The Committee met with the Auditor-General of South Africa, the Road Accident Fund, the Accounting Standards Board and the Office of the Accountant General, as a follow-up to its previous engagement to consider the Fund's audit outcome, the change in its accounting policy, and the court case relating to the audit process.
The Road Accident Fund (RAF) had received a disclaimer from the Auditor-General of South Africa (AGSA), with findings on compliance with legislation. According to the AGSA, the RAF management had amended the accounting policy to recognise claim liability and expenditure by International Public Sector Accounting Standards (IPSAS) 42, as social benefits. This had resulted in its accounting policy being in conflict with the conceptual framework of Generally Recognised Accounting Practice (GRAP) which applied to the entity, and the way in which it disclosed the provision for claims liability in the annual financial statements. The AGSA had concluded that the financial statements were pervasively misstated due to the use of IPSAS 42 to formulate the accounting policy. As a result, the provision for the outstanding claims liabilities, claims expenditure and the related disclosure notes for the current and prior year, were materially misstated. The misstatement was pervasive, as it related to the most significant matters – the account balance and class of transaction – in the financial statements, which in turn were linked directly to the key mandate of the RAF. The users of the financial statements were interested in the extent of the liability and the actual claims paid. Furthermore, any misstatement in this regard materially influenced the solvency and liquidity position of the RAF.
The Office of the Accounting General (AOG) made its position clear on the social benefits, obligating events and the availability of IPSAS 42. It affirmed that IPSAS 42 was not available for use by the RAF, as it was not listed, in Directive 5, as a standard to consider when applying GRAP 3. The obligating event for the RAF was the motor vehicle accident, and the RAF did not pay social benefits in terms of its mandate.
The Accounting Standards Board (ASB) also shared these sentiments, but it had unfortunately been dragged into a court action, which could set an unpleasant precedent. The court had ruled the ASB was a party with a material interest in the matter. However, the ASB was not a ‘party’ to the dispute – the matter was between the RAF and the AGSA. The ASB lamented that this matter would hurt its future work.
At the crux of all the questions and comments, Members wanted to understand why the RAF management and board had resolved to change the accounting policy, what the purpose of the court case was, and if the RAF management and board had explored all the necessary avenues before going to court. The RAF assured the Committee that it had done so, but so did the AGSA, which had submitted all supporting documents with timelines and reasons why in certain instances, the AGSA could not wait for the RAF management to finalise the audit process. During the audit process, the AGSA also used its technical team to assess and evaluate the impact of the change in the accounting policy, and all this information had been communicated to the RAF management.
The Deputy Minister requested some time for the Ministry to sit and deliberate on this matter, and would revert to the Committee within ten days.
The Committee made its position clear -- that it disagreed with the court action and was of the view that the RAF had not explored all possible avenues to avoid landing in court. It did not agree with the change in the accounting standard, so it disagreed with the court action. As things stood, the audit report of the AG had force and effect. The Committee reserved its rights, pending the ongoing consultations. It would decide on its report to the House as a matter of priority. Some matters would be deferred to the Standing Committee on the Auditor-General, to avoid being a player and a referee in this matter. It encouraged the Special Investigating Unit (SIU) to continue its work and ensure that those who were accountable were successfully prosecuted.
The Chairperson said that the Committee was still in the process of seeking legal advice on some of the issues surrounding the Road Accident Fund. The sub judice rule would not apply in the Parliamentary process, and it would be at the Committee’s discretion to decide how to take the matter forward. The Committee believed in the audi alteram partem rule – everyone must be heard. This was not an adjudication, but the Committee sought to hear everyone. The Committee must still be convinced that going to court was the last resort, having exhausted all the other avenues, and it was not convinced that all other avenues were exhausted.
The court case is a drastic step, and its precedent is the most worrisome. This was a family meeting. This drastic step opens the floodgates for many of the stakeholders.
Briefing by Auditor General of South Africa
Ms Sibongile Lubambo, Corporate Executive: Audit, Auditor-General of South Africa (AGSA), said AGSA
would take the Committee through the briefing document at a high level to refresh what was said in the last session. It would also address the audit process that led to the disclaimer outcome that the Road Accident Fund (RAF) had received.
Ms Hope Singo, Technical Assistant, AGSA, said the audit process of the RAF was finalised towards the latter part of last year, due to a change in accounting policy, which led to a formal dispute process. The audit report was then finalised, which was a disclaimer and accompanied by material findings on compliance with legislation. In simple terms, the AG was not able to express an opinion on the fair presentation of the financial statements that were presented to the AG, primarily due to the change in the accounting policy.
The AG believed that in carrying out its responsibility, it sufficiently engaged the RAF’s management on critical matters that impacted the audit opinion.
The presentation covered the audit opinion history; an overview of the 2020-21 audit outcomes; litigation by the RAF against the AGSA; modification paragraphs; key focus areas; drivers of internal control; overall conclusion and key recommendations to the Committee.
The audit outcome for the current audit cycle had regressed to a “disclaimer with findings.” The overall audit outcome of the RAF had regressed compared to the prior year. A disclaimer of opinion with material findings on compliance with legislation was issued for the 2020/21 financial year. The regression in audit outcome was a result of the change in accounting policy about RAF’s liabilities.
(See the presentation for a detailed explanation).
