Absurd for funders to do the work of state entity boards

THE recent decision by Futuregrowth and Denmark’s Jyske Bank to suspend lines of credit to state-owned enterprises (SOEs) was motivated by factors including lack of governance and oversight, and there is a strong likelihood that other financial institutions will follow suit.

While Jyske Bank has avoided the collateral public relations damage of this decision, Futuregrowth, by acting as fiduciary of its investors’ funds, has faced the unjust opprobrium of the government. By shooting the unwilling but brave messenger, our politicians have once again demonstrated their innate ability to muddy the waters surrounding the allocation of responsibility, which gives rise to contentious issues, of which the withdrawal of credit to SOEs is certainly one.

Surely, if the identification of lack of governance, oversight and accountability is the root cause of the withdrawal of credit, then it is simply a matter of attaching responsibility and resolving it? Proper governance and oversight, facilitating an environment in which annual financial statements can be released that are free from material misstatement due to error or fraud, and on which users can make informed decisions, should be the real focus in this furore.

Yet, through sleight of political hand, the narrative has changed to one of whether Futuregrowth should have first engaged privately with individual SOEs on issues of governance, standards and the credentials of directors before making any public announcements.

Futuregrowth’s primary responsibility is to act on behalf of its investors and shareholders in compliance with the law — its remit cannot include governance, standards and directors’ credentials at SOEs.

Rather, the responsibility for managing the legitimate concerns of credit providers rests with specific Cabinet ministers, individual SOE boards, their executive teams and expert advice and guidance supplied by the auditor-general and external auditors, where applicable.

SOE boards have to provide the leadership, expertise, governance and moral compass for them to navigate the business terrain in which they operate. Responsibility for the appointment of weak boards and frequently inept nonexecutive directors rests at the door of the minister who appointed them. It is ludicrous for funders to have even to consider engaging with SOEs regarding the adequate functioning of their boards and the quality of their individual members.

The fish rots from the head, and a dysfunctional SOE board will not attract the best executive management, which then exacerbates the downward spiral as competent senior and middle management depart, leaving the spine of the organisation compromised.

Surely Futuregrowth cannot be blamed for failed operational structures at certain SOEs? The shareholders of SOEs are South African citizens, and while the taxpayer keeps these entities afloat, the poor and indigent pay an enormous price since taxes that could be used to further alleviate their suffering are misdirected towards SOE misadventures.

Although the media keep our citizens well-informed of maladministration at the SOEs, it is apparent that neither the media nor the public are fully aware that numerous SOEs and their boards frequently breach statute without serious repercussions.

The Public Finance Management Act provides clear guidelines for the boards of directors (the accounting authority) of SOEs. Section 50(1) says they must (a) exercise the duty of utmost care to ensure reasonable protection of assets, and (b) act with fidelity, honesty, integrity and in the best interest of the public entity. Section 51(1) says they must ensure that the public entity has and maintains effective and efficient financial and risk management systems and internal control, and an appropriate procurement and provisioning system that is fair, equitable, transparent, competitive and cost effective.

They must also take effective and appropriate steps to prevent irregular, fruitless and wasteful expenditure, and take disciplinary steps against any employee who contravenes or fails to comply with the act. Section 83(1) says the accounting authority commits an act of financial misconduct if it wilfully or negligently fails to comply with any of these sections, and the individuals concerned are liable on conviction to a fine or prison stay not exceeding five years.

While the act places a heavy statutory burden on accounting authorities, it appears that they operate with impunity. I am unaware of any accounting authority being prosecuted due to breaches of the relevant sections. So if it is accepted — and the evidence is there for all to see — that some government ministers have appointed weak boards unable to attract the best executive management, leading to internal control failure and breaches of statute for which there is no accountability, why should credit providers be doing the bidding of those ultimately responsible?

This is especially so when the auditorgeneral or independent auditor could and should be sounding the necessary alarm bells given that their responsibilities include reporting on compliance with legislation and internal control.

Credit funders make critical decisions based on all the information contained in the annual financial statements of an SOE. The report of the auditor is an integral part of the statements because in simple terms it can include a clean opinion, or a qualified opinion that confirms misstatements that are material but not pervasive, or an adverse opinion. The latter means that owing to pervasive material misstatements, the statements do not fairly present the entity’s position.

Independent investigations at SOEs and the resulting reports are frequently highlighted by the media, and more often than not, they confirm spectacular failings in internal control and governance, as well as breaches of statute. Yet the reports of the auditors are generally noticeably light in disclosing and reporting on what appear to be material, if not pervasive, failings in numerous SOEs with respect to the Public Finance Management Act.

If we are serious about doing what is best for the country and its people, especially the poor, the government has to appoint competent boards; the National Prosecuting Authority must prosecute delinquent accounting authorities; and independent auditors or the auditor-general, during the planning and conducting of their audits, must obtain the necessary audit evidence to sustain the opinion included in the report of the auditor.

The continued media reports on independent investigations that confirm governance and internal control failures at SOEs provide much evidence that their consistent failure to comply with the law is not only material but potentially pervasive.

Audit opinions that are qualified or adverse in nature can be a further warning shot for credit providers such as Futuregrowth which, based on their own governance requirements, would be compelled to decline funding based on the report of the auditor, as opposed to having to go public with reasons.

Why did Futuregrowth have to take the hospital pass when there are many others whose responsibility clearly required them to take that tackle?

The narrative has changed to whether Futuregrowth should have first engaged privately with SOEs

Mantell runs a level-2 black economic empowered biscuit factory in Cape Town.

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