SOEs demonstrate galling lack of governance

Maybe, just maybe, the senior executives at the 2o or so state-owned entities (SOEs) should have ensured their financial governance were squeaky clean before they met President with Cyril Ramaphosa last week.

Then they would have not have had the spectre of why they had spent billions irregularly.

ALSO READ RIGHT OF REPLY: Sanral remains the victim of lazy analysis and shoddy reporting

In the interests of transparency, I thought it prudent to disclose the key findings arising out of the latest external audit reports on the annual financial statements of these SOEs. Some of them have been discussed at the state capture inquiry, but this article is only concerned with the 2018 external audit reports.

Our SOEs have demonstrated that they are quite adept at ignoring the National Treasury regulations, and contravening the Public Finance Management Act (PFMA) and the Companies Act. The SOEs who met with the President have run up irregular expenditure of a minimum of R178.5 billion by March 31, 2018.

This is a showcase for how the South African Government has completely lost all semblance of control over these entities.

It should be noted that an unqualified opinion does not, in my opinion, exonerate a company from contravening IFRS, and the PFMA. Where misstatements were detected by the external auditor, and subsequently corrected, an unqualified audit opinion is given. A ‘material uncertainty’ related to whether the entity is a going concern does also not result in a qualified opinion.

The hall of shame: Forensic investigations and litigation

Some of the SOEs in the spotlight are undergoing forensic investigations into serious issues other than IE and/or are embroiled in ongoing litigation.

In the case of Alexkor, the Minister of Finance has initiated an investigation into alleged irregularities regarding awarding of the diamond marketing tender to a supplier.

The CEF is a defendant in a number of litigation matters, the most significant of these relates to the court application to set aside the disposals of crude oil stock on the basis that the disposals were unlawful, invalid, and unconstitutional. A forensic investigation is being carried out by an independent consultant around matters relating to a contract review process conducted at Strategic Fuel Fund Association NPC, a subsidiary of the CEF.

Eskom too is under scrutiny in ongoing investigations into alleged irregularities, fraud and corruption at the power utility.

Petro SA has an obligation to rehabilitate and abandon its offshore and onshore operations valued at R8.1 billion with cash set aside of R2.4 billion and therefore the provision is currently underfunded by approximately R5.7 billion.

Four investigations currently being undertaken by the South African Police Service’s directorate for priority crime investigation (Hawks) are looking into allegations relating to financial misconduct, fraud and improper conduct in supply chain management:

1. Alleged failure by the entity to follow competitive bidding processes in appointing a legal firm for the Sabre deal. The award to the company was concluded on January 12, 2012. The investigation is still in progress.
2. Alleged failure by the entity to follow competitive bidding processes in the appointment of PetroSA’s transaction advisor in respect of Project Irene. The company was appointed on November 8, 2011. The investigation is still in progress.
3. Alleged unauthorised change in the financial recommended terms and conditions of the acquisition of upstream assets in March 2012. It is alleged that additional fees were added onto the purchase agreement without the approval thereof by the board. The investigation is still in progress.
4. Alleged unauthorised change in the financial recommended terms and conditions of the PetroSA-Sabre acquisition agreements. It is alleged that in December 2011 the purchase price for Sabre was increased without board approval and was unfavourable to PetroSA. The investigation is still in progress.

Prasa is facing an ongoing lawsuit related to the purchase of locomotives. Forensic investigations arising out of the Public Protector’s 2015 report are ongoing. The Directorate for Priority Crime Investigation is investigating cases reported by Prasa in terms of the Prevention and Combatting of Corrupt Activities Act.

In the 2017 AG report, paragraph 17 states that: “SAA did not report the reasons for not adopting a resolution to file for business rescue while the company was in financial distress to the affected parties, as required by section 129(7) of the Companies Act.”

The Special Investigations Unit and the forensic unit of the SABC are in the process of conducting several investigations into instances and allegations of financial misconduct and possible fraud.

Safcol is experiencing ongoing litigation in regard to fires. Read: Safcol irregular expenditure ballooned to R592m in 2018

An investigation into allegations of maladministration and irregular procurement processes relating to the Gauteng e-toll contracts at Sanral was conducted by the Public Protector, in terms of Section 182 of the Constitution. This investigation was concluded on January 30, 2018. Secondly, the Directorate for Priority Crime Investigation is currently investigating offences perpetrated against Sanral by various construction companies. This investigation has been ongoing since 2013.

Transnet is facing ongoing investigations into alleged irregularities and potential fraud. Lease agreements were entered into with lessors without following formal lease application processes. The group instituted investigations into alleged procurement-related irregularities on the acquisition of 1 064 locomotives.

The PFMA requires that financial statements have to be submitted for auditing within two months of the financial year-end. I wonder how many SOE’s have already ignored this requirement?

How many SOEs have inadequate systems of internal control and recording of financial statements?

How many SOEs cannot even determine how many assets they have?

How many more SOEs have a material uncertainty relating to going concern?

How much more irregular expenditure has been incurred?

The hall of shame is on the rise.

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