The AGSA concluded that the financial statements were pervasively misstated due to the use of International Public Sector Accounting Standards (IPSAS) 42 to formulate the accounting policy. As a result, the provision for the outstanding claims liabilities, claims expenditure and the related disclosure notes for the current and prior year, were materially misstated. The misstatement was pervasive, as it related to the most significant matters – account balance and class of transaction – in the financial statements, which in turn were linked directly to the key mandate of the RAF. The users of the financial statements were interested in the extent of the liability and the actual claims paid. Further, any misstatement in this regard materially influences the solvency and liquidity position of the RAF.
The matter was referred to the Office of the Accountant General (OAG) by the RAF last August, and the position of the OAG was finalised in December. The AG signed the report on 21 December 2021. It had waited for the OAG to finalise its position before signing the audit report.
(See the presentation for details)
Briefing by Office of Accountant General
Ms Karen Maree, Acting Accountant General, presented the three matters the OAG was dealing with concerning the subject matter – matters of disagreement between the RAF and AGSA. These matters were as follows:
Whether the activities of the RAF met the definition of social benefits as defined in Generally Recognised Accounting Practice (GRAP) 19 on provisions, contingent liabilities and contingent assets;
What was considered the obligating event of liabilities arising from accidents; and
Whether adopting IPSAS 42 was appropriate for the development of accounting policies in respect of the accounting treatment of obligations and expenses arising from motor vehicle accidents.
The position of the OAG in each matter was made very clear. As for the first matter, social benefits were always provided in collective arrangements. It was their interpretation that this implied that the benefits were collectively determined for the individuals or households and were not specifically negotiated as in the case of private insurance arrangements – or as in the case of the RAF. Therefore, they concluded that the RAF did not pay social benefits.
On the second matter, the OAG concluded that the obligating event for the RAF was the motor vehicle accident, as applied by the RAF in previous reporting periods.
On the last matter, the OAG was of the view that IPSAS 42 was not available for use by the RAF, as it was not listed in Directive 5 as a standard to consider when applying GRAP 3.
(See the presentation for details)
Briefing by Accounting Standards Board
Ms Jeanine Poggiolini, Chief Executive Officer, ASB, presented the problem statement; the history of the problem at hand; the status of International Financial Reporting Standard (IFRS) 4; the process of changing accounting policies; and the ASB’s involvement in the court action.
ASB’s involvement in the court ruling in 2022 was related to a joinder application filed by the RAF. The court ruled the ASB was a party with a material interest in the matter. The ASB joined as a second respondent in June 2022. The ASB was not a ‘party’ to the dispute – the matter was between the RAF and AGSA. Given the court ruling, the ASB did not oppose being joined and agreed to provide a responding affidavit. This was filed in August 2022. The matter was precedent-setting, and would likely harm the ASB’s future work.
(See the presentation for more details)
Mr S Somyo (ANC) asked the ASB to affirm that before a standard could be used by South African entities, it must first be signed off by the Minister of Finance before firms could use it. Secondly, he wanted to know whether entities could use standards of accounting that were not yet processed by the ASB and approved and signed by the Minister of Finance.
Ms Poggiolini replied that she had to be mindful of what was before the court and what she should be answering. However, if one wanted to change reporting frameworks, or develop accounting standards rather, there was a list that must be followed in the standards of GRAP 3. This would provide an idea of what must be done to change the accounting policy if it was not a standard of GRAP that had been signed off by the Minister. In this instance, there was none, as it was still working on one, and the options would be to go to a similar standard of GRAP that already dealt with these kinds of transactions. Even if they were not specifically similar, but had the same ‘look and feel’ from an economic perspective – what other liabilities’ standard could one use? The second step would be the conceptual framework in the standards of GRAP, which were the basic principles that one would use to develop an accounting policy. This document informed one fundamentally whether one had an asset or a liability, and pointed one to possible approaches of how to come up with a value.
One needs to get over the hurdle of a similar standard that could be applied within the suite in the absence of a signed standard, and consult the conceptual framework, and only after that should one consult international standards. In the international standards, ASB did not list IPSAS 42 in directive five, but listed standards that should be applied rather than those that one should not apply. Communication had been patched on to that provided in February 2021, which expressed the view that the ASB did not support the IPSAS 42.
Ms V Mente (EFF) asked if there was any other body that could authorise a standard besides the well-known bodies, and who could give such authority to any entity to have a standard.
This court case could be a precedent. She imagined a situation where the RAF had its accounting standard that it implemented. The AGSA had mentioned that in terms of the material benefits and how they accounted for them, many figures got lost in the system. For example, the liabilities could be written to zero with this standard. The RAF argued that this was a social benefit, but the social benefit was quite huge and cut across many departments. The public purse was effectively for social benefits, which meant that this could create a precedent for any other person to come up with a standard that would effectively write off many of the liabilities and erode the accounting standards of the country.
What were the dangers if this was allowed?
Ms Poggiolini replied that the social benefit spectrum was a huge concern when it came to public accountability. Social benefits and social insurance could include things like the employees’ pension fund, for which there was a standard. It was more about the non-exchange transactions, where government provided benefits to those in need to respond to social risk. These benefits could be in cash or in kind. Therefore, in developing the standards, the ASB dealt with both these aspects – benefits in cash and in kind – making sure that it recognised the obligations of government at the right moment in time.
