Ques­tions raised over Eskom’s ir­reg­u­lar ex­pen­di­ture

The Star Early Edition - - OPINION&ANALYSIS - Si­mon Man­tell runs the bis­cuit fac­tory Man­telli’s based in Cape Town. Si­mon Man­tell

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 SizweNt­salubaGo­bodo 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?


Eskom’s Ken­dal coal-fired power sta­tion. Eskom showed R3 bil­lion in ir­reg­u­lar and waste­ful ex­pen­di­ture in its AFS.

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