How SAA board has kept air­line fly­ing at a low and fa­tal al­ti­tude

Zambian Business Times - - AIRLINE BUSINESS -

AU­DI­TOR GEN­ERAL Kimi 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, says the writer.

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.

SAA flight ar­rival at Ken­neth Kaunda in­ter­na­tional Air­port

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