A couple of entities in 2014 were in the same space as the Unemployment Insurance Fund (UIF), the RAF, the Compensation Fund, and the National Homebuilders Registration Council. The National Student Financial Aid Scheme (NSFAS) was also a potential candidate. Social benefits in cash extended widely. The ASB was currently working on completing a draft standard that dealt with these cash benefits by the end of the year. It was trying to focus on what the users of the financial statements would want to know and when government’s obligation would arise. The ASB was developing a robust standard that would deal with all the schemes in the country, including the social grants paid by the Department of Social Development. The ASB would also make it clear that if entities did not fall within the scope of the social benefits standard for various reasons, the entity would have to go to the general liabilities recognition standard, which was GRAP 19.
In terms of precedent-setting, the court would probably want to focus on the legal processes rather than giving a specific accounting opinion, which was what the ASB was hoping for. As a standard setter, the ASB was meant to be objective and transparent, and did not provide technical advice on matters. To be involved in ongoing court matters relating to GRAP was difficult to deal with for the ASB. When anybody disagreed with the auditors about the interpretation of the standards, the ASB would now be seen as a party with a material interest, and it did not have the level of resources to deal with that. It was also not helpful in advancing the mandate as a standard setter.
Ms Mente said if an entity or a department had not followed what the ASB had outlined as alternatives in developing a new accounting tool, would that be acceptable or was it not acceptable?
Ms Poggiolini replied that the ASB was not a regulator. A regulator was different because they could review individual audit opinions that got expressed and decide whether they were correct or not. The ASB did not have a regulatory capacity. However, in assessing the appropriateness of what was done, the AGSA was the key party in assessing whether the reporting framework used was appropriate or not. The oversight structures, such as Parliament, would also be able to identify these kinds of matters.
Mr A Lees (DA) said the RAF had been bankrupt for many years. This change in accounting standard changed that picture somewhat. In recent history, the private sector has had two examples of misstatements of massive amounts -- Steinhoff and Tongaat Hulett. These had resulted in shareholders across the world losing billions of rands. They had misstatements in the annual financial statements calculated to bamboozle the users of those financial statements. This was exactly the situation with the RAF. Nothing changed concerning the liabilities by changing the accounting standard, but what it changed was the messages it sends to the users of the financial statements.
From 2019/20 to the 2021 financial statements, the RAF had moved from liabilities amounting to R316 billion to zero. This was a piece of paper -- it was not real. What the RAF was saying to us was that those liabilities recognised last year had a history over many years of never becoming cash. They were not liabilities; a liability was something that would ultimately be paid for. What they were being told by changing this accounting standard was that these liabilities were not likely to ever materialise.
This whole court process was an academic exercise to find some way of compromising, but the reality was that a lot of accidents had occurred. Was there a possibility of a cash payout taking place? Unless the RAF said the possibility of a cash payout had magically disappeared, what was the reason for being in court? The only reason for this was to bamboozle Parliament, which ultimately must fund this liability. They were the users of these financial statements, making decisions on bailouts. As the primary users of these financial statements, what was the RAF trying to achieve by this court case? Change the numbers of the report, and say to Parliament there was no real liability here? This was the main concern – so much money was spent on court cases. What was the objective of this court case? What were they achieving by doing this? Currently, there were 16 people here today who were probably flown on South African Airways and may be staying in hotels paid for by taxpayers’ money.
Road Accident Fund
Ms Thembelihle Msibi, Chairperson of the RAF, responded regarding her 16-delegation team and said that the last time she appeared before the Committee she had been asked by Members where the rest of the board was, and why they were not present in the meeting. To satisfy the Committee, the board thought it was necessary to come to the meeting as a full complement.
Secondly, on the comments that the RAF was trying to bamboozle Parliament instead of doing its work, she said this was part of the mandate of the board when it came into office in 2019. Then, the Minister gave the board some objectives, including reducing the RAF's legal and administrative costs. All of the objectives were driven by making the entity more customer-centric and ensuring that most of the funding received was paid to claimants. The budget at that time was R40 billion, and R17 billion was for administration, of which R10 billion went to lawyers. The other objectives were to review the structure; review and enhance the supply chain management (SCM); implement net interest cost (NIC) under a system; and reduce the liability.
The liability had been a challenge for the RAF. It dated back to the previous board, and it was estimated that it would have amounted to R800 billion by the end of last year. The board had to reduce this liability. Everything the board did was to ensure that those objectives were met. The operating model was changed – it was now mainly claims and administration, rather than litigation-based, as it was before. The numbers had been reduced.
The board had also reviewed the medical terms, which created many problems for the RAF. It was another major cost for the RAF, which had since gazetted the new medical terms. All this work was towards fulfilling the mandate. The board had worked on the liabilities for two years to ensure it did not come back to bite the board or the RAF. The board was not playing a game.
Mr Hilmi Daniels, Chairperson, RAF Audit Committee, added that the board had been considering how it could value its liabilities properly – what was fictitious, what was overstated, and they were broken down.
The Chairperson said that the board was now drawing the Committee into a hearing, and the substantive material issue was the change in accounting standards. Members needed to hear about the substantive material issue.
