Road Accident Fund 2023/24 Audit Outcome: AGSA briefing

Meeting report

Opening remarks

 The Chairperson said that, as planned, National Treasury was supposed to speak to them, but due to the budget delay, that would happen after the budget was tabled. In the meantime, alternative arrangements were being made to continue the planned discussions and add more. The Director General had confirmed they would come as soon as possible.

Today, the meeting would focus on the Auditor-General's (AG) audit outcomes for the Road Accident Fund (RAF). He reminded Members that during the last RAF meeting, they did not have the benefit of the AG's audit outcomes.

The AGSA would present the audit outcomes, and the RAF would meet with them next week. Following today’s meeting, the presentation would be shared with the RAF, along with questions raised during the discussion to help them prepare. The RAF would submit their responses by Friday, which would be distributed to Members before the conversation next week.

The Chairperson then welcomed the Auditor-General's (AG's) team, and invited them to begin the presentation.

 Road Accident Fund audit outcomes

 Mr Nicholas Mokwena, Deputy Business Leader, AGSA, said he was accompanied by Mr Siphesihle Mlangeni, Senior Audit Manager, RAF. They would be presenting the audit outcomes for the 2023/24 financial year.

Mr Mokwena began by noting that the audit had been completed on time, specifically by 31 July 2024, for the first time since 2021. This achievement was significant as it allowed the timely presentation of the outcomes to various oversight structures.

He provided an overview of the audit results, revealing that the RAF had received an adverse opinion for the current year, which was the same as the previous year. This indicated a fundamental disagreement between the AG and the RAF's management on how the financial statements were prepared. The main issue raised was the use of International Public Sector Accounting Standards (IPSAS) 42, which was not permitted for use by public entities in South Africa. Due to this, the RAF had been found to be in non-compliance with the Public Finance Management Act (PFMA), which requires public entities to prepare financial statements that fairly present their financial position.

The RAF had reported a deficit of R1.5 billion for the current year, an improvement from the R8.4 billion deficit in the prior year. However, it still faced financial challenges, with liabilities exceeding assets by R25.55 billion.

Regarding the entity's financial health, Mr Mokwena said that the situation indicated material uncertainty about the fund's ability to continue as a going concern. The RAF had accumulated significant deficits over the past five years, which further signalled the financial difficulties it faces. The AG recommended that the RAF revert to using accounting standards approved by the Accounting Standards Board (ASB) until a new standard specifically for claims liabilities was approved by the ASB.

Moving on to the RAF’s performance, he highlighted that it had achieved 85% of its key performance targets for the year. Notable targets included processing personal claims within 120 days, which exceeded the target set. However, the reduction of three-year-old claims was not achieved, with only 16.99% of the target being met, compared to the 20% target. This shortfall was attributed to the backlog of claims that could not be processed due to insufficient information. Another target related to the rollout of the integrated claims management system was also delayed, which had impacted the efficiency of claims processing. The AG encouraged the RAF to continue its efforts to meet these targets and address the backlog of claims.

On compliance and irregular expenditure, Mr Mokwena discussed the R440 million closing balance of irregular expenditure. He said most of this expenditure was still under investigation by the Special Investigating Unit (SIU) and the RAF’s fraud division, specifically concerning Project Siyenza from the 2017/18 financial year. The AG had emphasised the importance of closing these investigations to resolve the high levels of irregular expenditure.

Regarding the status of litigation, he provided an update on the Supreme Court of Appeal case, stating that in September 2024, the RAF's application for reconsideration had been dismissed. It had then filed for reconsideration with the Judge President of the Supreme Court of Appeal in October 2024, and was awaiting the outcome of this reconsideration.

