Another state entity is costing taxpayers millions with irregular expenditure habits

The South African Forestry Company Limited (Safcol), which falls under the Department of Public Enterprises, manages 10.5% of the commercial forests in South Africa.

Despite giving a nod to the Public Finance Management Act (PFMA), National Treasury regulations and the report on corporate governance, Safcol had no problem in ratcheting up another R222 million in irregular expenditure in 2018, arriving at the grand total of R592 million (2017: R369 million). To top this, the Auditor-General (AG) handed down a qualified audit opinion.

The irregular expenditure relates primarily to non-compliance with the group supply chain policy, but this did not dissuade management from “condoning” R272 million.

I could not find any reference to the shareholder condoning this expenditure. How does one condone non-compliance that cost the taxpayer R592 million? Safcol commented: “According to legislation, irregular expenditure is condoned by the board. Relevant disciplinary action has been taken where appropriate.”

The financial overview written by the then-acting chief financial officer states that: “It is hoped that the PFMA will introduce a timeframe in terms of reporting so as to provide certainty to entities on the parameters for identifying and reporting” on irregular expenditure. What an extraordinary request. Reporting timeframes are clearly set out. However, irregular expenditure is simply unacceptable. It shouldn’t occur. Ever.

The corporate governance of Safcol and its subsidiaries appears to be non-existent.

A new board was appointed by Minister of Public Enterprises Pravin Gordhan, effected on October 1, 2018, for a three-year term that ends on September 30, 2021. However, a board that is not supported by competent staff and appropriate financial systems will not be helpful.

Safcol however says the board is ensuring “continuous improvement of governance and internal controls” and that it “provides oversight of the entity and its activities”.

The total comprehensive loss for the year is R87 million. A profit of R150 million was recorded in 2017. The fair value gain on biological assets amounted to R751 million (2017: R915 million). In my view, the number of accounting errors does raise a question mark over the accuracy of the fair value adjustment. 

Qualified audit report

A brief summary of the detailed audit report:

1. The AG was unable to obtain sufficient appropriate audit evidence that all irregular expenditure had been recorded. In addition, Safcol did not have adequate systems to collect and record information.

2. Retained income was overstated by R59.5 million, financial liabilities by R51.5 million, the risk management figures were incorrect, and the AG was not able to obtain sufficient audit evidence for errors in the prior period.

3. The financial statements of the Komatiland Forests subsidiary were materially misstated.

4. There were many accounting errors, and prior-period figures had to be restated. However, supporting information was not provided, so not all necessary adjustments could be made.

5. Effective and appropriate steps were not taken to prevent irregular expenditure as required by the PFMA, neither could the irregular expenditure be quantified.

6. Effective steps were not taken to prevent fruitless and wasteful expenditure amounting to R174 000, as required by the PFMA. Fruitless and wasteful expenditure arose mainly from interest paid on overdue accounts.

7. Loans provided to Komatiland Forests were not authorised by the board of directors and were not approved by way of a special resolution adopted by the shareholder within the previous two years as required by the Companies Act.

8. The financial statements submitted for auditing were not prepared in accordance with the prescribed financial reporting framework and were not supported by full and proper records, as required by the PFMA.

9. Material misstatements of revenue, other operating income, current assets and disclosure items identified by the auditors were corrected and the supporting records subsequently provided. However, uncorrected material misstatements and supporting records that could not be provided resulted in the financial statements receiving a qualified opinion.

10. The procurement process was not fair, equitable, transparent or competitive, and there were many contraventions. The control procedures over procurement processes did not always include sufficient review and monitoring of compliance with the relevant legislation.

11. There is a question mark over whether there is any consequence management. It remains to be seen whether steps will be taken against the officials who incurred the irregular expenditure. Safcol says: “Management including the board are taking relevant action to ensure that the gaps identified in the AG report are closed and to ensure good corporate governance is in place in the company.”

12. There were deficiencies in internal control – executive management did not exercise effective oversight responsibility over financial reporting and compliance with legislation, or the related internal controls.

13. Senior management did not always ensure that the financial statements prepared were accurate and complete, or agree to supporting schedules. Misstatements were identified on the financial statements, which resulted in material adjustments submitted for audit.

Annual performance report

In auditing the annual performance report comprising financial sustainability, operational and socio-economic excellence, the AG stated that the reported achievement could not be supported by sufficient, appropriate audit evidence and was not valid and/or inaccurate and/or incomplete.

Having identified material misstatements in the annual performance report, the AG raised material findings on the usefulness and reliability of the reported performance information.

An unnecessary cost to taxpayers

Contingencies and ongoing litigation

There are approximately 44 registered land claims.

Safcol has provided a guarantee to the amount of R160 million in respect of Komatiland Forests’ obligations.

Safcol is defending a number of legal actions. The financial exposure arising from damages claims resulting from fires amounts to R207 million.

Late publishing of report

Safcol replied: “After the Integrated Report [IR] is tabled at the AGM, there are various processes which need to be followed before the IR is published.”

Another state entity, another example of lack of corporate governance, no consequence management, mismanagement, and irregular expenditure. What surprises will the 2019 annual report contain?

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