Ms B Swarts (ANC) pleaded with the board not to deviate from the subject matter at hand. They should not be sitting here in the first place, and this matter should not even be in court. When the first presentation was made, she was concerned about what this meeting was about. The board must not even try to defend itself -- Members wanted to hear the real substance of the issues and motivations. If any member of the board wanted to come before SCOPA and give Members lessons on what the RAF did and did not do – Members know this. They had the presentations and had gone through them, but they wanted to hear why they were here today and how to get out of this mess. Nothing less, nothing more.
The Chairperson said the fundamental nub of the issue was what the purpose of the court action was. The Committee accepted the tabled audit report by the AG, but it was giving due consideration to this court action. In essence, the Committee should be conducting a hearing on the issues tabled in the AG’s report, but before that occurred, they needed to be satisfied for what purpose the court action was necessary.
Mr Daniels said that breaking down its liabilities by establishing the criteria to establish a claim, made it easier to determine the accounting liability and the value of the claims. There was a difference of opinion between the RAF and the AGSA – the RAF did ask AGSA to look at claims values and accounting policies and address these matters early. Unfortunately, it was done towards the end, which subsequently led to court.
Dr Nomonde Mabuya-Moloele, Deputy Chairperson, RAF Board, said that the RAF had a regulator, and asked why its regulator was not invited to the meeting. Secondly, the interaction with the ASB started in 2014 and the board that first dealt with the accounting standard started in 2016. In her view, it had taken them eight years to develop a standard for the RAF, which was the end of this year. Thirdly, there was no government in the world that owed its citizens or voters money due to a liability in the books. Their mandate was to deal with long-term liability.
Why had it taken the ASB so long to develop a standard for the RAF?
The Chairperson said the Committee had invited the entities and departments that had a material bearing on the matter before the Committee. The primary stakeholder in the disclaimer of the RAF was the AGSA. The dispute was after the fact; it was secondary. The disclaimer was on the table, and the Committee needs to hear from the AGSA how it had arrived at that audit opinion.
The list of stakeholders was long and varied. There was a stakeholder in the middle of the street to whom the RAF owed money -- must they also be called to this meeting? The Special Investigating Unit (SIU) was also present. The ASB had previously made a pronouncement on this matter -- it was not a new determination. The AG had also decided, as had the Accountant General. Before they get into a hearing, they need to deal with the issue of the court case.
Ms Swarts said nobody responding here was taking responsibility for the court case. Members did not want to get into a situation of a hearing, because they would begin to ask more in-depth questions about the court case. A lot had been said, but there had been no concrete mention of why the RAF went to court.
Ms N Tolashe (ANC) was not pleased with the manner the deputy chairperson of the RAF board had talked about how it was decided to bring 16 people to the meeting today. She thought that came across in an arrogant manner, because it was the taxpayers’ money that was spent on all these travel arrangements and accommodation. The Committee did not want to sit here in front of members of the board just to see their faces. The fact that the Committee was being asked about who it had invited or not spoke to the attitude of this board. One could not invite Jack and Jill if they did not have a material bearing on the matter at hand. One could not ask who was not invited when one was not the convener of the meeting.
How did the Department of Performance Monitoring and Evaluation (DPME) feature in this matter, because they were in a country where corruption was rife? People were losing faith in the sitting government, and officials had become the perpetrators of that corruption. The DPME’s role needed to be assessed, because this issue ought to have been stopped before it came to this. All this was breeding corruption, because the Committee was not getting any legitimate explanation yet about the crux of the matter.
Ms B van Minnem (DA) agreed with the sentiments of the previous Members. She also did not understand why this matter had to go to court. She could not see why other alternatives were not explored because this was a waste of resources, and the matter should not have gone this far.
Mr B Hadebe (ANC) wanted to understand whether the decision to go to court was justifiable. He asked what the position of the executive authority was, and if any guidelines had been provided regarding this matter?
Further, AGSA had not specified its audit process, which happened to be in question by the RAF at this moment. Could AGSA explain the relationship between issuing the audit and the obligations that the RAF would consider in the finality of the audit process?
He sought clarity from the ASB about the directive that was issued on 30 September last year, which indicated the list of recently issued standards that should not be applied by an entity, either by directly adopting them or using them to formulate accounting policy. IPSAS 42 was among those listed. This directive was not authoritative, but if it was authoritative, the RAF would not have changed its accounting policy. He asked the ASB whether the directives and the engagements with RAF did not indicate a discontinuation of what the RAF was doing.
He asked if the communication and correspondence by the ASB to the RAF were not authoritative enough for the entity to stop what it had started. He did not think it was justifiable to go to court when all these role players had advised against changing the accounting policy.
He asked the OAG to explain at what point it had issued its concurrence with the Auditor General about what the AG proposed or recommended. The RAF was saying the process had not been completed, yet the AG said that on 4 December 2021, the process had been completed and there was nothing in the law prohibited them from issuing their audit opinion.
All the matters that sought to suggest whether the correct process was followed or not must be cleared up and clarified before getting into other matters relating to the disclaimer.
Ms Mente said that the memo shared by the RAF was problematic concerning what the deputy chairperson of the board was saying. The ASB was said to have been engaged since 2014, and it had not got back to the RAF. The memo said that the ASB had often been part of formulating this accounting standard. The board and the memo were giving conflicting views. The ASB, on the other hand, was saying this standard was not included in the standards that should be adhered to. With that said, who had advised the RAF to go to court and claim a standard, which was outside the scope of the AGSA? Was the RAF enforcing a standard they did not have in the country? This standard could not be measured by anybody in the country.
