Road Accident Fund audit outcomes & SIU investigations

Meeting report

Auditor-General of South Africa Briefing Note: Road Accident Fund

An Auditor-General of South Africa (AGSA) official presented the briefing note which covered audit opinion history, an overview of the 2022/23 audit outcomes, litigation by Road Accident Fund (RAF) against the AGSA, Key focus areas, Drivers of internal control, Overall conclusion, Special Investigating Unit (SIU) – status of the investigation and Key recommendations to the Committee.

[See the presentation for details]

Special Investigating Unit Briefing

Mr Leonard Lekgetho, Chief National Investigating Officer, SIU, gave a presentation on behalf of the SIU which covered the proclamation details, progress updates, observations, Systemic Recommendations, and Invoices to RAF.

The SIU told the Standing Committee on Public Accounts (SCOPA) that the scope of its investigation at RAF covered duplicate claims-payments made to attorneys, claimants, and sheriffs as well as change of mandates, procurement and tender irregularities (Fruitless and wasteful expenditure), payments made to service providers in terms of RAF Act and/or contract and fraudulent claims.

The investigation has so far cost R3.3 million, while the SIU has managed to recover R317.6 million from the return of duplicate payments made by the RAF to legal firms. A total of 102 law firms, including sheriffs, were being investigated for over R340 million in duplicate payments from the RAF. Further, several legal practitioners had signed an acknowledgement of debt amounting to R70 million and others had refunded duplicate payments directly to the SIU. The total amount of default judgments issued against RAF for cost and fees from 2018 until the second quarter of 2023 amounts to R4.7 billion. A sharp increase in default judgments was noted between 2021 and 2022.

[See the presentation for details]

National Treasury

An official from National Treasury noted that the Minister, through his office, dropped a note that the department was not able to do a detailed presentation due to the pending court case and that it would be opportune to come back with a solution once the legal matters have been settled.

The official stated that RAF management did approach National Treasury earlier in the year but gave a similar response to settle all legal matters first before recommendations are made. National Treasury noted the message by the AGSA in its presentation and is still in agreement with the facts supplied and did not provide any additional information or assistance for the 2022/23 financial year. National Treasury still disagreed with the standard that the RAF had used.

The Chairperson noted the confirmation of the outlook and stated that the Committee has been down this road many times before, on the accounting standard. The fact that it is a prevailing headache is fundamentally why the RAF would find itself swimming in the cesspool of challenges. He was being euphemist with the term ‘challenges.’

Road Accident Fund (RAF)

Ms Zanele Francois, Chairperson of the RAF Board, noted some of the comments by the AGSA, particularly how well the last audit went. She highlighted that the two teams, RAF and AGSA, finally found each other and the board hopes that the relationship formed will be sustained. She noted the changes in the audit outcomes even though not desirable. She stated that improvement in the control environment and RAF’s performance is notable over the three-year turnaround strategic process. She said that the RAF short-term liability was reduced from a projection of R59 billion to R9.3 billion and the legal costs were expected to be at R10 billion but were reduced to R3.9 billion.

She reported the increase in the processing of claims, which is the bread and butter for the RAF, and indicated that it exists to process and pay claims as quickly as possible. She stated that the RAF accepts that there were still challenges around old claims and that this was one of the targets missed. The main issue around the old claims is obtaining the minimum requirements, as there are still challenges in the provision of supporting documentation. To circumvent this, the RAF instituted a new claims contact centre from the beginning of October which assists in reaching out to the claimants to determine how individuals can reach the expected minimum requirements. She added that the RAF is committed to making payments once the required minimum documents are submitted.

She highlighted that performance improved significantly from 57% in 2020/21 to 91.3% in the 2022/23 financial year.

Referring to the engagements with the AGSA, she indicated that she was pleased that the teams had established a good working relationship. She requested a meeting for 4 December to reach out to the AGSA to find alternative ways to deal with the matter. She further stated that it is understood that the matter is sub-judice but settlements can occur at any stage of a legal process, hence the RAF was still reaching out to find a consensus. She explained that the auditor and the auditee have a marriage-like kind of relationship, thus it needs to be conducive regardless of the court case.

