Road Accident Fund litigation to prevent Auditor-General publishing its 2020/21 audit report

Meeting report

Opening Remarks
The Chairperson provided context for the meeting. The Auditor-General has submitted to Parliament the Road Accident Fund (RAF) audit opinion and audit outcomes as per the law. However, the RAF is challenging the audit findings and so its 2020/21 Annual Report has thus not been submitted to Parliament. This is unprecedented as the audit outcome would ordinarily feature in the Annual Report. It is therefore prudent that the Committee consult with Parliament’s Constitutional and Legal Services Office (CLSO) to navigate these unchartered waters.

Legal Opinion Impact on SCOPA due to Non-Tabling of Road Accident Fund Annual Report
Ms Fatima Ebrahim, CLSO Legal Advisor, said that the brief was to consider the impact on SCOPA due to the non-tabling of the RAF Annual Report, financial statements and the audit report. The Minister of Transport was invited to attend a hearing on the 2020/21 RAF Annual Report and Financial Statements which was meant to be on 27 May 2022. The Minister informed the Committee that due to the pending judicial review by the RAF of the audit report he has not tabled the Annual Report or the Annual Financial Statements. In his view Rule 89 of the National Assembly is applicable to this matter also known as the sub judice rule.

The Minister of Transport also directed the Committee to the fact that he had tabled a letter before the National Assembly on 30 March 2022 that outlines the reasons for the delay. He stated that the review application may materially affect the content and the conclusions of the audit report. This was the second letter explaining the delay, there had previously been a letter tabled by the Minister on 4 November 2021 that stated that the Auditor-General South Africa (AGSA) had yet to complete the audit report. The Minister attached correspondence received by himself from RAF that was dated 13 May 2022. Therein the RAF speaks to a host of procedural irregularities in the issuing of the audit report by AGSA. RAF requested the Minister to advise SCOPA on this and to give consideration to the fact that there is no Annual Report, it does not exist and that it cannot exist until this dispute is settled in court.

On the litigation, RAF submitted its annual financial statements to AGSA for auditing in compliance with the Public Finance Management Act (PFMA). On 25 June AGSA issued a finding that the use of the International Public Sector Accounting Standard 42 (IPSAS 42) for social benefits was an inappropriate accounting method to have used. A dispute then ensued between the RAF and AGSA on the accounting policy utilised by the RAF in the preparation of its financial statements. By July 2021 it was clear that there was a material disagreement between the parties.

It is AGSA’s contention that the RAF amended its accounting policy to recognise a claim liability and expenditure in accordance with IPSAS 42 which is in conflict with the conceptual framework of Generally Recognised Accounting Practice (GRAP) which would have been the applicable standard for the RAF to use. This resulted in material misstatements in claim expenditures, current and non-current liabilities and disclosure notes. According to AGSA this change in accounting policy has resulted in the removal of liabilities in the books exceeding R300 billion.

On the other hand, RAF is of the view that International Financial Reporting Standards: 4 Insurance Contracts which it previously used under the guidance of the Accounting Standards Board (which is a board set up according to legislation) is deficient because it does not conceptually accommodate for the provision of social insurance. Members should note that the RAF is not a profit-generating entity so that standard does not work, according to the RAF.

The dispute was not settled internally and it appears the parties reached an impasse. The court documents reveal that the parties do not agree on whether the dispute was handled correctly in terms of the internal dispute resolution process that should be followed when an entity objects to the Auditor-General's findings. Nevertheless, AGSA issued a disclaimer opinion and audit report on 20 December 2021 on the RAF financial affairs. According to AGSA, it did so after the dispute was referred to the Office of the Accountant General in the National Treasury which confirmed that it agreed with the view of AGSA.

In January 2022 RAF decided to institute legal proceedings in the High Court (Gauteng Division- Pretoria) that sought to do two things:
- To urgently interdict AGSA from publishing the RAF audit report (Part A of proceedings); and
- To review the audit report (Part B of proceedings).