The Chairperson said that in all the responses that would be provided, on what basis did the accounting standard change, and to what end was the court action -- these were the questions that must be answered.
Ms Msibi said that the RAF board had decided to change the accounting policy after a process had been followed. The chief executive officer would outline the process that was followed, but this included consultations with the ASB and other stakeholders. The board also took the decision to go to court. The board first had to consider the issue of the nature of the RAF’s business and whether it was an insurance benefit or a social benefit fund. Secondly, the board asked who determined the entity's accounting policy. Thirdly, what was the triggering event of the liability of the RAF – was it the accident when it happened, or when the assessment had been determined in terms of the liability? Part of the challenge was that the RAF had a legal opinion that it did not have to come here because the matter was still under judicial consideration, and it was sub judice. This was precisely why it was a struggle to answer some of the questions asked by Members.
The Chairperson said Parliament had its powers, functions and responsibilities. They were within their constitutional right to continue with the hearing, notwithstanding what happened in another arm of the state. This Parliament could subpoena. The legal advice that the RAF had received would have been misleading if it did not clarify that. The sub judice rule did not apply to Parliamentary processes. Even if the court process was ongoing, Parliament could run its process concurrently. They defer to the courts out of respect, but could decide in this Parliament that it was binding on themselves.
Mr Hadebe asked the AGSA who the role players were that ought to have played a role in finalising the audit process. Had those role players been allowed to play their roles?
Mr Phutjane Letsoalo, Chief Executive Officer (CEO), RAF, said that the difficulty that the RAF faced had been to change a system that had brought historical issues. The team had to go back to assess the basis on which to take decisions, hence what was before the Committee. Sitting in front of them was a R320 billion actuarial liability, referred to as an accounting liability. There was an expectation or estimation that this liability would grow to be one of the biggest the country had seen because, at this point, the RAF was number two after Eskom.
The RAF had been asked to investigate this liability and develop mitigating measures. It had gone back to 2013/14 to see what had happened and in that period, there had been a letter from the ASB, which was instructive. Whether the RAF was a social benefit or not was trite, because the application of IFRS 4 happened only if one could not apply GRAP 19, which specifically excludes social benefits. Therefore, in 2014, the advice was that the RAF must apply a relatively closer standard, which was IFRS 4 (Insurance Contracts). The RAF had asked the AGSA what this meant, and it said it was a directive from the ASB. The RAF had asked how it could deal with this matter, because the accounting for social contracts applied to the RAF. The answer was simply that it was an instruction from the ASB, and that the RAF must engage the ASB on it.
In January 2021, the RAF met with the ASB, and the previous CEO asked the RAF why it would change an accounting policy based on a letter. It was either a standard or a directive or at least a guideline. She had said the ASB did not issue letters. If the ASB had said the letter was authoritative, the RAF would have stuck to the directive in the letter.
In finalisation, there were two instances in paragraph 13 where one could only change the accounting policy: firstly, if it was a requirement in terms of the standard of GRAP and secondly, if it provided reliable and relevant information, in their view. This was a role of management, and it was specifically stated that auditors did not get involved in matters of accounting policy. The RAF was then referred to GRAP 3, paragraph eight. It had requested this to be in writing, and it was provided.
On 1 February, the letter that confirmed this discussion was received, and if the ASB had said at the time the RAF must not even consider IPSAS 42, it would have adhered to that. It was quite embarrassing that the RAF executive management had changed an accounting policy based on a letter, which meant that the decision taken in 2013/14 was wrong, because it was based on that letter. The RAF had then commenced with changing the accounting policy to arrive at a point where it gave relevant and reliable financial information. At the time, the RAF was asking itself what an obligating effect was, and that was when liability was assumed. The argument from the AG’s side was that the obligating effect was an accident. The RAF disputed this because, at the point of an accident, many processes had to take place before the RAF assessed and considered a liability. Section 17 of the RAF Act was where the mandate of the RAF indicated that there must be things that happen before the liability eventuates. Certain requirements must be met in the Act under Sections 17 and 18.
In terms of section 4(3) of the RAF Act, the Regulator was a provincial authority, and it was also instructive of who they were. The provision states that in assessing the viability and sustainability of the RAF, consideration would be given to the status and nature of the RAF as a public entity that was fundamentally a social security fund. One would have heard that the OAG said the RAF was not a social benefit fund, but the Regulator says it is. If following this process, GRAP 3, paragraph 8, directs the RAF, which says management shall exercise its judgment in determining the accounting policy. This was the process that was followed.
The way they saw themselves was not the same way that the AGSA saw the RAF.
Mr Hadebe asked if applying the judgment was outside of the standard that the ASB set. Was the judgment confined in that?
The CEO confirmed that that was the case. In applying GRAP 3, paragraph 8, read together with paragraphs 9 and 10 and paragraphs 11 and 12, tells one what they should do. The RAF followed the GRAP process and procedure step by step. If it was not against the GRAP framework or the standard, then in descending order, management was allowed to consider other standard setters or pronouncements. This was what the management did.
