South Africa: SOEs Remain Under Pressure

20 November 2019

State-owned entities (SOEs) are under significant pressure and there is doubt about whether some of them can continue with their operations in future without financial assistance.

This is according to the Auditor General, Kimi Makwetu, who on Wednesday released the national and provincial government's audit results for the 2018-19 financial year in Cape Town.

"There were weaknesses in the performance reporting processes and an increase in non-compliance at the 14 SOEs and their significant subsidiaries audited by the Auditor General South Africa (AGSA).

"These entities also disclosed R1.4 billion in irregular expenditure, although the amount could be even 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 report by the Auditor General said.

The irregular expenditure of the SOEs the AGSA did not audit amounted to R57 billion - which included R49.9 billion at Transnet and R6.6 billion at Eskom.

The AG's report indicates that the results of 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.

"A number of the SOE audits had not been completed by the 30 September cut-off date," the report said.

Makwetu said, however, the situation has improved slightly when compared to this time last year.

He said the delays were mainly due to financial statements and audits that were delayed because of SOEs struggling to demonstrate that they were going concerns.

The report highlights that 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.

"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," Makwetu said.

Key findings of audit outcomes

The audit results for the 2018-19 financial year indicate serious weaknesses in the financial management of national and provincial government that had not been addressed over the past five years.

"The financial health of auditees continued to deteriorate - with departments in particular struggling to balance their finances. Unauthorised expenditure remained high at R1.365 billion.

"There was an emerging risk of increased litigation and claims against departments. Over a third of the departments had claims against them in excess of 10% of their next year's budget," the report said.

A total deficit of R62.06 billion was incurred by the 31% of public entities whose expenditure exceeded their revenue - 90% of the total deficit related to the Road Accident Fund.

"Fruitless and wasteful expenditure continued to rise, with 223 auditees losing R849 million in the current year. Over the five-year period, R4.16 billion of government expenditure was fruitless and wasteful. Irregular expenditure increased to R62.60 billion from the R51 billion reported last year," the report said.

According to the report, overall, the audit outcomes regressed since 2014-15 with only 80 auditees improving and 91 regressing.

"Only 100 (26%) of the auditees managed to produce quality financial statements and performance reports and to comply with key legislation, thereby receiving a clean audit. In 2014-15, 106 auditees had clean audits," the report said.

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