Godongwana rejects Eskom’s financial reporting exemption application

Finance Minister Enoch Godongwana has rejected Eskom’s application for a partial exemption from the Public Finance Management Act (PFMA) and National Treasury regulations, which would have allowed it not to disclose irregular, fruitless and wasteful expenditure and material losses from criminal conduct in its annual financial statements.

Godongwana said on Wednesday he recognises the commitment of the Eskom board and management to fight and expose fraud and corruption, and the additional compliance and reporting burden facing Eskom and other state-owned enterprises (SOEs).

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Eskom must do more to recover

However, the minister added that Eskom needs to do more operationally to reduce the scope of fraud and corruption before such an exemption can be considered, and for it to be effective.

“As Eskom attempts to recover from the devastating impact of State Capture, and take steps against past and current corruption, it needs to ensure that its anti-corruption strategy is credible and has the support of key stakeholders like investors, lenders, suppliers, customers, and the public,” Godongwana said.

The decision drew praise from civil society organisations and analysts, including the Organisation Undoing Tax Abuse (Outa).

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Eskom said it accepts the decision by Godongwana not to grant a partial exemption from reporting in terms of a section of the PFMA and will continue to report in terms of the National Treasury instructions in this regard.

The state-owned power utility added that various initiatives have been implemented to deal with fraud and corruption, past and present.

“Due to legacy issues, it is expected that the auditors will continue to qualify Eskom’s financial statements on 31 March 2023 regarding the completeness of information reported in terms of section 55(2)(b)(i) of the PFMA,” added Eskom said.

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Godongwana commended

Outa CEO Wayne Duvenage commended Godongwana for the decision not to grant Eskom the exemption.

“We objected to this, as did many people … When this idea was first mooted, and it is right to commend the Minister for following due process thereafter, for reversing that decision, receiving comments from all sectors of society, heeding those calls and deciding not to go ahead with the granting of that exemption.”

“It is important to recognise the right decisions when they are made,” he said.

Duvenage added that while Outa acknowledges that it is more onerous for SOEs in their financial reporting, from a business perspective this is South Africans’ money and there needs to be extreme transparency and strong governance and oversight of fruitless and wasteful expenditure.

“This is not a normal business where shareholders can pull out of the company’s investments. This is our [taxpayers] money. We have no choice in investing. Government makes those choices on our behalf, and we need utmost transparency,” he said.

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In Outa’s submission to National Treasury objecting to the exemption, it voiced concern over Eskom’s history of corruption, and by granting such an exemption, it could create an environment encouraging even more money to go missing.

Energy analyst Chris Yelland said the decision is a complete vindication of the voice of the public and of civil society, which did not believe it was justified, and a complete rejection of Eskom’s application.

“It was being done for the wrong reason. If Eskom is in breach of its loan covenants, it’s in breach of its loan covenants and you don’t retrospectively change the rules of the game to save Eskom’s bacon. It was about Eskom’s going concern status when they are serious doubts about it,” he said.

Yelland said the rationale for the exemption was fundamentally misguided and invalid because the attitude of financial institutions towards Eskom would be the same whether this information was published in Eskom’s annual financial statements or in a report to Parliament.

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Public outcry

There was a public outcry when National Treasury initially exempted Eskom from the provisions of the PFMA and National Treasury regulations on 31 March 2023.

National Treasury justified the initial granting of the exemption by claiming pressure would be placed on the fiscus and the borrowing powers of SOEs would be limited if the exemption granted to Eskom from disclosing irregular and fruitless expenditure in its annual financial statements was not considered.

It further stressed that the exemption still required Eskom to disclose financial and non-financial information on irregular, fruitless and wasteful expenditure but only in its annual report and not in its annual financial statements.

The widespread criticism of the approval of the exemption application resulted in Godongwana announcing, only a few days later, the withdrawal of the exemption “to allow for a period of further engagement and written technical input from all relevant stakeholders on the matter”.

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Godongwana said on Wednesday National Treasury had engaged with the Auditor-General and considered all public comments received on the proposed exemption for Eskom.

He said 56 comments were received and a broad spectrum of accounting and reporting, auditing, governance, legal principles, and public interest issues have been considered.

Godongwana said National Treasury also engaged with audit firms, professional auditing and accounting bodies, a rating agency, and other relevant authorities to discuss the challenges and “seemingly onerous compliance reporting requirements” applicable to SOEs such as Eskom.

“Although irregular expenditure does not automatically equate to fraud and corruption, many comments submitted view irregular expenditure as an indicator of how SOEs are managing their finances,” said the minister.

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Onerous

Godongwana said the extensive PFMA reporting requirements “makes it more onerous” for a SOE than a listed company to have its financial statements qualified, “even when there is no financial mismanagement or corruption”.

“This in turn has the perverse effect of making SOEs more likely to require funding, or a guarantee, from the fiscus.

“It will be critical for the country that SOEs are not dependent on fiscal allocations and guarantees for their capital and operational funding requirements,” he said.

Godongwana said National Treasury remains committed to upholding the highest standards of financial governance in the management of Eskom’s finances and not compromising the ethos of the PFMA.

In addition, National Treasury will continue to assist Eskom to strengthen its mechanisms to prevent, detect and investigate any financial irregularities, and ensure that acts of fraud and corruption are fully and properly reported, regardless of the reporting requirements.

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However, Godongwana said National Treasury believes SOEs are facing legitimate technical challenges regarding compliance reporting and there is a need to differentiate between corrupt and suspicious transactions, and expenditure made in good faith, but that do not necessarily comply with the plethora of financial and non-financial laws and rules.

Godongwana said the comments from professional bodies and experts provide the basis for further engagement on the accounting and compliance reporting challenges, and will assist in developing a better framework for compliance reporting in SOEs.

The National Treasury is committed to collaborating further with relevant stakeholders and authorities to contribute to these reforms and ensure that the PFMA adequately addresses the complexities of financial reporting in the public sector, he said.

“Treasury will also continue to work with the Auditor-General to develop a revised irregular, fruitless and wasteful expenditure framework to form part of the PFMA reforms and address these and other financial and compliance reporting challenges, which will be finalised after an appropriate consultation process, for implementation in 2024 and after,” he said.

This article originally appeared on Moneyweb and was republished with permission.
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