In conclusion, Mr Mokwena recommended that SCOPA monitor and follow up on the effective oversight of the RAF’s financial statements, key performance targets, and compliance with laws and regulations. Furthermore, he suggested that SCOPA ensure that the RAF’s performance indicators align with key service delivery goals. Lastly, he urged it to follow up on the status of consequence management regarding the ongoing investigation into irregular expenditure.

see attached for full presentation

Discussion

Mr A Beesley (Action SA) thanked the AG for the excellent report. He asked if the RAF had followed the correct accounting standards, how much the loss for the current year would be, and what the accumulated deficit would be. He said that the presentation appeared to be based on incorrect accounting standards, and sought clarification on the potential loss and deficit. He also expressed concern about the growing deficit, predicting that the RAF would soon run out of money and would no longer be able to pay claims. He asked the AG if they could provide an indication of when this would happen, and whether the AG could request personal cost orders against those taking the government to court, as he found it unreasonable for the government to sue itself, with taxpayers bearing the cost.

Mr Mokwena responded that they did not have an exact figure for the provision of claims liability at the moment. He explained that determining the amount required actuarial evaluations, which had not been done for the current year. However, back in 2021, the indicative liability had been over R300 billion, based on the previous financial year. For this year, they could not clearly determine the impact on the income statement, deficit, or claims liabilities, but it was fundamental to their adverse opinion.

Regarding when the RAF would be unable to pay its debts, he said the financial statements showed that liabilities exceeded assets. Current and long-term liabilities were not adequately covered by the RAF’s assets. While the RAF was currently unable to pay its debts immediately, they had managed to operate by paying debts as funds became available.

Mr Mokwena said he was not in a position to comment on the matter of personal cost orders.

Mr F Essack (DA) recalled a meeting with the RAF in September last year. Despite the positive image presented at the time, the AG's report clearly showed the entity's severe financial problems, describing the RAF as being "in ICU" and almost collapsed. He highlighted the significant deficit of R1.6 billion in just one year, which he found alarming and indicated something was seriously wrong.

He asked the AG to clarify a point about the RAF’s failure to achieve targets for the rollout of the integrated claims management system (ICMS). He requested a simple explanation of what was meant by the lack of alignment between the requirements and the solution.

He also expressed confusion over the court cases, questioning what the RAF was trying to achieve by taking the state to court. He criticised the situation as "ridiculous," and asked for the status of consequence management regarding irregular expenditure, which the AG had outlined. He urged the Committee to have a serious discussion about the RAF’s ongoing issues and to decide on actions to address the status of consequence management and the continuous irregular expenditure.

Mr Mokwena responded that the RAF had launched an automation project called Bokamoso to streamline the claims management process. The project was initially supposed to be rolled out last year, but this has not happened. Upon inquiry, it was found that some of the user requirements were not aligned with what had been delivered. As a result, the RAF needed to go back and correct these issues. This had now been addressed, and the RAF had started the actual implementation and piloting of the system.

The Chairperson sought clarification, aiming to ensure accuracy in their discussion. He asked if the dispute was about the evaluation of liabilities from an actuarial perspective, rather than suggesting that the RAF was mismanaging funds to the point of bankruptcy. He wanted to confirm if the liabilities were primarily due to the number of car accidents and victims in South Africa, and not the RAF's own actions. He asked if the problem was that the number of accidents and the associated claims costs exceeded the funds the RAF received from the fuel levy, and if he was characterising the situation correctly.

He asked whether the actuarial calculation had not been done at all, or if it had been done but not applied to the financial statements. He wanted to know if the information existed but was not used, or if the RAF had completely stopped doing the actuarial analysis.

Mr Mokwena confirmed that the issue at hand was indeed about how the claims were being accounted for according to the required standards, and that the quantification of those claims was done through actuarial evaluation. Regarding the evaluation, he explained that the AG had not included the actuarial calculation in their audit because it was not presented in the financial statements. He suggested that management would be in a better position to clarify whether the actuarial evaluation had been done, as it was not part of the financial statements, and therefore not audited or verified by the AG.

Mr C Matiwane (EFF) asked about the adverse audit outcomes, specifically regarding the material misstatement due to the use of IPSAS 42, which was not allowed under the PFMA. He asked whether the AG would consider this misstatement a material irregularity under the Public Audit Act, and whether the use of IPSAS 42 was intended to conceal the RAF's liabilities or indebtedness.

