Questions raised over Eskom’s irregular expenditure
THE RECENTLY presented Eskom 2017 annual financial statements (AFS) raise serious questions concerning the performance and compliance with respect to applicable legislation and rules by its directors, operational management and external auditors.
It is now public knowledge that external auditors SizweNtsalubaGobodo have expressed an audit opinion that the AFS fairly presented in all material respects the financial position of Eskom, with the qualification that Eskom did not have an adequate system for identifying all irregular expenditure and that no satisfactory audit procedures could be performed by the auditors to obtain reasonable assurance that irregular expenditure had in fact been accurately recorded – essentially, a polite way of explaining that the Eskom supplied figure in the AFS of R3 billion in irregular and wasteful expenditure could not be verified and that this might be just the tip of the proverbial iceberg.
Corporate governance and accountability feature prominently in the lexicon of corporate speak and together with some applicable statutes and professional rules it provides the backdrop against which the performance of directors, operational management and the external auditors must be measured after taking into account disclosures made in the Eskom AFS.
The Public Finance Management Act (PFMA) clearly addresses the corporate governance and accountability of the accounting authority (board) and responsible officials to whom authority has been delegated.
Section 50 covers the fiduciary duties which require that the board exercise utmost care to ensure protection of assets and that they act with fidelity, honesty and integrity and may not act in a way which is inconsistent with the responsibilities assigned to them by the PFMA.
Section 51 requires that the board maintains an effective and efficient system of financial risk management and internal control and that an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost effective as well as a system for properly evaluating all major capital projects prior to a final decision is maintained.
Section 51 also demands that the board must prevent irregular, fruitless and wasteful expenditure, losses from criminal conduct and expenditure not complying with operational policies and that effective disciplinary steps must be taken against employees who undermine the internal control systems of the entity and who permit irregular or fruitless and wasteful expenditure.
Section 86 confirms that a board of directors (accounting authority) is guilty of an offence and liable on conviction, or to a fine or to imprisonment for a period not exceeding 5 years if that accounting authority wilfully or in a negligent way fails to comply with Sections 50, 51 or 55.
Operational management The Code of Ethics of the Institute of Internal Auditors of South Africa requires that principles be applied and upheld which include integrity, objectivity, confidentiality and competency.
Internal control is the system within an entity which ensures the operational efficiency, reliable financial reporting and compliance with laws and regulations and the safeguarding of assets.
The chief audit executive (CAE) of Eskom is required to ensure a well-functioning system of internal control and where necessary, the CAE must obtain the necessary high level support from the board to achieve this objective.
The conduct of external registered auditors is governed by statute, including the Audit Profession Act.
An external auditor should conduct his or her work with professional competence and due care and this would include appropriate audit planning to identify high risk audit areas so as to ensure sufficient audit work is conducted to provide the necessary audit evidence to support the opinion expressed by the auditor in the AFS.
International standards on auditing (ISA) govern the profession and ISA 200 covers professional scepticism which demands that the external auditor must plan and perform an audit with a questioning mind and be alert to conditions indicating possible misstatement due to error or fraud.
Although the media has covered the “highlighted numbers” in the Eskom AFS, it is the disclosures within the statement of directors’ responsibilities, the report of the audit and risk committee (ARC), the report of directors and the report of the auditor which raise legitimate questions as to whether the board, operational management and the external auditors have discharged their respective duties adequately.
The statement of directors’ responsibilities confirms “that the AFS have been prepared in accordance with International Finance Reporting Standards, the PFMA as well as the Companies Act” and confidently boasts that “in meeting its responsibilities, the board sets standards and management implements systems of internal control. The controls are designed to provide assurance that assets are safeguarded…”
The report of the ARC confirms that it has considered “the effectiveness of the internal control systems and governance processes as well as the compliance with legal and regulatory requirements” and it has also “considered the performance of the assurance and forensic department” and concludes that “internal accounting controls are adequate… and that nothing has come to the attention of the committee to indicate a material breakdown in the functioning of controls… and that controls are still appropriate to ensure compliance with the Companies Act and the PFMA.”
Commercial rationale The report of the directors asserts “that the ARC ensures that internal controls are effective… and that Eskom’s internal audit function is managed by the assurance and forensics department which reports directly to ARC” and that the board “has complied with its fiduciary duty towards the company in that all contracts were concluded in line with Eskom procurement policies and that all transactions have a clear commercial rationale.”
The report of the auditor confirms that the financial statements fairly present in all material aspects the financial position of the group and only qualifies its report with respect to the veracity of rand figure of irregular expenditure.
Seven “key audit matters” are noted which the auditor has identified as most significant to the audit and these matters include the valuation of plant and equipment, future fuel supplies and trade receivables.
Eskom’s AFS report that procurement on coal, nuclear, diesel and power from independent power suppliers totalled R83 billion in 2017 and a further R23bn was spent on repairs and maintenance – all of which, in terms of National Treasury requirements, would be subject to procurement and tender processes.
The AFS also report that R56bn was spent on fixed assets, bringing total 2017 procurement spend to R162bn, a figure which dwarfs any other line item in the AFS in terms of materiality.
Notwithstanding the material rand value of procurement, the external auditors, for reasons best known to themselves, appear to have concluded that procurement would not be a key audit matter which would be significant to their audit.
Available media reports indicate consistent failure of fiduciary duty by the board and a shambolic system of internal control with respect to procurement and one must ask if the board and operational management is not in breach of Section 50, 51, 56 and 57 of the PFMA and if the disclosures in the report of directors are accurate and fairly present the position as required by statute.
Contradictions abound and good examples are the board reporting satisfactory internal control compliance and acceptable compliance with the PFMA whilst the auditor confirms “significant internal control deficiencies” and confirms that the directors have breached the PFMA as “effective steps were not taken to prevent irregular expenditure as well as wasteful expenditure as required by section 51 (b) (ii) of the PFMA.”
An 860% increase In 2016, Eskom reported irregular expenditure of R348 million and in 2017 it had increased by an astounding 860 percent to R3bn.
If the auditors are unable to confirm this R3bn figure then why should we believe the board and there must surely be serious concerns about the accuracy of the 2016 figure?
Systemic procurement corruption demands that an external auditor use professional scepticism requiring detailed audit testing of procurement, but for inexplicable reasons, it appears that detailed procurement testing is anathema to audit planning and audit work schedules of state owned enterprises.
External auditors can cover their backs with tepid qualifications or they can choose to decline a lucrative audit appointment (R119m in the case of Eskom) or accept it on the basis that they extensively test the high risk and material area of procurement knowing full well that the pervasiveness of the procurement irregularities will probably lead to an adverse audit opinion resulting in the withdrawal of all lines of credit and a “game over” situation in all respects for the entity.
The Sizwe-Ntsaluba-Gobodo findings with respect to internal control ask serious questions of the competency of the Eskom chief audit executive and the confirmed breach of section 51 of the PFMA by the Eskom board should surely provide the necessary motivation for the NPA to prosecute and one has to only wonder why there have never been prosecutions of boards of state owned entities when the stench of malfeasance is so evident?