On 24 February 2022 judgment was delivered on Part A of proceedings in favour of AGSA. The court found that AGSA is legally bound by legislation to publish the audit report and the RAF remedy will lie in the review (Part B of the proceedings). Consequently, on 31 March 2022, AGSA published the disputed audit report and sent it to the Speaker on the same day. The actual review process (Part B) of the proceedings must still be heard.

On the legal framework, the Road Accident Fund is a creature of statute, established by section 2(1) of the Road Accident Fund Act, 1996. It is a national public entity in terms of Schedule 3A of the PFMA and is therefore subject to the legal financial prescripts of the PFMA. The financial year of the RAF runs from 1 April to 31 March of the following year. Section 13 of the RAF Act deals with the publication and tabling of its annual report in Parliament and states that: “The Minister shall lay upon the Table in Parliament a copy of the annual report within 30 days after receipt thereof if Parliament is then in session, or, if Parliament is not then in session, within 30 days after the commencement of its next ensuing session.” Therefore, there is not much detail in the RAF Act itself but the PFMA sets it out more clearly. The PFMA would trump the RAF Act in any event. The objective of the PFMA is to ensure transparency, accountability, and sound management of the revenue, expenditure, assets, and liabilities of the institutions which it regulates. She reminded the Committee to apply its mind to ask what the purpose for tabling these documents is when deciding on the way forward.

Section 55 of the PFMA states the board of the public entity must prepare financial statements in accordance with generally accepted accounting practice (GAAP), unless the Accounting Standards Board approves the application of generally recognised accounting practice (GRAP). The RAF needs to submit those statements to the auditors (in this case AGSA) for auditing within two months after the end of the financial year; which it did do. Within five months of the end of the financial year, it must submit the annual report, audited financial statements and the audit report to Treasury and the executive authority (which in this case would be the Minister of Transport) for the Minister to table it in Parliament. This is the step that has not been done.

The Minister, in turn, is responsible in terms of section 65 to table the annual report, financial statements and the audit report within one month after the accounting authority for the public entity received the audit report. This is in line with what the RAF Act also dictates. If the Executive Authority fails to table the necessary reports it must table a written explanation in the legislature setting out the reasons for not tabling these and the Auditor-General may issue a special report on the delay. The PFMA does not deal further with steps to be taken following the tabling of such an explanation. So what happens where there is an explanation but there is not a commitment to a specific date for a late tabling, how is it dealt with? That is absent from the law, as it stands.

The Public Audit Act states that AGSA must submit an audit report in accordance with legislation applicable to the auditee (in this case the RAF Act and PFMA). It also provides that audit reports must be tabled in the legislature in accordance with applicable legislation or otherwise within a reasonable time. Where an audit report is not tabled in Parliament within one month after AGSA had submitted the report, AGSA must promptly publish the audit report. It was on this basis that AGSA proceeded to publish its report.

As mentioned earlier, the Minister did mention the sub judice rule in his letter. It is a common law rule that limits public comment that may prejudice the administration of justice on matters under judicial consideration. It seeks to protect the rights of persons to a fair trial in both civil and criminal matters and to prevent the undue influence of judges. The application of this rule has changed significantly since the final Constitution due to the seminal judgment in Midi Television Pty Ltd t/a e.tv v Director of Public Prosecutions (Western Cape) 2007 (5) SA 540. (SCA). The case revolved around the broadcast of a crime documentary by e.tv in a matter that was at the time still before the courts. The court ruled that the rule would only apply if it is prejudicial to the administration of justice in allowing free speech and that prejudice is demonstrable and substantial and there is a real risk that prejudice will occur if debate takes place. Mere conjecture or speculation that prejudice might occur will not be enough. Even then publication will not be unlawful unless a court is satisfied that the disadvantage of curtailing the free flow of information outweighs its advantage. The court specifically looked at the right to free speech which is contained in the Constitution.

This case is obviously quite different to the matter at hand even though it also deals with free speech. So in further unpacking the case, it is evident that most issues before the National Assembly are extensively reported on in the media and are usually already in the public realm. The risk of a Member of Parliament or an official providing information to the National Assembly that is contradictory to information they have provided to a court, would not be a factor in determining if there will be prejudice to the administration of justice.