The Chairperson interjected and said that the CEO, in his response, was saying that the RAF management was right and had followed the correct procedure. From the RAF’s point of view, the process had been followed, and consultations had taken place and they had arrived at a determination. The RAF disagreed with the AGSA, the OAG and the ASB.
The CEO said fast-tracking this to April, the board decided to go ahead but wanted an assurance that the right processes had been followed. An international accounting firm, PricewaterhouseCoopers (PwC), was hired, headed by an expert. After this process, the board came on board and resolved to proceed with changing the accounting standard. Once the policy was applied, the AGSA came back with an outcome that said it did not agree with the application of the new accounting policy. In the first part, AGSA said that the RAF must use IFRS 4, and did not agree that the RAF was a social benefit entity. However, there was an authoritative letter from the ASB. The RAF management wrote back to the ASB to clarify, and it simply said that as a standard setter, it was not supposed to advise on matters of accounting and its application. It also said that it did not issue something that was excluded. The ASB also mentioned that there were issues with IPSAS 42. There were no disagreements before until this time.
As for the letter dated September -- it was not a directive, it was a letter. In January, the RAF was told that this was not authoritative. The ASB came only in December and was also received from the OAG.
The Chairperson interjected again, and asked the CEO to answer the question of whether RAF, from its point of view, was correct in arriving at the determination to change the accounting policy.
The CEO confirmed that the management of RAF was correct.
The Chairperson said at the crux of the matter, the Committee wanted to understand whether the RAF management believed it was right and had followed all the required and necessary procedures. This was confirmed to be so by the CEO. However, what remained at bottom of this issue was to what end the court case.
Mr Lees said that having listened to the responses, he concluded that the objective was by ministerial decree, even though he did not believe that the Minister intended this kind of outcome -- he had wanted the RAF to get rid of the liability. Now, instead of dealing with this liability bit by bit or one client at a time, the RAF had gone on to change the entire accounting policy as it related to the liability, and in the end, could say to the Minister, 'We’ve achieved the mandate.'
The CEO concluded by referring to the OAG. The most important aspect was found in slide three of its presentation, which revealed why the RAF had ended up in court. The RAF had gone through these processes and agreed to an alternative dispute resolution mechanism led by the OAG, but it was the only entity that presented itself in that alternative dispute resolution mechanism. Now, towards 31 December, which was the agreed date for the issuing of the report, it had engaged with the OAG, but the matter had been finalised without concluding the alternative dispute resolution. It had argued that the audit had been finalised, and this came after a letter of 2 December in which the AGSA said the RAF must conclude by 6 December and finalise. The audit office was closing for December on the 17th, but the AG wanted to conclude. There were still outstanding processes that he and the DG of Treasury had to finalise. They were at 2 December and the second meeting was scheduled for the 6th. By the time they met, the AG had finalised the audit without the process being finalised with the OAG.
An RAF representative said the engagements with the OAG had been fruitful, and it had agreed with the RAF that the obligating event could not be the accident date. They had been hopeful that they could find each other with the OAG and the AGSA.
The Chairperson said that the AGSA had explained to Parliament how it had arrived at tabling its audit outcome.
The chairperson of the audit committee said the RAF had been setting up a system to develop reliable claims. This was where they were now, and nothing stopped the RAF from changing its accounting processes and determinations. The RAF looked at the claims and determined what a claim should be, using an element for actuarial evaluation. These matters had been highlighted upfront before the audit started, and should have been addressed during the audit. The RAF could confidently say that it had substantially reduced the error rate of claims. The claims accounted for were reliable, whereas previously, these were distorted.
Auditor-General South Africa
Ms Singo said that earlier, it mentioned that it was guided by international standards on auditing and how the audits were conducted. Those standards require that the AG continuously engage with the management, the audit committee and the board, and anyone else responsible for governance. The engagement letter directed how the AG would conduct the audit, the audit strategy and the finer details of the approach and timing of the audit. In the audit strategy document, the AG would have outlined key points and at what point the AG would communicate with the audit committee and the executive management, especially as it related to the finalisation of the audit. Further, in the engagement letter, the AG articulates the process that would be followed, and there would be an observation on the ground. When the change in accounting policy was brought forward, the AG assessed the impact of that change on the audit process, which would have been communicated in the engagement letter.
In dealing with the matter, there would have been engagements between the audit team and management to further understand what prompted the change in accounting policy. The AG looked at the change in the policy in two respects. The first one was to check the appropriateness of that accounting policy. This was where IPSAS 42 became relevant, to say whether IPSAS 42 was a relevant basis for changing the accounting policy. Once the observations had been made, there would be an engagement between the audit team and the management. Because this was a technical accounting matter, the technical team was approached to assist in evaluating it and its appropriateness. This was exactly what had happened in this instance before issuing the audit finding. Once this process was done, the AG reduced the key arguments, assumptions and positions, and produced what was termed a communication of audit findings. This was the first draft that management got to see. Management would then be granted five days to respond to that communication, which would lead to any further discussions and engagements or clarity. This had been done, and the communication of findings was based on the technical report obtained to support the conclusion. Ordinarily, the technical opinions form part of the audit evidence on the audit file. This was the body of evidence that would lead to the conclusion of the audit opinion. This was not information that was shared in the public domain.
