Issues Emanating from Annual Reports (Compliance with the PFMA and Internal Financial and Control Systems): briefing by SAA & South African Express Airways

Meeting report

Opening Remarks
The Chairperson welcomed the new DA Members, Ms N Michael and Mr E Marais, to the Committee.

He reminded the Committee that in their last meeting Members had agreed that there would be more interaction with the state-owned companies that reported to them. This meeting with the South African Airways (SAA) and the South African Express Airways (SAX) should be viewed in this light. The Committee wanted the entities to focus on issues raised by the Auditor-General (AG) such as non-compliance with the Public Finance Management Act (PFMA) and procurement procedures, weak financial control systems, ineffective audit committees, and issues of wasteful, fruitless and under expenditure. Members wanted to avoid a situation where they only found out at the end of the year that entities were experiencing certain problems.

The Chairperson informed the Committee that the National Treasury and the Office of the Auditor-General had been invited to attend the meeting and both were present. They would be making comments where appropriate.

South African Airways Briefing on Issues Emanating from the Annual Report
Ms Cheryl Carolus, Chairperson of the SAA Board, agreed that proactive engagements between the Committee and the SAA had to be encouraged. SAA found Members’ feedback to be very helpful and hoped to benefit from more regular interactions. She thanked Committee Members for their engagements with the SAA as well as colleagues from the AG’s Office for their proactive engagements with the entity. SAA found itself in a tough trading environment, which gave it more of a reason to be vigilant. The Dollar impact on the price of oil and the global recession had impacted greatly on the national carrier and she was glad that the Committee was keeping an eye on it. However, there were successes as well. SAA’s growth strategy was working; the entity had added new frequencies in Africa and there was now a direct flight route to Beijing. SAA was looking at Africa, but it was also focused on the global trend.

Ms Carolus assured the Committee that the SAA efficiencies were improving, even though there was room to do better. From the Board’s side, it was very comfortable with the skills set at that level, especially with general oversight over the company’s operations. The Board was also particularly comfortable with its audit committee who they thought were highly skilled and performed their functions well.

Mr Wolf Meyer, Chief Financial Officer for SAA, proceeded with the presentation. He informed the Committee that the SAA received an unqualified audit opinion for the financial year 2010/11 from the AG with certain emphasis of matter. The emphasis of matter was on the restatement of corresponding figures, competition matters and guarantees for air service licenses. He asked the Committee to note that those were not classified as audit findings. The auditors were only drawing attention to what was already disclosed in the financial statements.

Restatement of Corresponding Figures
During the financial year, an improvement was made to internal controls related to operational management and financial accounting of deposits paid to fleet lessors. This enabled SAA to more accurately measure the recoverability of maintenance deposits payments. As a result, comparative numbers had been restated and opening accumulated losses as at 1 April 2009 were adjusted.

Competition Matters
There were certain legal matters against SAA; however, the ultimate outcomes of the matters could not be determined at present, and no provision for any liability that could result had been made in the financial statements.

SAA made major inroads in addressing legacy related anti-trust fines/claims emanating from various jurisdictions. SAA’s strategy includes the reduction and control of contingent liabilities as a consequence of claims and litigation. The 2010 South African Competition Commission investigation was due for settlement, but all other related anti-trust investigations in other jurisdictions had been settled.

Guarantees: Air Service License
The requisite guarantees were expiring on 30 September 2011. At the time, SAA was in the process of ensuring guarantees were in place for the period commencing 1 October 2011. National Treasury declined the request for the part utilisation of the R1.6 billion going concern guarantee for the International Air Traffic liability. SAA secured the guarantees through a financial institution on both the domestic and international air service licenses. 

Independent Auditors Report: Other legal and regulatory requirements
The non-compliance with the PFMA highlighted in the 2010/11 audit report was mainly due to legacy tender processes prior to the implementation of the new procurement system and inadequate contracts management processes.

Audit Committee Report
The Audit Committee’s (AC) assessment was that the overall control environment was effective. It was satisfied that since the previous year of reporting, significant progress was made in improving the internal control environment. The AC was satisfied that the financial statements were based on appropriate accounting policies, and believed the financial statements complied with the relevant provisions of the PFMA and International Financial Reporting Standards.

According to the Director’s Report, a number of actions were being taken to address areas of non-compliance with the PFMA. SAA was confident that the controls implemented will bear fruit going forward.

Baggage Pilferage Project Zero: Background
Ms Siza Mzimela, Chief Executive Officer of SAA, stated that the purpose of the project was to improve the quality of baggage services provided to SAA’s customers. A full audit was done on the current status of baggage pilferage. Benchmarks were done with other airports and previous audits were reviewed. The problems were identified and prioritised and project streams were defined and initiated. Statistics showed that baggage pilferage at SAA declined from 1.33 bags pilfered per 1000 bags in August 2010 to 0.53 bags pilfered for every 1000 bags in December 2011.

