Worst audit outcomes ever for SOEs


More bailouts might be needed for South Africa's state-owned enterprises, whose financial health has "remained under significant pressure", the Auditor-General of South Africa found in the worst audit outcomes for SOEs ever.

This while not one of the 14 SOEs audited by AGSA managed to obtain a clean audit.

Auditor-General Kimi Makwetu reported the national and provincial audit outcomes to the media on Wednesday.

He said the audited SOEs continued to regress from the previous year.

"None of the SOEs managed to obtain a clean audit opinion, with the South African Post Office slipping back to a qualified audit opinion and the Development Bank of Southern Africa regressing from a clean audit in 2017-18 to a financially unqualified opinion with findings in the year under review," he said.

The actual report is more emphatic: "The overall audit outcomes of the SOEs are the worst they have ever been."

Almost no impact from turnaround plans 

"The overall audit outcomes of the SOEs regressed when compared to the previous year and significantly regressed over the last five years. Confidence in the ability of the executives tasked to manage the affairs of SOEs has similarly regressed over the past years," reads the report.

"Turnaround plans initiated almost on an annual basis had almost no impact in restoring the SOE environment, as executive and management instability makes it impossible to hold those responsible accountable. We found the discipline of sustained monitoring and oversight of key controls to be extremely weak at most SOEs."

While a number of SOEs didn't complete their audits by the September 30 deadline, Makwetu noted that this "situation has improved slightly when compared to this time last year". He said the delays were mainly due to financial statements and audits because the SOEs "struggling to demonstrate that they were going concerns".

Significant pressure

The SOEs who didn't complete their audits on time are South African Airways, the South African Nuclear Energy Corporation and Trans-Caledon Tunnel Authority.

The SOEs' financial health "remained under significant pressure" and there was "significant doubt about whether some SOEs can continue with their operations without financial assistance".

AGSA found weaknesses in the performance reporting processes and an increase in non-compliance at the 14 SOEs and their significant subsidiaries audited by the AGSA.

These entities also disclosed R1.4bn in irregular expenditure. But this amount could be higher, as four SOEs – Denel, the South African Broadcasting Corporation, South African Express Airways and the South African Forestry Company – were qualified on the completeness of their irregular expenditure disclosure.

The irregular expenditure of the SOEs the AGSA did not audit amounted to R57bn, which included R49.9bn at Transnet and R6.6bn at Eskom.

However, in the report, AGSA states that many SOEs got new accounting authorities in the past year, and the significant increase in irregular expenditure at these SOEs are "due to a drive to clean up irregularities from the past".

The AG's report highlights how the 10 departments responsible for overseeing SOEs did not have consistent oversight practices and the majority did not adequately plan for their oversight function and report on it in their performance reports.

"As the audit office, we recommend that the SOEs be directed by stabilising their leadership tasked to operationalise the action plans designed to improve the strategic direction and internal controls of the SOEs," said Makwetu. 

"Those tasked with the oversight of SOEs should set clear responsibilities to periodically evaluate the SOEs' actual performance against the predetermined performance targets and to implement consequences when such targets are not met."

Government exposure

AGSA's report also had a look at the government's financial guarantees to SOEs.

Government provided financial guarantees of R446bn, compared to R428bn the previous year, to 11 of the SOEs, one more than the previous year.  

The total government exposure relating to these guarantees amounted to R328bn, compared to R290bn the year before.

"SOEs therefore used 13% more of the guarantees in the current financial year than in the previous year," reads the report.

Eskom got the biggest slice of the pie, with 78% of the total guarantees, with the total cumulative guarantees issued to Eskom amounting to R350bn with a R286bn exposure as at March 31, 2019, a 17% increase in the utilisation of guarantees.

"The amount stated as total exposure means that the SOEs utilised the guarantees to obtain loans from lenders. Even despite the difficult economic conditions, it is commendable that some SOEs sustained their operations and fulfilled their dual mandate with their own resources, with minimal or no support from government," reads the report.

"The key enablers to SOEs being able to sustain themselves are often found in leadership stability, well-considered performance plans, key financial ratios that are monitored to avoid falling behind on financial management responsibilities, and those charged with governance and oversight holding officials accountable for commitments and periodically monitoring SOEs’ performance against predetermined objectives."

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