He also raised concerns about the performance report, noting that it was ineffective if it did not include a key performance indicator (KPI) showing actual payments made, as the main mandate of the RAF was to pay benefits to accident victims.

Lastly, he asked about the impact of the court cases where the RAF had taken the AGSA to court in an attempt to withhold or interdict audit reports, and whether these court cases had any effect on the AG's ability to take remedial action.

Mr Mokwena explained that regarding the use of standards that were not allowed, the assessment of whether it amounted to a material irregularity was still ongoing. While they had raised a material misstatement, the impact on the financial statements was still being evaluated. They were considering whether the use of IPSAS 42 had caused harm or loss. The assessment would continue, and the longer it took to resolve, the more it may impact the public.

On the question of whether the RAF was concealing liabilities, Mr Mokwena confirmed that the RAF had not recorded all the liabilities they should have, meaning the liabilities were understated. While the RAF disagreed with this assessment, he said the issue was that the recorded liabilities were inadequate.

Mr Mlangeni addressed the question of consequence management and whether the ongoing court process would trigger a remedial binding action by the AG. He explained that at this stage, they had not determined that the case involved a material irregularity. Remedial binding action would be considered only after a material irregularity notification had been issued. Therefore, until it was confirmed that the matter constituted a material irregularity, a remedial binding action would not be considered. It all depended on whether the matter was ultimately determined to be a material irregularity.

Mr G Skosana (ANC) said he noted that the RAF's overall performance against targets was 85%, which was good, though slightly lower than the previous year's 91%. He also expressed concern about the ongoing issue with IPSAS 42, the contested accounting standard. He said it was unfortunate that this matter continued to affect the RAF's ability to achieve a favourable audit opinion. He pointed out that despite being advised by the court that they had no prospects of success, the RAF continued to litigate and lose, which contributed to the unfavourable audit outcome. He also highlighted the costs associated with the litigation, which used up funds that could have been used elsewhere.

He raised a question about the irregular expenditure. He said that 99% of the irregular expenditure had not been dealt with, with only 1% -- about R4.2 million -- being condoned. He expressed concern about the large sum of R440 million that had not been finalised, particularly R362 million related to Project Siyenza. He asked for an update on the investigation into this R362 million, and also inquired about the remaining R78 million and its status regarding investigations.

Mr Mokwena addressed the question about irregular expenditure, confirming that over 90% of the expenditure had not been resolved. This related to expenditure under investigation by the SIU, which was filed back in 2017/18. The SIU was still investigating the matter, and that they would follow up with them for an update on its status. Regarding the remaining R78 million, he said that it had been investigated, with officials responsible for the irregularities identified. Disciplinary action was now being taken against those found guilty in connection with that amount.

Ms H Neale-May (ANC) raised a concern about the cost of legal bills, suggesting that continuous litigation might be benefiting lawyers. She questioned whether a specific lawyer was giving the RAF advice to keep pursuing cases despite court rulings and recommendations. She emphasised that understanding the full scope of the situation would require looking at both the current presentation and the SIU report together, as it would provide a clearer picture of the RAF’s operations, including the hidden liabilities and deficit.

Ms V Mente-Nkuna (EFF) expressed concern over the apparent contradiction in the RAF's performance and audit findings. She pointed out that despite the RAF meeting its primary function by paying out new claims within 120 days and making significant progress on its backlog, it had still received an adverse audit opinion due to non-compliance with accounting standards. She compared this to other departments that may receive a qualified audit, despite failing to achieve their core functions, like water-related departments that did not deliver on their projects.

She questioned the communication and assessment process, emphasising the importance of being clear and aligned between the AG's findings and what was actually happening on the ground.