SAA was in the process of auditing the success of the actions taken against baggage pilfering. It also wanted to communicate its successes to the country. 

Discussion
The Chairperson asked SAA to elaborate on what actions it had taken to address issues of non-compliance.

Ms Mzimela explained that one of the key things that SAA did to improve on compliance was to adopt a group compliance policy where training was provided for every single unit within the organisation because some people did not understand that certain actions resulted in the entire entity falling foul of its objectives, which resulted in non-compliance.

Mr A Mokoena (ANC) thanked the SAA for respecting the request of the Committee to send a high-ranking personnel to address Members. He congratulated the company for opening new routes in Africa, and particularly the direct route to Beijing. He asked what the situation was with SAA’s former CEO, Mr Khaya Ngqula, concerning the financial obligation he had to repay the organisation for wasteful and fruitless expenditure. There was a slight reference to the legal situation being under control, but the Committee needed to know exactly what SAA’s position was. He wanted to know what SAA was paying to the Civil Aviation Authority (CAA) every year. He noted that SAA was servicing and maintaining the engines of other airlines. Did SAA experience any difficulty in collecting revenue from some of those airlines?

Ms Carolus replied that the legal matter between the SAA and Mr Ngkula was in the hands of the courts and relevant authorities. SAA took the matter very seriously as much of the case had to do with the PFMA. Unfortunately, the matter was out of its hands; however, it felt confident that it would be resolved shortly.

Ms Mzimela answered that the company did not have the figures for how much it was paying the CAA. However, they were under the impression that whatever they were paying CAA was fair.

Ms Mzimela further explained that SAA was providing maintenance for other airlines. At the moment, there were problems with one particular client where payment still had to be made for services provided. However, this matter was being tightly managed. Many of the clients paid upfront.

Ms G Borman (ANC) asked for clarity on what SAA meant when it said there were certain legal matters against the company, that the outcomes could not be determined and that there was no provision for any liability that could result from it. This was worrying. She imagined that multiple arrests and suspensions had made people think twice about engaging in baggage pilfering. This was something the Committee had been speaking about for ages. She congratulated SAA on the new flight routes and asked if there would ever be the return of the Durban-Cape Town flight.

Mr Meyer addressed the question on the lack of provision for liabilities. He stated that some of the outcomes were uncertain and the SAA did not want to make a provision for it because sometimes it denoted an admission of guilt. However, many strides had been made and most of the cases had been settled.

Ms Mzimela answered that the SAA had managed to turnaround the loss-making situation in terms of the Durban-Cape Town route for both themselves and Mango. In the last three months there had been a profit made on the route for approximately R2.3 million.

Mr C Gololo (ANC) thanked SAA for their presentation. He commented on the direct route that was recently opened to Beijing, China. This was going to benefit local businesses trading with China. He also wanted to know how many aircrafts SAA leased and if there was any intention to purchase the aircrafts once the lease agreements expired.

The Chairperson added that SAA should also say whether it was better to lease or purchase aircrafts.

Ms Mzimela replied that most of the SAA’s aircrafts were leased; SAA owned only seven of its 61 aircrafts. Given SAA’s financial position, it had always been a better option to lease rather than purchase. Having said this, even airlines that had “deep pockets” always made the decision to lease and own a few aircrafts. It was easier to lease and return an aircraft, and then lease a new one if the need arose.

Mr Meyer added that the decision to lease or buy depended on certain factors such as whether the SAA had a tax base. SAA did not have a tax base, which influenced the decision as to whether the entity had enough cash to purchase an aircraft or not. The other option was to buy the aircraft through financing.

Dr G Koornhof (ANC) noted that in the AG’s reports for the past two years, he had said that SAA did not comply with audit laws and regulations. The CFO indicated that the non-compliance issues identified by the AG had been resolved and corrected. He wanted assurance that this was true and that the next Annual Report to be tabled in September would not receive a report from the AG saying that SAA did not comply with audit rules and regulations.  He thanked the SAA for the information on baggage pilferage. He noted that there were 0.4 bags pilfered for every 1000 bags. He asked where SAA wanted this figure to be. How would this compare to the international norm? In previous meetings SAA said that its Debt-Equity ratio was a concern. It was above 70% at the moment. He asked the SAA for more clarity on the matter. Had progress been made on this issue?

Mr Meyer replied that it was unfortunate that all audits were similar. If there were certain findings or any findings, the audit report would always make a general statement that there was non-compliance. The PFMA was a huge act, so if a finding was made there would always be a general statement of non-compliance. What the SAA could do was to ensure that there were no repeat findings. This was why internal auditor’s role was so important.

