The Road Accident Fund (RAF) has hit out at the auditor-general for issuing a disclaimer on its latest financial statements, saying the audit opinion was based on incorrect accounting standards.
A disclaimer is the worst possible audit outcome and signifies that a company’s accounts cannot be relied on and often indicates that the organisation is in serious financial trouble and poorly managed.
The state-owned entity is responsible for providing appropriate cover to all road users in SA, rehabilitating and compensating people injured as a result of motor vehicles. It collects about R43bn a year through a levy on the fuel price, but has been financially unsustainable for decades and dogged by allegations of corruption, malfeasance and fraud, which have affected its ability to settle claims.
The RAF is regarded as one of the biggest threats to the state’s finances as the government would be obliged to step in and make payments should the fund fail to honour settled claims.
The fund is involved in a court battle with the auditor-general over the audit opinion and the accounting standards used in its most recent annual report, which again offered a bleak assessment of the entity.
“The audit report of the [auditor-general] inappropriately expresses an opinion on the incorrect version of the annual financial statements,” CEO Collins Letsoalo said in a submission to parliament’s finance watchdog, the standing committee on public accounts (Scopa).
At the heart of the dispute is the RAF’s decision to adopt new accounting standards, which the auditor-general believes has resulted in it understating its liabilities by about R300bn compared with the previous year.
Letsoalo said the RAF changed its accounting policy from International Financial Reporting Standards to the International Public Sector Accounting Standards after uncovering that the escalation of its liabilities coincided with an accounting policy adopted in the 2013/2014 financial year that are applicable to insurance contracts. The RAF essentially argues that its liabilities and payment obligations cannot be equated to those of an insurance company.
“The Road Accident Fund is in fact a social benefit scheme and therefore does not have any insurance contracts. It is simply not an insurance company or involved in the insurance business,” Letsoalo said. “Furthermore, it does not fall within the definition of an insurance fund in terms of the Insurance Act ... The Prudential Authority, the RAF’s regulator maintains that the RAF is fundamentally a social benefit fund.”
The fund subsequently approached the high court to stop the auditor-general from releasing the audit report for the 2020/2021 financial year pending a review application. It also argued that publishing the disclaimer and audit report would lead to it suffering irreparable harm and reduce its chances of obtaining funding on its own.
The court dismissed the application earlier this year, saying it was not persuaded that the RAF has established a well-grounded apprehension of irreparable harm if the audited financial statements were published. The RAF is now banking on the review application to set aside published report.
The auditor-general’s office has argued that the disclaimer was issued on the basis that the RAF’s financial statements weren’t prepared in accordance with the prescribed financial reporting framework and weren’t supported by full and proper records.
Officials from the auditor-general’s office told MPs on Wednesday that in publishing the RAF’s annual report, they were following due process and applicable standards, and that the process was fair.
MPs resolved to continue with the meeting later in September as they decide how the matter should be handled since it is still before the court.
“The matter is very serious ... but work must continue to get a structure and manner of the court processes for us to consider whether it would not be in the interest of parliament to join this matter as an amicus curiae [friend of the court] because I am worried about the precedent it sets insofar as audit outcome management is concerned,” Scopa chair Mkhuleko Hlengwa said.
The court battle may open the “floodgates of disputes and negotiated audit outcomes” which would place the auditor-general and parliament in a difficult situation, Hlengwa SAID.
“Without casting aspersions, disputes and court processes must not become the default position,” he added emphasising that the auditor-general’s report still holds despite the dispute.
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