The DA has condemned an instruction note issued by the Treasury in December that exempts state-owned enterprises (SOEs) from reporting their irregular expenditure.
The party has called on finance minister Enoch Godongwana to rescind the note immediately.
The existence of the instruction note, which also applies to provincial treasuries, was disclosed this week by Financial Mail (FM), Business Day’s sister publication.
The instruction note changes the way public entities account for irregular expenditure, which previously had to be reported in the annual financial statements and verified by the auditor. Irregular expenditure from previous years which was not addressed previously had to be carried forward into the next set of financial statements.
In terms of Instruction Note 4, irregular expenditure will not have to be audited though it will still have to be included in the annual report. This means that auditors will not be able to raise concerns about irregular expenditure. The SOE board will also be able to condone previous irregular expenditure that contravened the Public Finance Management Act (PFMA).
Such condonation could occur, for example, when the board sees no possibility of recovering previous irregular expenditure, lost for example during the years of state capture.
In terms of the PFMA spending that fails to meet highly technical requirements such as the obligation to get three quotes for minor purchases is deemed irregular which can give a distorted picture of the state of finances of an SOE.
Losses from criminal conduct will remain in the audited financial statements in terms of the instruction note.
The FM quotes former head of the Independent Regulatory Board for Auditors and current professor in auditing at the University of the Free State, Bernard Agulhas, as saying the instruction note is deeply concerning as it will effectively hide irregular expenditure from members of the public. Auditors will not be able, he says, to report on irregular expenditure, which will only be disclosed in the annual report, which is not technically audited.
The move preceded the exemption given by Godongwana in March to Eskom from disclosing irregular fruitless and wasteful expenditure in its accounts for the next three years. The exemption was withdrawn after a public outcry.
DA finance spokesperson Dion George and MP Ghaleb Cachalia said they were “deeply concerned” about the reporting exemption given to SOEs by the instruction note.
They said the instruction note “means that the stain of past misconduct can be entirely erased, and the board of the SOE can “condone” or pardon previous contraventions of the PFMA.
“This effectively hides irregular expenditure from the public eye and allows management to escape accountability for past misconduct,” they said.
“The result of erasing these numbers from the accounts is that it undermines efforts to recover lost funds and hold those responsible accountable. This instruction by the Treasury fundamentally undermines the principles of transparency and accountability,” George and Cachalia said.
“The regulation will also enable SOEs to attract more funding under false pretences, as it would make them appear more viable and financially attractive than they actually are. It is fundamentally dishonest and misrepresents the true financial health of these entities and the burden they place on taxpayers. By distorting audit outcomes in this manner, the Treasury is enabling a culture that is not only unethical but will also threaten the integrity of our financial system.”
Treasury had not responded to a request for comment on the rationale for the instruction note by the time of publication.
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