In terms of the debt-equity ration, the Member was correct. The figure was much higher now. SAA has engaged with its shareholder and the National Treasury to address this issue. SAA understood that this was an important issue.

Ms N Michael (DA) noted that baggage pilfering was one of the biggest complaints from members of the public. South Africa would be used as a porthole destination to other countries in Africa and Latin America. Now more than ever, it was important that people had confidence in SAA. She was happy with the progress that had been made. She did not think that there was enough communication about the successes in terms of reducing baggage pilfering. She suggested that there be concerted advertising campaigns in airports such as OR Tambo to allay people’s fears. She wanted to see continuous reports on baggage pilfering. This was a matter that had to be completely transparent. Some of the arrests also had to be exposed to deter future syndicates from operating in airports.

Ms Carolus stated that all the Members were correct in terms of baggage pilfering. It was indeed an emotional issue, and was very bad for the country’s image. The target for baggage pilfering was zero. People had to know that they would get caught for baggage pilfering and that the law would be brought in to deal with them. She agreed that the successes were not always communicated, so the organisation’s situation always looked quite negative. SAA was in fact getting better at catching the pilferers. It would undertake to give the Committee constant updates about the successes achieved with reducing baggage pilfering.

Ms Mzimela stated that all the comments about baggage pilfering were noted. The reason the baggage pilferage project was called Project Zero was because SAA wanted to get to the point where there was zero-tolerance on baggage pilfering.

Mr E Marais (DA) noted that SAA went hand in hand with tourism. In the State of the Nation Address (SONA) the President indicated that economic growth and job creation was the main focus, which would be encouraged through channelling finance in the direction of infrastructure. If one looked at Cape Town’s international airport and harbour, one would note that it was becoming congested with freight and the handling thereof. The President also indicated that money would be shifted in the direction of Saldanha Bay Harbour to extend and develop the harbour. After Cape Town, Saldanha Bay was the only natural deep sea harbour in Cape Town. This meant that not only iron-ore, but freight would also be coming through Saldanha Bay harbour. He asked if the SAA Board had thought about this and future long term planning for freight coming in via the “maybe” upgraded airfield of the SAA military academy, and the future collaboration between the harbour and airport.

Mr M Sonto (ANC) asked for clarity on what the SAA was doing about fines and penalties for wasteful and fruitless expenditure.

Ms Mzimela said that one of the examples of fines was when SAA received fines for passengers flying out with the incorrect documentation. Fines related mostly to SAA’s operations.

Ms C September (ANC) noted that SAA was a going concern. This was the reason why Treasury declined the company’s request for the part utilisation of the R1.6 billion going concern guarantee for the International Air Traffic liability. How would this debt be serviced in the future? There was a concern that this issue would be raised again in the next report from the AG. She asked if the SAA had a huge amount of interest owing on debt. The Members noted that the SAA had said that non-compliance with the PFMA in the 2010/11 audit report was mainly due to legacy tender processes prior to the implementation of the new procurement system and inadequate contracts management practices. It would have helped if the Committee was told what the new system revealed. The Committee was interested in how SAA was moving forward and what it was putting in place to proactively address the issues.

Ms Mzimela explained that many of the legacy matters pertained to contracts. It meant that SAA had genuinely required the service but did not go back to ensure that proper contracts were in place to govern some of the services. There was a project in place now to ensure that all of the contracts were properly updated. Going forward, SAA was very aware of which processes had to be put in place. “Gate keepers” were also put in place to ensure that payments made on contracts had to be verified first.

Mr Meyer stated that the SAA did not have a huge amount of interest on debt for this past financial year. Going forward, there might be increased debt levels which will increase the interest costs.

Mr Meyer replied that the auditors looked at the financial statements every year and made an assessment on whether SAA had enough cash resources to be seen as a going concern for the next 18 months. If the company’s cash flow position was insufficient then would acquire a guarantee from the shareholder. This was where the R1.6 billion guarantee came from. This year, the guarantee required would probably be higher.

Mr Mokoena stated that this matter could not be swept under the carpet.

Mr Meyer said that the SAA needed to take into account the cash it needed for operational requirements and for replacement fees for fleets. In terms of the entity’s growth strategy, more cash would also be needed. The amount the SAA was looking at was probably about R4-6 billion depending on what the entity wanted to pursue in terms of the growth strategy. 

Ms Carolus added that the fuel price had “taken a huge whack” out of SAA’s operating profit and the Rand itself had been weak and volatile. The company’s profit would have looked a lot better had it not been for those factors.

