The auditor-general of South Africa’s (AGSA’s) audit opinion of South African Airways (SAA) for the 2016/2017 financial year regressed from an unqualified audit opinion with no findings during the financial years running from 2012 to 2016 to a qualified audit opinion with findings on compliance with legislation as well as findings on performance information predetermined objectives.
Prior to the AGSA auditing the airline in 2016/2017, from 2012 to 2016 financial years the joint audit was conducted by PricewaterhouseCoopers (PwC) and Nkonki. The two firms had issued clean audits for five consecutive years.
A business executive at the AGSA, Polani Sokombela on Friday told the commission of inquiry into state capture that the audit opinion for the 2016/2017 financial year “regressed from being a clean audit to a qualified audit with a significant amount of findings”.
Responding to the chairperson of the commission, Deputy Chief Justice Raymond Zondo, Sokombela said it is outside of the mandate of the AGSA to express an opinion on the work done by PwC and Nkonki.
Sokombela said though the AGSA was allowed access to the audit file and working paper of the previous auditors, which the AGSA used for its “own purposes”, some issues were noted, which included a lack of documentation, resulting in the AGSA having to perform “painful” additional procedures, especially for SAA management.
Zondo noted that the examples found by AGSA which Sokombela listed as issues gave rise to a question whether a proper job had been done resulting in the findings of clean audits in the five years from 2012 to 2016.
Sokombela told the commission that the audit of SAA was done by the AGSA for the first time in the 2016/2017 financial year.
He said the national carrier at the time faced a lot of instability and that more than 40% of critical vacancies were filled in an acting capacity, which created challenges. These included a CEO, chief financial officer, commercial officer – “a very, very important official”; a chief procurement officer, and a chief strategy officer, a position which Sokombela clarified was not vacant but the incumbent was on suspension.
The newly appointed board at the time did not have an aviation specialist or someone with experience in the sector, which the AGSA identified as a possible challenge, Sokombela told the commission.
The AGSA found a number of issues at SAA, which include a serious challenge of compliance with legislation and concerning amounts of irregular and fruitless and wasteful expenditure, the commission heard.
Sokombela said during that year under review, SAA disclosed R125 million as irregular expenditure – “but this was not complete”.
The airline’s legal division and office of the company secretary were “severely under capacitated”, Sokombela said, adding that SAA was operating on letters of awards, with no contracts signed between the national carrier and a majority of its suppliers.
“That also, in our view, was a big risk for SAA,” Sokombela said, explaining that without a contract, controlling suppliers would be difficult for the entity.
“But [suppliers] were paid based on these letters of awards,” he added.
Sokombela said the airline operated like this for “quite some time, for some years”.
The credibility of SAA’s contract register was questionable, Sokombela said, which led Zondo to question why the previous auditors had not picked this up as a concern.
“If they found it in the state that it was [when the AGSA started auditing SAA] they ought to have picked it up,” Sokombela responded, adding that he did not know whether PwC and Nkonki found SAA’s contract register in the same state as it was during the 2016/2017 financial year.
One of the concerns the AGSA had with the office of the company secretary was in it fulfilling one of its responsibilities, which is advising the board, the commission heard.
Sokombela said for many board resolutions, the AGSA could not see where the company secretary had advised the board.
An example Sokombela gave was when SAA provided financial assistance to its subsidiaries contrary to Section 25 of the Company’s Act and at a time when the airline was in financial distress when its liability exceeded assets and it was insolvent, among other issues.
Sokombela told the commission that record-keeping “was a significant concern” for the AGSA, which led to it sometimes getting information it had requested only after three months.
Some of SAA’s policies were outdated, with some only updated five or ten years prior to the 2016/2017 financial year, which created challenges, especially in the auditing process, Sokombela said, adding that the AGSA realised that this meant “no one was accountable for anything”.
Sokombela said SAA management was responding very slowly to addressing the AGSA audit findings, “that was also a challenge”.
He said there was no discipline of record management at SAA, “each and every business unit would do what they like”.
The quality of the airline’s annual performance report “was very poor”, Sokombela said.
Another “quite significant” concern the AGSA had was with the ineffective information technology infrastructure at SAA, the commission heard.
“The information technology department is supposed to work as an enabler to business … but we saw there was no effective communication between the two,” Sokombela said.
He added that a lot of paper was being used at SAA, instead of the SAP system in place being put to effective use.
Sokombela said risk management processes at SAA lacked maturity and that the delegation of authority did not operate optimally.