She appreciated the number of recoveries made so far by the SIU and stated that when the previous board took over, the issue of double payments was the main concern. She said that the challenge with sheriffs and rates is the fact that by the time RAF processes payments, which is within 180 days, there would already be an execution by the sheriff and an attachment of RAF’s accounts. This has been the modus operandi behind double payments. She was pleased with the assistance of the SIU and added that the RAF needs more assistance in dealing with fraud.

Regarding referrals for disciplinary processes, she said that these are being executed and that the process is continuing. Referring to the referrals to the investigative agencies, she said that the RAF will wait for the results and cooperate with the SIU.

She noted that the RAF was seeing the report for the first time and that there had not been any engagement on the progress of the report. She expressed uncertainty regarding when the SIU invoice was issued and stated that the RAF would pay its SIU invoice for the sterling work it has done so far.

Regarding the recommendations, Ms Francois said that the RAF was aware of the systemic issues and that the system in place is still paper-based, hence the process of developing a fit-for-purpose integrated claims management system. She stated that the process is on track and the Acting Chief Executive Officer (CEO) would provide details on it. She added that the current system has many challenges and complexities but efforts to automate are under consideration and that systemic improvements in the control environment of the RAF are visible.

She said that all AGSA findings and recommendations are allocated to the heads of departments who are then given timelines to agree on and are monitored to ensure that finalisations are done within the agreed timelines.

Mr Phathutshedzo Lukhwareni, Acting CEO, RAF, went through RAF’s presentation that covered the summary of claims performance, organisational performance, AGSA outcomes, and conclusion.

[See the presentation for details]

Discussion

The Chairperson cautioned against divorcing the audit outcome in its material nature because, central to the disclaimer, the adverse and now the court action is the accounting standard. He said that the Committee runs a risk of cherry-picking the reality confronting RAF.

He highlighted that for the 2022/23 financial year, the RAF reported a deficit of R8.4 billion which is a significant deterioration compared to the surplus of R428 million in 2021/22. The deficit was mainly attributed to the increase in the claims liability for offers that were not yet requested for payment as of 31 March 2023. As a result, the RAF accumulated deficit increased to R23.9 billion and the total liability reported amounted to R34 billion, of which R24.9 billion are claims not yet requested for payment but will be requested and paid within 12 months. He stated that the Committee assessed that RAF has been technically insolvent for a considerable amount of time due to facing significant operational challenges, and key amongst these is an operational model that relies heavily on litigation.

He said that the RAF is a highly litigious organisation and that there is a need to ascertain who bears the costs of these things. Even on the accounting standard, he mentioned that National Treasury, the Accountant General, the Accounting Standards Board (ASB), and the Committee have put a view on the matter but based on the RAFs perspective, everyone else is wrong except the organisation. He asked who is going to bear the costs as the AGSA has decided on the matter.

He stated that with a stroke of a pen, RAF changed the direction of its finances and everyone in the ecosystem informed the entity that it was incorrect. He added that the issue of the accounting standard is central to the current briefing. In the previous week during oversight, he stated that there
was a dismissal of an urgent bid to stop the auction of movable assets, and Members saw that tables and desks were all tagged for the sheriff.

Mr B Hadebe (ANC) read the letter that was written by former Minister of Transport, Mr Fikile Mbalula, dated 4 October 2022, where he wrote and met with the board and directed it to consider passing the necessary resolution to withdraw from the courts and pursue less confrontational measures. He equally directed the board to table all outstanding reports for scrutiny by the relevant Parliamentary structures in line with the accountability measures provided for the relevant prescripts that govern the work. He read the letter because he was perplexed and puzzled that Part B was still in court. He said that he understood the instruction to say that the board must seek alternative ways to deal with the dispute. He asked the board to clarify the matter as they were appointed on 1 October 2023, but nature allows no vacuum because there is continuity in the board.

He highlighted that the board chairperson said she was willing to work with the AGSA to resolve all the disputes, but the board has been in office for two months. He asked what has been done since then and what the response to the Minister’s letter on the matter is.

Ms Francois said it has indeed been two months since the new board was appointed and that the board needed to be inducted whether there are new members or not, and this has been ongoing. Secondly, she stated that the board had to deal with the finalisation of the audit and the audit report, and a special board meeting was called to approve the audited financial statements and accept the audit report. She mentioned that the board was also seized with various matters since it was appointed such as the audit that was delayed, hence it had to have a special meeting to finalise the process. She added that the relationship with the AGSA is important and 4 December was finally decided upon to meet with the AGSA.