Ms Mente-Nkuna also raised a point about RAF’s budget constraints, especially when the number of claims exceeded their budget allocation. She wondered how the RAF should handle situations where they needed to pay more claimants within the 120-day target, but lacked the necessary funds before the next budget cycle. She argued that the current accounting standards did not accommodate such situations, leading to deficits and potentially punitive consequences under the PFMA. She called for a review or amendment of the PFMA to better align with the realities faced by entities like the RAF, which operated under unpredictable and uncontrollable circumstances, like traffic accidents. She requested clarity from the AG, highlighting the need for solutions that account for the challenges faced by public institutions like the RAF, while adhering to the law.

Mr Mokwena said that while the RAF did not comply with accounting standards, resulting in an adverse audit opinion, the AGSA report noted that it had achieved 85% of its performance targets, despite some areas not being fully met. The AGSA audits were based on current standards, and as a result, the adverse opinion was necessary. He agreed with Ms Mente-Nkuna that a new standard should be developed to better address claims accounting, especially in cases of budgetary constraints. However, he clarified that the AGSA could audit based only on existing standards, which had led to the adverse opinion. He urged responsible parties to develop a more suitable accounting standard.

The Chairperson asked if the Compensation Fund would be treated the same way as the Road Accident Fund in terms of accounting. He explained that while the Compensation Fund was not insurance in the traditional sense, it was similar to insurance. The primary difference between the Compensation Fund and the RAF was the volume of claims each handles. He added that if the Compensation Fund faced the same number of claims as the RAF, it would be in a similar situation unless the funding formula changed.

Mr Mokwena said that in terms of the principle, the same accounting treatment for claims should apply to both the Compensation Fund and the Road Accident Fund, as they were similar in nature. He acknowledged that while he was not auditing the Compensation Fund, the same principle should be applied to account for the provisions. He also noted that the issues at the RAF were quite significant.

The Chairperson said that Ms Nkuna had raised a point he was also thinking about. He highlighted that the RAF had achieved most of its targets, as reported in the audit. However, there was an accounting issue that had led to the adverse finding. He said the public might have misunderstood this and thought the RAF was not performing well. The Chairperson compared this situation to other instances where an entity had underperformed on targets, but had still received a better audit outcome due to satisfactory financial reporting. He asked for the auditor's comment on this.

Mr Mokwena said that, as indicated, there were instances where auditees had not achieved most of their targets but still received an unqualified audit opinion with findings or no findings. He explained that when auditing, they focused on three areas -- financial statements, compliance with laws and regulations, and performance information. For financial statements, they assessed whether the auditee had complied with the set standards, and expressed an opinion based on that. In terms of compliance, they checked for any material non-compliance. When auditing performance information, they evaluate its usefulness and reliability, ensuring it aligns with the framework and planning documents. However, they did not express an opinion on the achievement or non-achievement of targets. While underachievement may be noted, it was up to the relevant parties to follow up with management to ensure targets were met.

Ms Mente-Nkuna asked for clarification on the AG's approach to auditing. She pointed out that when an entity like a municipality met financial statement requirements but failed to deliver on service, it still received an unqualified audit opinion. However, the RAF, despite meeting its targets and delivering claims on time, received an adverse opinion due to issues with financial statements. She asked why the RAF, which had performed well in terms of service delivery, was penalised with an adverse finding when others with poor performance in service delivery received unqualified opinions. She wanted to understand how the AG arrived at this conclusion.

She also asked if the AG had engaged with the RAF to propose changes to the law, particularly to amend the PFMA, to accommodate situations like the one with the Road Accident Fund. She emphasised the need to amend the law so entities like the RAF could function properly, especially when circumstances were beyond their control, such as unexpected accidents. She asked if the AG would consider meeting with the RAF and Parliament to propose these amendments and deal with the accounting standards to prevent future issues.

Ms Nkuna said that while the AG was following the law, finding a solution that works for the people was crucial, and suggested that continuing legal battles may not be the best solution in the long term.

