Transnet; SAPO; Postbank; PRASA & SABC audit outcomes: AGSA briefing

Meeting report

Briefing by the AGSA on the SABC 2021/22 Audit Outcomes
Mr Andries Sekgetho, Business Executive, Auditor-General of South Africa (AGSA), introduced the Committee to its officials and the presentation.

Ms Surette Taljaard, Senior Manager, AGSA, took the Committee through the audit opinion of SABC 2021/22.

The audit outcomes for the SABC remained stagnant for the past four years with a qualification on the financial statements and findings on predetermined objectives and non-compliance findings. SABC received a qualified audit opinion for the 2021/22 financial year.

AGSA suggested recommendations to management for implementation to address the significant matters that were reported. SABC must conclude the process of identifying possible irregular expenditure from the prior years. It must also ensure effective output initiatives concerning the turnaround plan and strict monitoring thereof. It is recommended that SABC implement regular and adequate review controls over financial and performance reporting to ensure that valid and accurate reporting occurs. The consequence management process should be more focused, deliberate and assigned the necessary swiftness.

(See document for further details)

Discussion
Mr B Hadebe (ANC) said that the recommendations are very key and progressive as it relates to what is termed as material uncertainty and the going concern of the entity. This includes the graph showing that the revenue will be less than the expenditure resulting in continued loss. He said he understood the mandate of the SABC and it being a public broadcaster. However, the picture, as reflected by the management revenue projection, does it indicate that the SABC is trading recklessly? What does this mean in terms of sustainability of the public broadcaster? He said that the irregular expenditures, root causes and recommendations were well-articulated in the document.

Mr Sekgetho said the issue around the going concern is twofold. Concerning reckless trading, there are a number of tests that the institution must meet for AGSA to say that it is trading recklessly. It is difficult in the state-owned enterprises spaces because it is given a certain mandate. Although SABC is incurring losses, it still has sufficient assets and cash on hand to meet short and medium term liabilities in the institution. So, in the foreseeable future, the institution will have sufficient cash.

The AGSA is currently comfortable that there is no need to elevate, modify and report something on the audit report. The reason for including the information in the report is to trigger and spur conversations on management in a proactive manner within the Committee. This is to say, for instance, that the indicators are unfavourable at this point in time and whilst it may have sufficient cash to take it to the next cycle, what will then happen thereafter from a sustainability point of view. Questions such as what measures are being implemented to ensure that the situation in the institution is turned around can be asked.

On an annual basis, there is a number of indicators that AGSA looks at. In this suite of indicators, some might be positive and others negative such as the continued operational losses that the institution continues to suffer. AGSA has not modified them but AGSA is saying that in the suite of indicators, there are a number of them that are unfavourable that could indicate potential problems. This is the reason attention is brought to it.

Briefing by the AGSA on the SAPO 2021/22 Audit Outcomes
Ms Joyce Maki Dangeni, Senior Auditor, AGSA, took Members through the audit outcome for SAPO 2021/22 financial year.

SAPO received a disclaimer audit opinion.

AGSA remained concerned that some of the key audit matters reported in the audit report were repeat matters. Some interventions could either not be implemented or were not still successful in dealing with these key matters due to various reasons.

(please see the document for further details)

Discussion
Mr Hadebe said that the AGSA does not have to worry, SAPO will be called to account.

He thanked AGSA for the presentation and the recommendations.

He said the issue of going concern is even worse here in this entity. The report paints a picture of an entity with significant financial losses with no sustainable income. The entity has severe financial distress. The entity did not successfully implement a turnaround plan and did not yield any positive result, but somewhere along the presentation, it is stated that the excuse from management was that there were no funds to implement the turnaround strategy.

Were there any instances when the plan was implemented or partially implemented?

AGSA indicated instability and capacity challenges resulting in the slow implementation of strategic initiatives of support. Is the board not capacitated to turnaround the SAPO?

He said that this is what he is reading in the report. There is also mention of fruitless and wasteful expenditure that has been modified due to the lack of support documentation. The board approved the right of fruitless and wasteful expenditure without evidence that proper procedures were followed. What is meant by modified? Does this mean the board’s action or conduct in this regard was inconsistent with the legislation? In other words, that action could be tantamount to unlawful conduct and can be challenged? How much was written off for material losses due to criminal conduct? Is the R2.2 billion loss the amount concerning criminal conduct? What were the steps taken to try and recover such losses? Was anyone identified for the criminal actions to be proven against them?

A material impairment of R703 996 000 was incurred due to the impairment of the loan to the Courier and Freight Group (Pty) Ltd. What does this mean?

There is also a mention of other financial assets to an amount of R861 000 000 that were withdrawn from the post-retirement medical aid investment and then the root causes and recommendations says “not applicable”. Does this mean the AGSA could not ascertain what the money was used for or did it find out what the money was used for and who withdrew the money?