It was important to say that what was in the technical argument and contained in the communicational finding were the same. However, maybe it was presented to management in a different format. Once this process was concluded, the AGSA compiled its findings into a management report. This was the document where the AGSA shared its observations with the board, the audit committee and management. After the five days had lapsed, the AGSA would evaluate the responses from management and respond to management. This process was followed by the AGSA.
Dispute resolutions were stipulated in the engagement letter. Some processes must be followed, and it would be escalated to the business unit leader who oversees the business unit. Once this process was exhausted, it would be escalated to the head of the portfolio. If this process did not yield satisfactory results, a dispute resolution mechanism was done through the office of the OAG. It was a joint dispute resolution process.
The AGSA had followed its due processes.
The Chairperson informed Members that there was documentation available that supported what the AGSA was saying. There were also timelines and reasons why there must be conclusions. These would be circulated to the Members in due course.
Ms Lubambo added that when the RAF chairperson wrote to the AGSA, she was then tasked by AGSA to deal with the matter. She had written to the chairperson to present the audit report, and had communicated with the RAF deputy chairperson. The meeting was subsequently held on 13 December with the management and the chairperson telephonically. This was to discuss the management report and close the audit process. The CEO was correct that the AGSA office was closing on 17 December, but after the 13 December meeting, the RAF's deputy chairperson had asked the AG to give the RAF up to 21 December. The AGSA had agreed, but those meetings were never scheduled. She had contacted the deputy chairperson and the chairperson of the audit committee. Up until the report was signed, the meetings were never scheduled. At the meeting of 13 December, the RAF wanted the AGSA's technical report. During this meeting, the AGSA had been clear on how it considered management’s input and what informed the audit opinion. Even after that meeting, that document was circulated again to the RAF’s management, board and audit committee.
The CEO had talked about the AGSA not presenting itself to the OAG for the alternative dispute resolution mechanism. The technical team had engaged with the OAG, and maybe the CEO had a different expectation of how the AGSA was expected to present itself. This process was followed.
The key thing was that if one relied on the auditee to set a meeting to present AGSA's documents and these meetings were not scheduled, what must they then do? They could wait forever and never finalise the audit, even after the AGSA had been clear on the issues. This was used to ensure that the audit process was never finalised. The OAG mentioned that the AGSA had finalised its position and wrote to the OAG. This was raised with the OAG on 26 August, but now they were sitting in December and the process was not finalised. In terms of the legislation, that report was supposed to be signed on 1 July. They were sitting in December and the report was not signed. At what point was the process finalised? Was it at the point where they agreed with the other's view, or where they had given their view and how they had arrived at that view? The point remained that the meetings were not scheduled.
What was expected of the AGSA at this point? If the RAF felt strongly that the current standard was not catering for its specific need, perhaps it should have followed a different mechanism.
From the AGSA’s point of view, the process was followed, but it differed from the way AGSA interacts with other stakeholders because they granted the AGSA meetings -- and the RAF did not pitch up for the meetings. The correspondence that AGSA wrote to close that loop had been done.
Accounting Standards Board
Ms Poggiolini said that the ASB was required in terms of the Public Finance Management Act (PFMA) to consider international best practice when it issued standards of GRAP. Social benefits were a fundamental liability and expense for government. The ASB chose to wait for the International Public Sector Accounting Standards Board (IPSASB), the international body that the ASB relied on for its standards, to complete its process. The social benefits standard, IPSAS 42, was only completed in 2019. The ASB had reservations about the standard once it was issued, and the ASB needed to decide on what it would do as a board. The perception was that the ASB had taken a long time to respond to issuing the standard, but unfortunately, that had been the case internationally.
Secondly, the board was a standard-setting body that issued standards of GRAP, interpretations of the standards, directives and guidelines. These were subjected to a public consultation process. To the extent that the ASB had issued any of those, they were authoritative and must be applied. The Minister of Finance signs off the standards and other documents that supplement the standards issued.
The directives like Directive Five, which deals with the GRAP framework, were authoritative. It was mandatory, and the ASB prescribes and describes what should be applied in a particular period. However, there was no indication of what should not be applied.
The “directive” that was issued in September was a communication that the staff had drafted to explain some of the board’s decisions at the September board meeting. At that board meeting, the board had decided to depart from IPSAS 42 in developing its standard, which meant that IPSAS 42 would not be suitable for application in the local market. That communication was shared with National Treasury, and the ASB utilised Treasury’s communication methods to distribute these letters on its behalf. It also used the public sector accounting forum, which contained a few entities that served on that committee. Several international standards would be relevant to other entities, but it was important for the ASB to explain the position on all those international standards and why they were not included in the GRAP reporting framework, in Directive Five. It was a genuine and general communication to be helpful to entities -- it was not specifically for the RAF.
The evolution of the departure from IPSAS 42 had been a long process and during the time of the process, a few important decisions were taken, but ultimately they needed to depart from IPSAS 42. The issue with it was the recognition point – the past event – of liabilities’ recognition, as mentioned by the RAF earlier. The ASB had engaged National Treasury, the South African Reserve Bank and others to understand what social insurance was, and how it could be applied in the South African market. Social insurance was very broad, as it included things paid as part of a pension fund or any other benefits in cash or in kind. Insurance in this context did not refer to typical commercial insurance. There were specific criteria that they were looking to define in their standard of GRAP as to when one would be a social insurer or not. This had been subjected to extensive debate.