She said that the board had no intention of disregarding the letter from [former] Minister Mbalula but rather considered what the Minister had said, hence the withdrawal of Part A. She indicated that the board needed to exercise its fiduciary duty to first understand the details and merits of the case and interrogate the merits of the case before giving direction. She added that due care and skill needed to be applied in dealing with the case and that there is a vested interest in seeing RAF revived. She assured the Committee that the board was working on the matter.

Mr Hadebe indicated that he took note of the point that the board is still new and highlighted that not all the members are new.

He said that on 30 October 2023, the RAF filed its heads of arguments and asked if this was filed with the board’s knowledge and approval, which meant the RAF was forging ahead with the case. Yet, the board has assured Members that it was willing to find alternative measures to resolve the impasse.

Ms Francois replied that the board is a collective and cannot just walk in and throw away everything. On court matters, the board must charge its fiduciary duties and she asked the Committee to allow the board some time to get into the merits of the case before it decides, as per the Minister’s letter. She said that the RAF has a skilled and experienced executive team, and the previous board also exercised its duties with due care. She recalled that there were consultations with professional bodies besides the ASB and AGSA to obtain their opinions on the matter. Numerous times, the board also sought legal advice and it was still early for the board to make any instructions on the matter.

Mr Hadebe asked if the heads of argument filed were approved by the board.

The Chairperson agreed that due care was a necessary course of action for any board. He stated that the matter is not in a vacuum; the office of the AGSA, the ASB, National Treasury, and the Committee applied extensive due diligence and consultations. He said that SCOPA has made the point that at the stroke of a pen, the accounting standard changed and the outlook of the finances improved. He highlighted that all relevant stakeholders still held the same position held in the year before and asked what responsible action steps were taken to guide the allowing of the matter.

Ms R Lesoma (ANC) said notwithstanding what the Portfolio Committee on Transport, the current Minister, and the letter written by [former] Minister Mbalula have said, the RAF board is still saying that they are still deciding if it is continuing with the matter but not considering what the Portfolio Committee on Transport has said. She said this reflects on the Portfolio Committee on Transport, insinuating that it is not doing its work, which is untrue. She stated that the Portfolio Committee on Transport has requested the entity through its board to consider settling the matter out of court. She indicated that she was disappointed about the recent filing of heads of arguments given how many stakeholders have instructed the RAF to withdraw the case from the court and pursue other Alternative Dispute Resolution (ADR) mechanisms.

Ms Francois replied that the board was seized with the matter but needed to investigate it thoroughly before a decision was taken. She added that SCOPA has had sufficient time to deal with the matter. She explained that the board’s fiduciary duties are important, hence, it is first proceeding with mending the relationship with the AGSA and then proceeding to engage with the ASB and other relevant agencies. The entity is also considering resolving the technical aspects of the matter and having the right standard that will replace IPSA S42. She added that there is a process that has started in developing this and hopefully, by the next court date, something would have happened.

She said that engagements needed to first be undertaken before a recommendation was made and that all recommendations by the AGSA and other stakeholders were taken seriously and being implemented. Hence, she requested more time for the board to go through the merits of the case.

Mr Hadebe said he asked a simple question and it has not been answered, which is whether the heads of arguments were filed with the board’s input, consideration, and approval. He stated that he wanted an answer to the question, but if it was difficult to answer, he asked who filed the heads of arguments and approved for the heads of arguments to be filed.

Ms Francois requested Mr Lukhwareni to respond.

The Chairperson refused and said the question was directed to the board and that when the heads of argument were filed, the board was effectively in office.

Mr Hadebe then asked if Ms Francois was aware that on 30 October 2023, heads of arguments were filed.

Mr Lukhwareni said he would allow Ms Francina Kumalo, Chief Governance Officer (CGO): RAF, to confirm.

The Chairperson interjected and asked if the papers were filed on the 30th and by whose authority the papers were filed.

Ms Kumalo confirmed that the heads of arguments were filed and said that usually affidavits are signed by the Chief Executive Officer (CEO).

Mr Hadebe said he was referring to the one filed on 30 October and not the usual ones.