He wanted to know whether the information on page 16 of the document means that separating the entity (Postbank) has also contributed to the financial crisis of the Post Office. Did this strategic move not yield any positive results?

Mr A Lees (DA) said that the going concern and reckless trading are something that has to be dealt with. What is the possibility of SAPO being forced into liquidation by creditors for non-payment?

Have statutory payments such as the unemployment insurance fund, medical aid deductions and contributions been paid? If not, does AGSA not have an obligation to raise criminal charges against the accounting officer? It is a criminal offence to not pay those.

Responses
Mr Sekgetho said that contributions had been made, but this is not an easy discussion.

This is an institution that has a couple of divisions. When one division is taken away, which is the most profitable division, it means that the remaining divisions are not profitable. So, when the Postbank was within the Post Office, it was its most profitable division. So, when the profitable division was taken out, the remainder of the institution was unfortunately unable to carry out its own operation. However, the nature of both sets of accounts is different because one is a banking service. So, the strategic intention was to separate the entity.

The strategic intention for the Post Office still remains. SAPO still has a particular role and mandate to fulfil in society but it should still be able to carry its own costs regarding the operations that remain for postal and courier services. This is where the challenge lies. So, with the most profitable division being taken out, inefficiencies surfaced when it was reported on its own.

The R2.2 billion losses are not just a result of criminal conduct. The overarching principle is that the institution is not making profit. This amount is a result of it not being able to generate revenue to cover its costs. There is a part that specifically talks to the losses suffered as a result of criminal conduct. Management should ensure that these cases are investigated and followed up.

In the current financial year, AGSA did not report a specific instance of non-compliance. In other words, AGSA acknowledged that certain work is being done in the background so all it has done was emphasise it.

The AGSA sometimes provides users with information even though it does not necessarily result in a particular unfavourable outcome. This is something that was disclosed by management themselves.

He apologised for the wording of modification; the AGSA does make use of technical jargon. He said that modification essentially just means qualification. “Not applicable” just means that essentially that AGSA did not get sufficient or appropriate supporting evidence or was not in agreement with the balances that were disclosed. In other words, it contains material misstatements. He again emphasised that the word “modify” or “modification” is a substitute for the word qualification.

He said that after the AGSA reported on the fruitless and wasteful expenditure, management did its own determination test and management then produced a figure. Proper investigations have to be instituted to do the proper root cause analysis to implement remedial action and internal control systems. This is also done to hold people accountable in terms of consequence management. Once this process is done, problems are identified and it can be fixed.

The determination test done by management was insufficient, but the board still proceeded to write in all those balances. So, AGSA informed the board that last year, there was a big balance of fruitless and wasteful expenditure that must be investigated. Only once the investigation is completed can those balances be written in. These adjustments need to be supported as part of the audit process. AGSA engaged management on this to gain the necessary comfort and satisfaction around that. For example, SAPO says it has incurred fruitless and wasteful expenditure due to penalties and interest paid or late statutory payments. If this is true, then the AGSA would then indicate that this resulted in fruitless and wasteful expenditure and explore the whole suite of payments. This is to determine in what category the payments falls and whether the entity did not have money on the date the payment was required or it did have the money and could have made the payment. But an official did not release the payment and therefore it resulted in this situation. So, management just sort of said that it did not have money.

This is the root cause but AGSA has been saying that the entity did not do a proper analysis and assessment because it was supposed to demonstrate that it was indeed the case. Hence, that informed the modification or qualification.

The primary mandate of AGSA is to perform the audit and once problems have been identified, they are highlighted in the report. If management does not pay or not comply with those statutory payments on time, it is normally picked up in the fruitless and wasteful expenditure. He confirmed that statutory payments are made regularly; it is just that the payments are made late.

Ms Dangeni said that there is certain information that has to be verified.

She said that if the assessment is made, one would expect that other costs would have been considered. So, if the assessment is done and AGSA sees that saving costs were considered by giving packages and so on. But the problem is no information on how much it will cost or what the plan forward will be; the AGSA sees that as additional information not being sufficiently provided for the AGSA to properly evaluate to know if the initiative will work and be able to provide the benefit that management is hoping for.

She said that this is one instance. In some instances, it has not been implemented because there were no funds, funds ran out or it had to reprioritise the money. AGSA then evaluates this going concern. The going concern is linked to the strategic plan. There has been a lot of movement at board level. Some members resigned and some were dismissed. This is what AGSA is raising in its presentation. If there are stable members, some of the plans in place will be dealt with.

An amount of R648 million was written on was not sufficiently supported and AGSA could not contribute to why it should be written off. She said some things that make up this figure of R2.2 billion is due to money being stolen or money that cannot be claimed back due to fraudulent activity.

