which the Committee fundamentally believes the courts have sufficient capacity to handle.

The Chairperson said that the meeting was suspended to reconvene on 20 September 2022 and further details would be provided. The Committee implored all the relevant affected stakeholders to accept this as a necessary and constructive effort to ensure that oversight and accountability continue uninterrupted, parallel to whatever processes may be in play.

The matter of amicus curiae would be considered on certain aspects as a means to ensure that the Committee does have control over the matters about disputes and actions on audit outcomes. Also, to ensure that the matters can be better handled in future.

The audit report is before the Parliament and as a result, it requires the attention of the Parliament, its complexity notwithstanding. Further communication would follow.

Closing Remarks:
Minister Mbalula said, as indicated in his opening remarks, that there was no question of the government and its entities accounting to Parliament. As the RAF, they would be guided by the Committee on how the Committee chooses to approach the audited report tabled by the AG. He agreed with the Committee that areas not in dispute must be attended. This would be in line with the RAF’s commitment to ensure accountability to Parliament. He thanked the Chairperson for “steering the ship” and concluded his remarks.

The Chairperson thanked the delegates from various organisations that were present and assured them that further communication would follow.

The meeting was suspended to reconvene physically on 20 September 2022.