Taking all of that into consideration, CLSO looked at it and the role of AGSA and the oversight role of Parliament. AGSA is the supreme audit institution in South Africa and plays a key role in promoting financial accountability in government. Like similar offices worldwide, it further provides independent assurance to both Parliament and the public that the financial statements and financial administration of government departments are in order. The role of AGSA is complemented by the oversight role of Parliament. For this purpose, it places reliance on the reports of AGSA as an expert in matters of financial accounting and financial administration as that is not a skill that resides in Parliament. AGSA has, in accordance with its own Act, published the RAF audit report. This publication occurred notwithstanding the ongoing disagreement between AGSA and the RAF and the pending review application. It is beyond the scope of this opinion to reflect on or consider if AGSA is correct in its assertions that the accounting policy utilised by the RAF is inappropriate. This will form the subject of the review before the courts. What is important though is that AGSA has issued its audit report which presently, in the absence of an interdict or successful review, is of legal force and effect. AGSA is, by discharging the function of publishing the report, functus officio. In other words, AGSA cannot go back on what it has done now. The only remedy now available is for a competent court to set aside the AGSA audit report on the Financial Statements. So, for all intents and purposes that audit report is of full legal effect and binding.

In terms of both the PFMA and the RAF Act, the regulatory calendar for the tabling of these reports has passed. The Minister requested an extension previously notwithstanding that the audit report had been issued more than five months ago. In fact, none of the documents that form a part of the package has been tabled. The provision was triggered when the Board received the audit report from AGSA thus creating a legal obligation on the Minister to table the necessary reports by 20 January 2022. The Minister has not tabled the necessary reports on the basis that the audit report is subject to a court review process.

Presumably, the Minister finds himself in a quandary as he is reportedly not in possession of the Annual Report which the RAF has indicated it cannot finalise until the review application is heard. These documents are ordinarily tabled and considered together as only the complete set can paint a full picture of the financial health of an entity. It means that the Minister is not in a position to table in the normal sense as he would do with any other entity. The contention by the RAF that the Annual Report does not exist is concerning as this report should have been prepared together with the financial statements. It is clear that the RAF is willing to defend its annual financial statements and similarly should be able to defend its Annual Report in any oversight process regardless of the opinion and qualifications of AGSA on this. However, it is noted that this may be a simplification of the difficulty that the RAF is now facing. It may be prudent to have RAF come and report to the Committee on why it cannot be done.

She explained that the CLSO does not consider that the review application renders the matter sub judice for purposes of National Assembly Rule 89. According to the Midi judgement there must be demonstrable and substantial prejudice to the administration of justice in allowing free speech and that there is a real risk that the prejudice will occur if debate takes place (conjecture or speculation that prejudice might occur will not be enough). It is unclear how an oversight exercise carried out by Parliament will create any such real risks. In any event, the role of the court will be to adjudicate on the technicalities of the accounting standard used and if there was a legal basis for such standard to be used.

The parliamentary oversight exercise will instead focus on issues pertaining to the financial health of the RAF. Furthermore, the RAF is a public entity which raises revenue in the form of a fuel levy which is payable by every motorist in the Republic. The functions of the RAF apply to every road user whether a driver, passenger or pedestrian. Its reach therefore impacts, in one way or another, on every road user who in turn, therefore, has a direct interest in the administration of the RAF. Therefore, there is huge public interest and the right for the public to know what is happening in the financial affairs of the RAF. In any event, the dispute has unfolded publicly and in seeking reprieve through the Courts the RAF had already set out the salient facts applicable to the dispute. In addition, the audit report has now, in any event, been publicly released.

Based on this, she concluded, the sub judice rule is not applicable to this matter and should not be used to frustrate the oversight process of Parliament. The constitutional functions of Parliament cannot in any event be trumped by internal rules and processes. The oversight mandate of Parliament, and in particular the financial oversight mandate of SCOPA, should not be stifled by litigation processes that may take years to resolve. These oversight processes are instrumental for accountability but also to empower Parliament in its budgetary allocations and consideration of issues related to legislative reform. The fact of the matter is that the audit Report is presently of legal force and effect and must therefore be considered by SCOPA in terms of Assembly Rule 245(1). As such the Minister and the Board of the RAF should attend any engagements with SCOPA to scrutinise the audit Report.