The material impairment is a loan provided for support to the subsidiary because the subsidiary is currently not in a position to pay support. So, the decision was made to write it off. The wording of “not applicable” is that it is not necessarily a finding identified, so the AGSA was not saying there is an issue, root cause or recommendation. All the AGSA is doing is drawing attention to the item.

She said that SAPO could indeed be forced to liquidate by creditors. AGSA is in a position to report criminal charges due to failure of payments.

Briefing by the AGSA on the South African Postbank 2021/22 Audit Outcomes
Ms Maki Dangeni took the Committee through the audit outcome for the South African Postbank 2021/22 audit outcome.

The Postbank received a disclaimer audit opinion.

The AGSA suggested a few recommendations such as filling vacancies and strengthening security controls.

(See document for further details)

Discussion
Mr Lees said the issue is really trying to establish whether there is room for a similar situation to develop here as in the VBS Mutual Bank given the large numbers of poor people who use the Postbank.

If this huge amount of money can be stolen in a few days, is it known if more money has been stolen? Was AGSA able to deal with the stringent requirements of the South African Reserve Bank since it is the first time auditing a bank? What kind of relationship does AGSA have with the South African Reserve Bank?

Mr Sekgetho said that AGSA appreciated the indulgence especially given the fact that it is the first time it is auditing the institution.

A bit of history and context is required to understand the magnitude of the issues.

He said that AGSA has been working closely with the new acting CEO and the Minister to set up an intensified information system as soon as it became aware of the magnitude of some of these gaps but it was always purported to have been system issues with no real risk attached.

Some material gaps have been reported and the lack of material reconciliation that was not done between the system AGSA used and the overarching system that the banking society usually uses.

The AGSA reported to management the real source of all the transactions to understand how much money has flowed and what should be reconciled. On this basis, the AGSA disclaimed and did a bit more of an intensive audit. The outcome of the process was indicated to management and the board that there is a potential that additional funds were taken. The Minister has commissioned a full investigation and implemented some short term stopgap measures that the AGSA recommended. Although the audit sign off was 31 July, the intervention went all the way up to 31 August.

The institution has commissioned a forensic investigation and the AGSA has also done a little more in-depth work over and above the normal reconciliation. The AGSA is limited in this regard and has given a briefing to the Minister.

So, after the Minister is done, AGSA can come back and engage in oversight with a little more detail regarding the specific intervention and how management is responding to it. It has now been a couple of months so Postbank is in a position where one would be able to determine the status of any form of implementation. AGSA ensures that from a mandate point of view, it has enough resources and skills to execute its responsibilities and add value to the system by elevating and highlighting all the significant gaps to prevent similar occurrences such as the VBS Mutual Bank.

Briefing by the AGSA on Transnet 2021/22 Audit Outcomes
Ms Madidimalo Singo, Senior Manager, AGSA, introduced the team.

Ms Modiehi Skosana, Acting Deputy Business Leader, AGSA, took the Committee through the Transnet audit outcome for the 2021/22 financial year.

The audit outcome for Transnet SOC Ltd for the year ended 31 March 2022 is unqualified with findings on compliance legislation.

The overall audit outcome improved from the prior year’s qualified audit opinion.

AGSA recommended that the accounting authority strengthen preventative controls to ensure compliance with legislation and to enable the control environment to mature by the time the irregular expenditure exemption expires.

The accounting authority must continue to work through the audit committee to ensure that management implements and enhances processes to review the financial statements.

There must be effective monitoring and oversight by the audit committee to ensure that errors in the financial statements are prevented and legislation is complied with.

The developed action plans must be thoroughly reviewed by the accounting authority to ensure that they address the root causes. The internal audit function and the audit committee must review the audit action plan to ensure that root causes are properly identified and that the plan is adequate to address the findings raised.

There must be monitoring of performance and consequence management, especially around supply chain management.

The accounting authority should continue to implement and monitor the initiatives in place to improve performance, such as progress made on agreements with the original equipment manufacturers of rolling stock, maintenance and security of infrastructure.

(See document for further details)

The Chairperson said that it hears what AGSA was saying loud and clear.

Mr Hadebe said that he could not wait to deal with the affected executive authority and accounting authorities. He agreed that AGSA was very loud and clear.

Briefing by the AGSA on PRASA 2021/22 Audit Outcomes
Ms Ilze Slabbert, Senior Manager, AGSA, took the Committee through the audit outcome of PRASA for the 2021/22 financial year.

PRASA received a disclaimed audit opinion.

AGSA requested and recommended that the Committee consider the recommended actions to be implemented as part of the role oversight can play in facilitating an improvement in the financial and performance management, as well as the status of compliance to improve audit outcomes, thereby ensuring good governance and administration of public funds.