Ms Khumalo replied that heads of arguments were filed as instructed by the DJP’s dates on 30 October.

The Chairperson criticised the board for not knowing about the filing of the heads of arguments on 30 October. He said that the board appeared before the meeting talking about enhanced governance, due diligence, consultative processes, and being responsible meanwhile, court papers on a substantive matter were filed without the board’s knowledge. He said that the board only learned about the matter for the first time on 29 November, almost a month later. He asked why the meeting should proceed, and how long Mr Lukhwareni had been an Acting CEO.

Mr Lukhwareni said he assumed the role of an Acting CEO for the current meeting as he was representing the Chief Executive Officer as he was not well.

The Chairperson indicated that he believed that a new board sweeps clean, but as it stood, everything was back to square one a year later. He said that the Committee sat discussing the issue extensively and now the RAF was just throwing around technicalities on a simple issue. He asked how the RAF was in court for such a serious matter, and the board did not know. He exclaimed and said; “This is a joke”.

Ms Lesoma asked if the board had delegated its authority to the CEO and the capping thereof as it borders on the authority, policy, and gravity of the matter. At any given time, the matter must go via the board.

Mr Hadebe asked how many meetings the board has convened since its appointment.

Ms Francois said that the board has had two meetings that dealt with the induction of the new members of the board and the signing of the strategic documents and annual reports. She mentioned that the board has been in office for two months.
 
She was aware that the performance agreement of the board and the shareholder’s compact expire in March 2024 and the mentioned matters have not been dealt with. She said that in January, the board will have a strategic session on policy implications in terms of powers and authority. Currently, it has not been formally inducted and signed the necessary documents in terms of going forward, however, the existing delegation of authority still prevails until they are reviewed.

The Chairperson lambasted the board that it wants to engage the AGSA and ASB, yet the RAF is in court with the AGSA, and its board learns about the court processes in the current meeting. He asked what the board was inducted on. He asked the company secretary why the board was not informed about the substantive matter during induction because it has resulted in some issues not being tabled in Parliament. He added that the matter is at the heart of the audit outcomes and that SCOPA needs a better response.

Ms Francois replied that during the induction, the board was appraised about the current state of the matter.

Mr Hadebe said that the board would have then understood the gravity and seriousness of the matter and would have made a follow-up unless, upon the appraisal, the board did not see it as an urgent matter. He asked if Ms Francois was aware that the AGSA was busy preparing to file its heads of arguments due on 30 November, but the RAF still seeks an audience with the AGSA.

Ms Francois replied that the board has only been in office for two months and it has been seized with compliance matters. She added that they were appraised of the matter and decided to first engage the AGSA before a decision was taken. 

The Chairperson said that SCOPA had granted reasonable time, and he wondered what the meeting with AGSA would entail considering the court case. He asked what the RAF would say to the AGSA in the midstream of the court process. He said that the issue is not the merits of the court case but that substantive processes are moving outside the board’s knowledge, yet it is making efforts to engage the AGSA. He said that the Committee was pointing to a governance crisis, and it seemed everything was back to ground zero. He expressed that he was extremely concerned.   

The company secretary said during the induction that the dispute with the AGSA was considered and the background to the matter was shared with the new board members who requested time to thoroughly study the package provided about the court case. The secretary added that there was also a request to meet with the AGSA to hear its side, hence the meeting to be held on 4 December. The secretary mentioned that there were attempts to meet with Ms Maluleke, the Auditor General, but the team will meet the business unit leader with their deputy.

Ms Francois requested some time from the Committee as she needed to engage with the executives on the matter.

Mr Hadebe looked at the letter sent to the RAF by the AGSA about the meeting between the management and the board. He said that the subject matter was the conclusion of the matter discussed at the meeting, which reads that, in conclusion, the board and the management are parties that would make the decision to withdraw the judiciary review of the 2020/21 audit unconditionally. Until then, the AGSA will continue with the necessary preparations for the review of proceedings sat down on the 3rd and 4th of October. He said that the understanding was that the matter was going to be withdrawn unconditionally by the previous board.

He asked what the current board wanted to engage the AGSA on and whether this was to seek alternative resolutions. He said that for the RAF board to seek an audience with the AGSA, it must be privy to the issues.

