PWC CHOKES ON A CRACKER
The regulator has fined PwC’s auditor for shoddy work at SAA. The man who lodged the claim in 2017 says it should never have taken so long
It’s safe to say that had Simon Mantell not been so incensed at how he’d been shafted by SAA seven years ago, we might have had no reckoning for PwC, the auditors of the failed airline. Mantell knows a thing or two about auditing. Back in 1987, he qualified as a chartered accountant at what was then Price Waterhouse, before starting Mantelli’s — which makes biscuits, cookies, rusks and crackers at a factory near Cape Town — the next year.
But Mantell was never the type to turn the other cheek. So in 2014, when SAA’s in-flight catering business Air Chefs told him that Mantelli’s had landed a contract to supply crackers on SAA flights — and then claimed there’d been a “mistake” and reversed the deal — Mantell smelt a rat and began to dig deeper.
What he uncovered ended up at the Zondo commission. It turns out that SAA’s accounts were such a holy mess, despite PwC’s involvement, that the airline might as well have been audited by one of Carl Niehaus’s less-numerate (living) relatives. So in 2017, Mantell asked the Independent Regulatory Board for Auditors (Irba) to investigate PwC’s handling of all SAA’s accounts between 2013 and 2016.
This week, Irba confirmed that PwC’s auditor, Pule Mothibe, had been fined R800,000 for errors made at “an entity” — which was SAA. These included failing “to disclose material noncompliance with legislation and internal control deficiencies in the 2014, 2015 and 2016 audit reports”, and failing to obtain sufficient audit evidence on “irregular expenditure and fruitless and wasteful expenditure”. Mothibe “failed to maintain an attitude of professional scepticism”, Irba said.
(It delivered a similar finding against Nkonki, which conducted the audit alongside PwC.)
Though Mantell welcomes the finding, he says it should never have taken 3½ years. “This was a case of national importance, as it involved SAA. It should have been dealt with in six months. It illustrates how Irba lacks capacity, especially with investigations,” he tells the FM.
In fact, had PwC done the job it was so richly paid for a decade ago, the SAA crisis might have come to a head long before now, he says.
“Had the auditors done their job properly all those years ago, they would have identified that the vital internal controls necessary to prevent procurement irregularities and corruption, as well as material misstatements due to fraud or error, were absent,” he says.
And a proper audit would have probably led to either a severely qualified audit opinion or even an adverse opinion — the kind of thing that no company scrounging for cash can afford to have against its name.
Mantell says negative audit opinions would have stopped commercial banks lending to the airline. “No cash would mean no opportunity for procurement, and the accompanying corruption,” he says.
The way Mantell sees it, SAA’s staff, including the pilots, cabin crew and ground staff, are carrying the can for the fact that “service providers” such as PwC missed the irregularities and virtually nonexistent internal controls.
“SAA was spending about R22bn a year on procurement and a conservative estimate is that it was overpaying by
15%. Had proper procurement systems been in place, then a saving of R3bn a year would have been made,” he says.
And that, over a decade, pretty much equals the bailouts from the government. At the very least, says Mantell, “those firms that messed up should be forced to repay all the fees they earned over that time — an estimated R90m”.
Though PwC and Nkonki conducted the audit jointly from 2012 to 2016, it was only when then auditor-general Kimi Makwetu took over in 2017 that the full horror show emerged. Makwetu issued a qualified audit report, saying there was a “material uncertainty” about the airline’s ability to continue, and pointed out numerous holes in its finances — such as the fact it overstated assets and understated expenses. It was an accounting basket case.
In July last year, Mothibe testified at the Zondo commission and admitted there had been an “error of judgment” that led to PwC failing to flag the fact that SAA had flouted the Public Finance Management Act. Which sounds like a remarkably tame description of what happened.
Contacted by the FM, Mothibe referred queries to PwC, which said: “The audit partner accepted Irba’s monetary sanction for failing to highlight failures by SAA to comply with procurement legislation in the respective audit opinions. This is despite bringing such failures to the attention of those charged at governance and management at SAA.”
The firm said it was “disappointed” that the audit did not meet “the high standards we set ourselves”, but pointed out that Irba “did not identify a breach of ethical standards”.
But Mantell says it’s an embarrassment that such shoddy work was ever done in the first place. “SAA isn’t a complicated case. It’s like if you break your arm in numerous places but the radiographer looks at the X-rays and sends you home, saying there’s nothing wrong. The auditors missed obvious stuff and it’s why all our state-owned entities [SOEs] are in such trouble,” he says.
Rather than waiting for a complaint, he says, Irba should proactively investigate all the SOEs. And ask obvious questions, such as why did Eskom, which was robbed blind for years, not have a single qualified audit over that time?
Before his clash with SAA, Mantell says he assumed most of the gripes about government tenders were sour grapes. But as he looked deeper, he saw how broken the system is — and how professionals, including auditors, enable this. “I thought, hang on — we need to be exposing this stuff, because nobody else is going to,” he says.
It’s like if you break your arm but the radiographer looks at the
X-rays and sends you home