The RAF will be at liberty in such an engagement to respond to the findings of AGSA and to provide clarity to SCOPA on the concern around liabilities as well as on any other financial matter. The Minister should be asked to account for the failure to secure the Annual Report from the RAF notwithstanding the review process. The tabling of an explanation for the delay does not absolve the Minister from the responsibility to comply with the tabling prescripts in the PFMA. In other words, the tabling of an explanation does not obviate the requirement for Parliament to fulfil its oversight duties. If the Annual Report cannot be finalised pending the review, the RAF would need to come to the Committee to explain why. The Minister should be directed to have regard to a provisional Annual Report (with any necessary provisos occasioned by the review application) can be issued in the meantime.

The Annual Report contains important information on the administration of an entity that extends beyond the scope of the financial statements. This includes information on governance processes, human resource management and performance information. This information will assist Parliament in fulfilling its oversight mandate.

CLSO advises that SCOPA contact National Treasury to obtain independent advice on the issuing of a provisional annual report where the audited financial statements are disputed. The PFMA does not provide a mechanism for an annual report in this form but there should not be a legal reason prohibiting it. There would be no reason if the RAF review application is successful, that Parliament could not hold further meetings after that. However, to sit back and simply wait for the litigation to be done is not right. There is no doubt that SCOPA is at least required to look at the audited financial statements as they are of full force and legal effect.

Discussion
Ms B Van Minnen (DA) said that it is straightforward that the Committee needs to have a hearing. Everyone needs to come and discuss this with SCOPA. This is something that has to go forward, and it cannot be allowed to be delayed.

Mr S Somyo (ANC) proposed that the Minister be informed of the legal advice and asked to come to the Committee on the basis of that advice.

Ms N Tolashe (ANC) agreed with Mr Somyo. She asked how much has the department spent on this back-and-forth situation. Can the Minister tell how much has been spent?

The Chairperson noted that these questions will be put before the Minister.

Mr B Hadebe (ANC) said that if SCOPA were to continue, having read the Auditor-General report and its findings, it is SCOPA’s responsibility to hold RAF accountable for the audit opinion. This will be done by relying on the outcome of the court review of the audit report. What if the Committee were to hold RAF accountable for a disclaimer audit opinion but, hypothetically speaking, what if the court rules in favour of RAF after this Committee arrived at certain recommendations and effected consequence management? What will happen then and what would be the remedy?

Ms A Beukes (ANC) agreed with the CLSO. Could the Committee not engage Treasury on the use of this new accounting policy. Why is it that some entities make use of this policy while AGSA considers it to be inappropriate?

Mr Somyo said that National Treasury is critical, the AG, audits on the basis of standards that are approved by the Accountant-General which is a Treasury instrument. The AG does not possess any right in terms of the adopted standard. It is a National Treasury standard. That is why National Treasury is supportive of every step that the AG takes, it is therefore necessary that they are a party to any engagement that will have to ensue with regards to this matter. As the report is public, it is the responsibility of this Committee to engage and deal with the matter.

CSLO response
Ms Ebrahim replied to Mr Somyo saying that the legal difficulty that SCOPA faces is that as it stands the audit report is of full legal effect and it is binding. In turn, the rules therefore require SCOPA to consider it. There are, however, no rules as to how oversight is conducted. The situation playing off in the background will certainly inform the process and the way in which the Committee deals with the matter during its hearings. There are matters that will not be affected by the use of accounting standards such as supply chain management (SCM) matters where disciplinary hearings need to take place or where there needs to be implementation of better controls. There would be no reason why this sort of recommendation cannot be made. The Committee needs to remember that oversight is a fluid process.

The Chairperson noted that the Committee will need to consider all the variables of this matter and structure a hearing with the Department of Transport and RAF. Oversight is too important to forego in this case due to the litigation process.

The Chairperson thanked the CLSO and adjourned the meeting.