Ms Francois said she was aware that there is always an alternative to a settlement in any court matter. She admitted that background to the case was provided during the induction but the board wants to understand the merits and the genesis of the court case directly from interacting with the AGSA.

She was unaware of the instruction or commitment that the board would drop the matter unconditionally, as the previous board could have made this. She said that the plan is to engage the AGSA to find a meeting of the minds and she committed to engaging with the executives about the case.

Mr Hadebe said the sought meeting with the AGSA is a fact-finding mission for the board to apply its mind and ensure that due diligence is done.

Ms Lesoma praised SCOPA for how it deals with such matters and that it was factual and direct to the issues. She added that Ms Francois had not yet been properly briefed which meant that it was not a priority for the executive to inform the board about the gravity of the matter. In addition, it seems that Ms Francois does not appreciate that RAF is a government entity and they were appearing before Parliament.  

She suggested that the RAF board sought an update on what was happening from the executives as the current situation was embarrassing. She said that Ms Francois should have taken the opportunity to seek to be appraised on the matter to ensure that they were updated and lead the delegation knowing what she was leading.

The Chairperson quoted the statement of the Portfolio Committee on Transport, which was issued three weeks ago. He read as follows, “The matter should be resolved out of court and RAF must provide a progress report and the entity needed to resolve the high percentage of legal costs.”

Ms Francois responded to the statement as follows, “We are unable to give an absolute answer on the resolution of this matter. We do not have the power to move the hand of the AG in this matter. The previous board tried but failed. The court was the last resort after so many attempts, we could not put a timeline to it as it required agreement from other parties.”

The Chairperson emphasised that this was the position of the board and that there is no will, on RAF’s part, to leave the court and this is inclusive of the board. He said the meeting with the AGSA on 4 December is not an exercise in good faith because RAF fundamentally believes they are right. He said that the delegation and the Committee were going to spin around and go on, but listening to what was being said, he had no hope.

He stated that the RAF continues to define itself outside due process, advice, and guidance of the statutory bodies that matter in the ecosystem of its functionality. It has been a year since the Minister instructed the RAF to get out of court, but nothing has happened. What was now being said was that there would be attempts to get the AG to concede to the matter. He indicated that the accounting standard the RAF used is wrong and no amount of wrestling is going to change that. He stated that SCOPA will engage Legal Services and consider its options if the matter continues, as it is unacceptable. He added that he did not think the RAF was engaging with SCOPA in good faith.

He was uncertain what the Department’s position on the matter was because the shareholder representative should have a position. He asked whether it was the Department's position that the course being taken was the right one and asked why financial solutions should be thrown to non-financial problems.

An AGSA representative confirmed that the AGSA will be filing its own head of arguments to reply to what the RAF has tabled or filed. Secondly, the board requested to meet Ms Maluleke but she replied that due to her commitment, she would not be able to meet. However, if it is related to the litigation, the matter must be dealt with by the legal representatives. If it relates to the audit, the RAF would have to meet the business unit leader with their deputy.

Department of Transport (DOT)

Adv James Mlawu, Director-General, Department of Transport, noted the discussions and the Committee’s position. He said that the board is prioritising the matter; however, the question must be asked about what transpired after the Minister’s letter. Although this does not assist, it might be fair to grant the RAF board some time and the Committee can decide on the deadline. He stated that the matter was of concern and that there are details that are not before the Committee. He indicated that the matter had been discussed at great lengths, even during the induction. What led to the current state of affairs is a decision that has not come through the board. He said that the board is being granted an opportunity to consider its stance and from the shareholder’s side, there is no antagonistic posture other than seeking alternative dispute resolutions.

He stated that there was a meeting with the AG in May and it did not go well, but when the new board came in, it was decided to continue meeting with the AGSA as they consider what the Minister has provided. One of the proposals was the consideration of reopening the 2021 audit, considering the subsequent events, and a response was received that it was not a favourable posture. He said that the board had to consider everything since the meeting and that the Minister did not give a directive but mentioned that the board must consider alternative dispute resolutions.

He stated that an urgent meeting will be convened to discuss whether there is a need to fast-track the new board’s understanding of the matter and added that in the following week, the board may come back with a new resolution.

