Professional services firm KPMG — which recently ditched junior miner Salungano, which supplies coal to Eskom, for failing to meet its “risk evaluation criteria” — has laid bare the accounting problems facing the group.
KPMG in its independent auditor’s report for the company’s year to end-March 2023 gave a disclaimer opinion, essentially meaning the auditing firm is distancing itself from providing any opinion at all related to the financial statements.
“We do not express an opinion on the consolidated and separate financial statements of Salungano Group. Because of the significance of the matters described in the basis for disclaimer of opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated and separate financial statements,” KPMG said.
“The directors have not provided us with sufficient appropriate evidence to support the consolidated and separate financial statements being prepared using the going-concern basis of accounting.”
KPMG’s opinion is dated May 20 2024. It resigned as the group’s auditor two weeks later. KPMG raised several concerns about Salungano’s books, according to the report published in the company’s annual report released on Tuesday.
This included the group having not at the time of auditing its books secured the refinancing of its outstanding debt, amounting to R481.5m. It said this debt pile was in default.
KPMG also said the business rescue plan in respect of Wescoal Mining had not been finalised and “accordingly the realisation of the assets and the terms of settlement with the creditors are unknown at the date of issuing these consolidated financial statements”.
The audit firm also flagged that a number of creditors of Salungano’s subsidiary Keaton Mining have filed notice of application for Keaton to be liquidated. Salungano, formerly Wescoal, is opposing the liquidation application.
“The realisation of the assets and the settlement of obligations to affected creditors is unknown at the date of issuing these consolidated financial statements,” KPMG said.
“Included in the separate financial statements, as disclosed in note 8 to the separate financial statements, is an investment in Keaton Energy Holdings, the holding company of Keaton, amounting to R523.6m and a loan receivable from Keaton Energy, as disclosed in note 11 to the separate financial statements, amounting to R420.4m.
“We were unable to obtain sufficient appropriate audit evidence to support the expected credit losses in respect of the loan receivable from Keaton to Keaton Energy and consequently the loan owed by Keaton Energy to the company.”
The auditors concluded that the loans to group companies are overstated by R203.8m and the movement in credit loss allowance is understated by R203.8m.
KPMG further said it was unable to obtain sufficient appropriate evidence to support various journal entries recorded in Keaton’s general ledger “given a breakdown in internal controls” that could affect several financial statement captions.
“Furthermore, the loss before taxation in the consolidated financial statements is understated by the aggregate of audit misstatements amounting to R33.4m which have not been corrected by management. Consequently, retained earnings is understated by R33.4m, current assets overstated by R22.4m, non-current assets understated by R2.7m and current liabilities understated by R13.7m,” KPMG said.
Trading in Salungano’s shares on the JSE is suspended after it failed to publish its 2023 results within the prescribed time as set out by the listing requirements of the local bourse.
Three members of the company’s audit and risk committee resigned last year after the company announced that it would delay the publication of financial results. Andile Mabizela, Nomavuso Mnxasana and Nonzukiso Siyotula resigned from the board with immediate effect.
Mabizela also chaired the social and ethics committee, while Mnxasana headed the remuneration committee and was a member of the nomination committee.
Siyotula, who was the group’s lead independent director, chaired the audit, risk & compliance committee and sat on the remuneration, nomination and project & investment committees.
The company’s directors in their report published in the group’s annual report “noted” that the KPMG audit report contains a disclaimer of opinion, based on material uncertainties related to the company’s going-concern status.
“The directors evaluated the appropriateness of the going-concern assumptions used in the preparation of the consolidated annual financial statements ... and remain satisfied that the company can continue to operate as a going concern. The consolidated annual financial statements were therefore prepared on this basis.”
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