She commented that having the word "insurance" attached to the name of an entity did not necessarily make it an insurer, so the ASB assessed the substance of the individual or group of transactions as to whether there was insurance or not.
On the management’s judgment, as professional accountants, they were well trained to understand the accounting standards, and some criteria had to be followed in the standards of GRAP, so judgment needed to be made, bearing in mind who the users of the financial statements were. The criteria outlined in the standards assist in how management could use that judgment so that the information presented was relevant and reliably presented in the financial statements and faithfully represents the financial position of the entity. It must represent the economic substance of the transaction.
National Treasury (OAG)
Ms Maree confirmed that the OAG had concluded its processes with the AGSA. It had been a long process, and they had tried to come up with solutions going forward. She aligned the OAG to the comments made by the AGSA on following the process.
Ms Sindisiwe Chikunga, Deputy Minister of Transport, said she had listened to all the presentations, concerns and questions from the different institutions. She noted that the Committee had not yet engaged the Treasury on the content of the AG’s report. She requested the Committee to grant Treasury time to further assess this matter and would revert to the Committee. This matter required the Minister’s articulation as well. She would sit with the Minister and write back to the Committee on the way forward, considering the issues that had come up during the meeting.
Mr Hadebe asked the executive authority what role it played, and what advice was given to the entity concerning this matter. This was the only voice missing. Did it share the sentiment of taking this matter to court? If so, why?
Ms Swarts asked the RAF how much it had paid so far to take the AGSA to court.
Ms Tolashe asked if the board was prepared to take full responsibility for the outcome of the court judgment.
Mr Somyo said that the board and the CEO must not abuse the Deputy Minister’s assertions and those of the Minister. The Minister had surely instructed the RAF board to deal with the liability by paying those owed by the RAF, not to change the accounting standard that would result in spending money on court cases with the AGSA. In terms of the law, the AGSA had presented a report and tabled it in Parliament.
Arrogance was not going to help them. The state was going down because of the arrogance and attitude of its administrators and the failure of the boards to make them accountable. Allowing the Ministry to further assess and evaluate this matter was only fair.
Ms Mente said that seven days would be enough for the Ministry to deal with this matter. Currently, no other law placed the responsibility or obligation of compensating those affected or who became victims of accidents in the country, other than the RAF. Therefore, this became a liability, and it could not be termed anything else by those who seek to wish those figures away. It was not changing the accounting tools of the RAF, nor was it going to make the AGSA compromise its systems. Public funds were involved, and these must be accounted for. If the RAF did not want to classify these claims as a liability, what would become the new term and the accounting tool for it, and how would it be audited? Could the current laws, the Public Audit Act (PAA) and the PFMA, which give authority to the ASB to help formulate accounting standards, become a mechanism for considering how management could be innovative in dealing with the liability matter? Management could be innovative, but it must go hand in hand with what was applicable and could be utilised by other institutions that work with the RAF. The standards used by the RAF must be compatible with the standards used by the AGSA, and they must be recognised by Treasury, the PFMA and the ASB. If it was not recognised, how was it going to be audited?
This responsibility could not be wished away. That responsibility was going to be paid for with public funds, and those public funds could not be zero. The AGSA was saying to the RAF if they used this tool, it was taking this liability away and the country would be unaware of where it stood in terms of liabilities. No accidents were yet to happen; they had already happened and been recorded. Therefore, what had been recorded and the debt of the RAF to the people of South Africa, was a liability.
She emphasised that she would appreciate the intervention of the Ministry on this.
Mr Hadebe stressed that there must be consequence management if this becomes a fruitless and wasteful expenditure. Someone had to account for this.
The Chairperson suggested that the issue of costs should be stated in writing.
He thanked the board of RAF and its executive, the AGSA and the ASB, for assisting the Committee in clarifying matters and deciding.
Chairperson's concluding remarks
He concluded by saying that as things stood, the Committee did not agree to the change in the accounting standard, and therefore disagreed with the court action. It was noted that the AG's audit report, as things stood, had force and effect. The Committee reserved its rights, pending the ongoing consultation. It would decide on the Committee's report to the House as a matter of priority. It would include deferring some of these issues to Standing Committee on the Auditor-General (SCAG) to avoid being a player and a referee. The SIU must continue with any work it did at the RAF and bring these matters to logical conclusions that would result in successful prosecutions.
The Ministry would be given ten days to provide its position on this. The decision had been triggered by something that had come from the Ministry, the interpretation of which had resulted in this situation. The Committee could meet during recess to finalise matters, but this would be item number one on the agenda for the next term.
It was undesirable to have state institutions resolve matters of policy in court because of the precedent it sets for the greater state machinery. The courts would become ultimate players and referees in policy making. This court action would simply require the court to make a policy decision. This was wrong. The RAF must accept the audit outcome, and not try to circumvent it with costly and creative innovations. The Committee was not convinced.
South Africans relied on a functional RAF. If the events of the past few days were anything to go by, considering the Pongola truck accident, there must be speed, efficiency and agility in the RAF’s operations to respond to what happens on the country's roads. To be saddled with court actions was not the way to go.
The Committee would await the report from the Ministry within ten days and in the interim, it would compile an urgent report to the House.
The meeting was adjourned.
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