(See document for further details)

Discussion
Mr Hadebe welcomed the presentation and said that the bulk of the issues should be addressed directly with PRASA.

The presenter mentioned that PRASA should be careful that it does not use consequence management to instil fear in management but yet it is also said that not much has been done in terms of consequence management.

Consequence management is not at the level it is supposed to be. Mr Hadebe said that this was contradictory and asked for clarity.

In the finance unit, there is only one person responsible for the financial statements and as a result, it was unable to have its financial statements reviewed.

What then happens to the quality assurance providers in an audit and internal committee? Is record keeping still an issue and if so, to what extent? Are there key documents that AGSA could not access to fulfil its mandate? In the past, there have been issues with recording keeping. Is this still happening? If so, who are the culprits?

Which unit or department is struggling with record keeping? How many trains are being stockpiled and not being used? What impact does it have financially? Are the trains still in good condition or has it been vandalised? What is the maintenance in terms of the time span and equipment?

Does it amount to fruitless and wasteful expenditure if the trains are just standing? How many officials have been suspended? Is the suspension isolated incidences or a serious cause for concern?

Ms Nompakamo Matanzima, Auditor, AGSA, said that in the presentation document, the AGSA touched on the capacity and the constraints thereof experienced by the internal audit.

There was a reason why there was a lack of review by the internal audit on the quality of the financial statements. This was due to capacity constraints. There are currently 105 trains being stockpiled to the value of R9.8 billion.

On record keeping, it relates mostly to the property plant and equipment. AGSA could not have some documents relating to the fixed asset register and the fruitless and wasteful expenditure in terms of the assets written off.

Ms Slabbert said that currently, not all trains are being stockpiled. Some trains are being utilised on some of the corridors. As of December 2021, 69 trains were available for operational purposes. At that time, 67 of the trains travelled less than 1 000km and the other two more than 1 000km.

The trains are still being maintained so there are few concerns. There is however a concern that the depots where the trains are stored are getting full. This is something that PRASA needs to watch continuously.

The AGSA does not know about vandalism and theft.

PRASA would be in a better position to provide an accurate figure for the long suspensions of officials.

Critical specific matters have been investigated rigorously by PRASA because of the magnitude of irregular expenditure and fruitless and wasteful expenditure. There are legislative requirements to investigate each of those instances. So, when it comes to these investigations and consequence management, people are reluctant to participate for fear of consequences. PRASA should do this in a balanced matter to not deter people from being part of those critical decisions that require the entity to move forward.

Mr Hadebe said that follow-up would be made with PRASA.

He found it concerning and disturbing that officials fear doing the work because they will make a mistake and be taken to a disciplinary process. Some officials do not know how the work needs to be done or to do it correctly. He said that what he meant with the maintenance of the stockpiled trains was that since it is not generating income, does it not amount to fruitless and wasteful experience?

Ms Slabbert said that the culture of fear is something that was reported to AGSA when there was a discussion about the lack of progress in the procurement processes. The entity itself will have to shed some light on this matter. However, it did seem that there was some reluctance of officials to participate in contracts because of fear of not knowing what to do, resulting in inadvertent errors and then being charged through a disciplinary process.

She said that the maintenance of the trains is a critical component and AGSA maintains its concerns that the trains are not being optimally utilised.

The recovery of the infrastructure is a comprehensive and multidisciplinary process and PRASA is working on it. She suggested that PRASA do this as soon as possible because it is a critical component that will enable the deployment of the trains.

The Chairperson asked about the audit outcome report for South African Airways.

Ms Singo said that the audit outcome reports have been outstanding for four years. However, the AGSA is currently in process of doing these audits and it will be finalised sometime next year February. The feedback will then be provided to the Committee.

Mr Hadebe wanted to know why there was still a delay with the South African Airways audit outcome. He said he thought that this matter would have been settled going through business rescue and having new equity partners. The delay was unacceptable. Are there any concrete reasons behind why it is still the same after four years?

Ms Singo said there had been challenges of going concern and financial viability. Financial statements were not submitted. It is only after the business rescue that such statements were submitted.

Mr Hadebe said he understood but wanted to know when the financial statements would be submitted.

The Chairperson said that it should focus on the issue at hand. South African Airways should answer the broader questions.

Mr Fhumulani Rabonda, Deputy Business Executive, AGSA, said the outstanding financial statements were submitted on 31 May 2022. However, the process could not start because outstanding subsidiaries were not submitted. It was submitted in August 2022, but there were many issues. The AGSA then engaged with management and another version of the subsidiaries' documents was received last week. These are the issues that contributed to the delay in finalising the audit outcome report.

The AGSA is dealing with the delays of multiple submissions but the process has commenced and is currently continuing.

The Chairperson thanked AGSA and said that meetings had been scheduled with the different entities.

The meeting was adjourned.