Mr Hadebe was not sure how the RAF board was not aware of some of the issues that have come up, including the SIU invoice. He asked to whom the SIU submits its progress reports because these were submitted along with the invoice.

He highlighted that it seems to be a transport trend to terminate contracts, and this has led to difficult situations. He said the panel of attorneys' contract was terminated, and the default judgment escalated to R4.7 billion. The same was done with the Passenger Rail Agency of South Africa (PRASA), although the contract was unlawful, and trains are now not running. He asked what the costs of the court claims that were paid then and the subsequent termination of attorneys were to compare the value until currently. He said it needed to be ascertained how many cases the RAF attorneys were losing versus what was paid.

The Chairperson asked if the current board chairperson was not on the previous board.

Special Investigating Unit (SIU)

Adv Andy Mothibi, Head of the SIU, said the submission of the progress reports is regulated through the letter of engagement. In that letter, there is a liaison person to whom the reports are submitted. This used to be the head of forensics who has since been moved to the position of governance officer. He said the expectation is that once these reports are submitted, they should be processed internally.

Regarding the escalating default judgment, he said that the rationale behind the cancellation of the panel’s contract is being looked into and anyone with some light on the matter is encouraged to provide it to the SIU.

The Chairperson was perplexed that the RAF board chairperson served on the previous board but still needed to get details on the court case.

Ms Francois said it was important to understand that being the board chairperson does not make one the board itself, whether they are a new member or not.

The Chairperson requested that the meeting be suspended because he did not believe that the RAF was being honest and fair with the Members. He said that the RAF maintains its outlook and it seemed that the matter will ultimately be in court. He clarified that there is no issue about the court process but there must be a rationale and reasonable course to go to court.

He expressed that the Committee was saddled with an entity whose relevant bodies have indicated that its accounting standard is wrong and it reaffirmed that position. He said that Members visited the RAF and engaged the AGSA extensively including a directive to pull out of court. He indicated that the RAF is committed to this course of action and that the Committee will be strung along with the hope that Parliament will dissolve the matter. He mentioned that there was an unfortunate incident at the RAF where comments were made in the Member’s absence that the RAF enjoys political proximity. He added that Members were not ignorant of the fact that the RAF is allergic to oversight and accountability. He indicated that there is no honesty at RAF.

The Chairperson stated that despite all the efforts made, the RAF continues in its course. He said that he would be surprised if the board does not take action on the issue of the filing of heads of arguments because if it does not, it will confirm that the board is a party to the process. This will vindicate the position of the Committee that it is complicit in this course. He added that if there is no consequence management, then the Committee will be vindicated.

He did not believe that a matter of such great importance to the life and death of the RAF would be dealt with in such a fashion, and he added that there is a game plan and Members see it for what it is. He said that the Committee would reconvene physically in Parliament, the following week, to get an update from the board on its position.

Mr Hadebe suggested that the executive authority should be present in the next meeting. He read from a transcript saying, “The Deputy Minister shared with the Committee that a letter was written by the Department with a directive for RAF to withdraw the case against AGSA due to the legal obligation of the RAF to report to Parliament. The Deputy Minister further indicated that the letter did not contain conditions and it was specific that RAF must withdraw the litigation unconditionally.” 

He highlighted that in April 2023, a letter was written instructing the RAF on what to do and further stated that “the DM said if RAF fails to act on the letter, the Minister will exercise her rights as the shareholder, hence the time granted to RAF to submit everything due to Parliament”. He asked if the shareholder acted since the RAF failed to withdraw the case.

The Chairperson concurred with Mr Hadebe and heeded what the Director-General had said about what has transpired since the letter was issued. The Chairperson said it remains an open door, but it is noted.

He proposed that the meeting take place the following week on Tuesday to avoid the absence of the Minister due to Cabinet attendance. He mentioned that Legal services will be approached as he anticipates a huge risk of oversight.

Ms Lesoma requested to join the meeting.

Mr Hadebe asked for confirmation if all the audits have been submitted to Parliament and said that this is to be clarified in the next meeting.

The Chairperson indicated that 2020/21 was still missing because of the disclaimer. He said the Committee will meet on Tuesday on the RAF matter and virtually on Wednesday to finalise the irregular expenditures.

He thanked everyone present and declared the meeting adjourned.