The auditor-general, Kimi Makwetu, recently released his audit opinions on the financial statements of South African Airways (SAA) and Mango for the year ended March 31 2017, which suggest delinquent conduct on the part of the directors and provide further evidence to support the Independent Regulatory Board for Auditors’ (Irba’s) proposals for auditor rotation.
Makwetu’s qualified audit opinions warrant closer analysis, especially when juxtaposed with the consistently "clean" audit opinions supplied by large international audit firms for these state-owned enterprises.
It must be asked whether the auditor-general and his team possess unique talents that allow them to unearth financial misadventures the audit firms have consistently missed. Or is it just a coincidence that the SAA group went rogue in the first year in which Makwetu was responsible for the audits?
Truth be told, the track record of mismanagement at SAA confirms that the likelihood of the airline only "going bad" in the past 12 months shares the same probability as Donald Trump committing to retain top staff for longer than a year.
While the media have reported on the massive losses incurred by SAA for the 2017 financial year, insufficient attention has been paid to the detail of Makwetu’s audit opinions, which portend what is to come, especially with regard to throwing more good money after bad.
In his preamble to the tabling of his audit opinions, Makwetu was at pains to explain the importance of adhering to sections 55 and 65 of the Public Finance Management Act.
These require that the accounting authority (the board) submit financial statements for auditing within two months of the year-end and that within five months the accounting authority must submit the annual report, audited statements and audit report to the relevant executive authority responsible for the entity, and table them in Parliament within one month.
Makwetu confirms that the accounting authority for SAA only submitted its statements for auditing on October 31 2017, in breach of section 51, and that he completed the audit on December 8 2017. He adds that since the executive authority did not table the relevant reports before Parliament, he was obliged to publish his audit report for Mango and SAA in terms of the Public Audit Act notwithstanding the absence of financial statements and the annual report.
Even when faced with shambolic sets of accounts, the audit profession, for reasons best known to itself, adopts a walking-on-eggshells diplomacy, and in certain aspects Makwetu stayed true to his vocation. But it is in the detail of his audit opinions that he provides concise insight to the disgraceful state of affairs at SAA.
His audit opinion for the unreleased SAA financial statements for 2017 is qualified under a number of subheadings:
Property, aircraft and equipment. Makwetu records that SAA did not adequately review the useful lives and residual values of these assets and some were not even recorded. He was unable to obtain sufficient evidence to assess impairments and was unable to determine the correct net carrying value of these assets. In other words, a material R4bn balance sheet line item cannot be verified owing to financial maladministration.
Inventory. With respect to spares and parts, Makwetu was unable to obtain reasonable audit assurance that inventory at SAA Technical was fairly valued owing to the fact that the assumptions applied in calculating net realisable value could not be supported by appropriate audit evidence. This meant an almost R1bn balance sheet line item could not be verified.
Maintenance costs. SAA was unable to recognise maintenance costs in accordance with global accounting standards, and these were also recognised in wrong accounting periods and/or using incorrect exchange rates. Maintenance and trade payables were understated by more than R500m.
Irregular, fruitless and wasteful expenditure. The auditor-general concluded that SAA did not establish adequate controls to maintain records of irregular expenditure and that he was unable to establish what these amounts should be in rand terms, a breach of the Public Finance Management Act.
Makwetu said the directors also failed to ensure assets were properly managed and safeguarded and failed to ensure that all goods and services were procured in a manner that was fair, transparent and competitive.
Equally troubling is his concern with respect to "internal control deficiencies", where he confirmed a decline in the internal control environment, lack of action to mitigate emerging risks, failure of leadership to tackle nonperformance, failure to handle audit findings timeously and to ensure human resources were sufficiently skilled and that individuals were accountable for nonperformance, and a lack of governance in information technology.
Regarding financial and performance management, Makwetu found SAA did not implement proper record-keeping in a timeous manner to ensure that complete and accurate information was accessible and regular reconciliations were not conducted. Effective financial systems of internal controls had not been implemented to ensure accurate financial statement preparation, and the review of the statements was not adequately planned.
The above snapshot of the dysfunction at SAA serves to highlight not only a delinquent board, but also the futility of bailing out an organisation that has no internal or financial controls.
Makwetu’s findings ask serious questions of the performance of the external auditors in previous years, when SAA received clean audit opinions.
In conclusion, one must ask whether an executive team and board incapable of managing and overseeing elementary financial accounting principles can be entrusted with the overall responsibility of vital aircraft maintenance and safety. Is it not a matter of time before there is a catastrophic incident, the cause of which is not pilot error?
• Mantell runs a biscuit factory in Cape Town.
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