Mr Mokwena clarified that the reason for giving the RAF an adverse opinion was based on the audit of their financial statements, which showed material misstatements. The decision to issue an adverse opinion was made independently of the other areas, such as performance and compliance, where there were no material findings. He said that the opinions for each area -- financial statements, performance, and compliance -- were assessed separately. He explained that despite the adverse opinion on the financial statements, this did not affect the performance or compliance opinions.

Regarding engagement with the RAF on the issue of accounting standards, Mr Mokwena said that the AG’s role was to audit based on the current standards available, which were set by the Accounting Standards Board (ASB). He acknowledged the need for suitable standards, especially for entities like the RAF, but emphasised that it was up to the ASB to develop them. Once the relevant standards are updated, the AG would be able to audit against those new standards.

The Chairperson said that this was a discussion that also needed to be had with the ministry. During their last meeting, the ministry had indicated they were working on a funding solution for the Road Accident Fund, and other interventions. These efforts might directly impact the RAF's balance sheet. A solution to the funding problem and how liabilities were understood must be found, so that the solution could be applied to audits in order to determine whether the entity was compliant or not.

Mr D Skosana (MK) pointed out that, in the past, there was no issue when Eskom and Transnet were exempted from certain requirements, and he questioned why the Road Accident Fund was constantly being scrutinised. He emphasised that it was a constitutional right for RAF to take cases to the highest court, noting that they had won some cases in the Supreme Court of Appeal. He argued that it was unfair to criticise the RAF for exercising this right, as decisions made by the courts could vary, and losing a case did not invalidate their right to appeal. He questioned why there was an obsession with preventing RAF from going to court, pointing out that this was a matter of legal rights and fairness, and he urged a level playing field when it came to compliance with the PFMA and other regulations.

Mr P Atkinson (DA) said he had two questions. The first was whether the irregular expenditure included the contract centre tender and procurement process. His second question was about the savings in legal fees. He asked if the average returns or payouts had been evaluated since the panel of lawyers was removed. He said it seemed the average payouts per claim had increased significantly since they stopped defending cases with their own lawyers. He questioned whether this change had been assessed to determine if they were actually saving money or losing more by paying higher amounts.

Mr Mokwena said they had not conducted an analysis on the payout differences after the establishment of the panel. He suggested that the RAF would need to handle that analysis. He also confirmed that the irregular expenditure largely stemmed from instances of non-compliance with supply chain management prescripts.

The Chairperson said that the matter was not currently being heard in the Supreme Court of Appeal, as the court had refused to hear it due to a lack of reasonable prospects of success. However, the RAF had requested a reconsideration from the Judge President of the Supreme Court of Appeal, who was now deciding whether to allow the case to proceed.

The Chairperson emphasised that the funding problem at the RAF was a significant issue, driven by an insufficient fuel levy to cover all claims. This was not a problem caused by mismanagement, but by a mismatch between the funding formula and the scale of the issues the RAF faces. The Auditor General could only apply the rules as they currently stand, and that any change to those rules would need to come from lawmakers or other authorities.

The Chairperson said that the focus of the upcoming conversation with the RAF should be on their financial statements, audit outcomes, and performance issues, not the court case. The legal matter was in court, and the Committee would follow the court’s guidance once a decision was made. He acknowledged the ongoing SIU investigation, dating back to 2017/18. He said it was appropriate to receive an update from the SIU on its status before the next meeting with the RAF.

Mr Skosana said his issue was that the explanation was clear, and they should wait for the court’s decision. He said the RAF had written to the Judge President, which he saw as the proper process, before the Constitutional Court. He did not understand why it was so hard for people to grasp. He said they should wait for the court to decide if the Treasury was correct. The RAF believed they could win, and if not, so be it. They were fighting for the organisation, and if it helped the people, so be it.

The Chairperson thanked the AGSA team for their service to Parliament, the Committee, and South Africa. He also expressed gratitude to the Members for their engagement, participation, questions, and comments. He concluded by mentioning that the Committee would be in touch with the Road Accident Fund later that day to provide guidance, ensuring a focused conversation when they arrive next week.

The meeting was adjourned.