Mr Meyer wanted to clarify the issue of the going concern further. At the moment, the assistance that SAA had from the shareholder was a R1.3 billion subordinated loan and R1.6 billion going concern guarantee. Previously, SAA was allowed to use part of the guarantee to cover its liability guarantee but this has been declined by Treasury. So, at the moment SAA still has its R1.6 billion guarantee. The reason SAA had this guarantee in the first place was because an assessment was done by the auditors in the previous year to see how much cash SAA required for a period of 18 months after year-end. The auditors determined how much the SAA needed in cash or assistance and this was how the figure of R1.6 billion was determined. A similar exercise was being completed for this financial year.

Ms September said that she wanted to know how SAA’s debt would be financed in the future and how much the interest was on their debt. She thought the National Treasury and the AG’s Office should comment on this as well.

Ms Michael asked how much the settling of all the anti-trust measures cost and how much Comair was claiming from SAA.

Dr Koornhof noted that the Committee was out of time for this part of the interaction. This was the first interaction the Committee had with an entity. He felt that either the answers from SAA were too vague or the Members’ questions were too vague. Many of the questions had also not been replied to.

Mr Marais noted that his question had not been addressed. If the organisation could not answer it right now, it could always come back to him with the information.

Mr Gololo asked SAA to think about the future of the route to Mpumalanga, as British Airways had already stopped flying there.

The Chairperson invited the Office of the AG, the National Treasury and the Department of Public Enterprises (DPE) to comment on the SAA’s situation. He noted that all entities did not have any comments.

The Chairperson noted the end of the discussion with SAA. He asked the national carrier to note the concern from Members that some of the questions had not been fully answered and others had not been answered at all. He asked them to think of responses as there were going to be follow-up meetings. The issue of Mr Ngqula was something that the Committee was going to keep close tabs on. These were meetings that would assist the Committee at the end of the year when Members assessed the annual reports. 

South African Express Airways Feedback on issues emanating from the Annual report
Mr Inathi Ntshanga, Chief Executive Officer for SAX, gave the Committee an update on the forensic investigation taking place at the organisation. SAX had previously reported that the R42 million VAT balance under trade receivables had to be reconciled, as it had been discovered, post reconciliation, that the balance related to opening balance adjustments. If reversed, this would be adjusted to retained earnings to the period it related to. However, full reconciliations had to be conducted.

There was also a R16 million debtors query that related to the 2006/07 and 2007/08 financial year. If a dispute resolution was followed and the debtor was determined irrecoverable, it would be written off during the current financial year. Alternatively, if this was raised in error it had to be adjusted to the period in which the debtor had been raised. SAX had been in discussions with SAA over the matter.

Sizwe Ntsaluba Gobodo was appointed by the board to investigate the allegations from the AG. A forensic report was submitted to the board upon conclusion of the engagement and internal disciplinary procedures are currently underway. Disciplinary enquiries were postponed to enable the board to gather more information than that presented in the forensic audit report. Feedback would be provided once the board was able to share the information. However, the board had resolved to withdraw the Annual Financial Statements (AFS), which would impact on previous AFS.

SAX identified weaknesses in oversight of controls as a major problem. Therefore, it was decided to review the financials, inclusive of all accounts/balances. KPMG had been deployed to review and audit the accounting policies and practices, and SAX had been reviewing skills, resources, processes and systems to ensure that the errors do not recur. This process may result in further financial restatements and findings. SAX had also chosen to focus on the restatement of its financial statements for 2009-2011, to implement immediate cost/efficiency improvement initiatives, to focus on improvement and compliance with internal controls, and to improve stakeholder relationships.

One of SAX's immediate problems was identified to be the threat of the company's costs exceeding revenue, which threatened the sustainability of the business. Other challenges included “weak” stakeholder relations and inaccurate and unreliable annual financial statements. These form part of SAX's first phase – Strategy in Action. 

Regarding the restatement of financial statements for financial years 2009-2011, KPMG was deployed to review and audit the accounting policies and practices. SAX was also in the process of reviewing skills, resources, processes and systems, and reviewing internal audit functions and audit plans. The procurement function and system capability was also in the process of being reviewed.

Some of the remedial actions being discussed involved reducing SAX aircraft capacity to improve the load factor, opening a Durban base, negotiating SAA contracts down, initiating an employment freeze where necessary, focusing on cost conservation management, and improving maintenance planning. All of these would result in total savings of R98 million by September 2012, and R197 million by March 2013.

Phase two of the SAX's Strategy in Action plan focused on medium to long term consolidation and development, which focused specifically on flawless execution of optimal processes, a high performance culture (with the right people in the right jobs), brand-driven customer centricity, and expanding their African footprint. The overall idea of the strategy was to consolidate and embed business cost/efficiency improvement initiatives, to consolidate business processes and internal controls, and to strengthen stakeholder relationships. 

Ms Lillian Boyle, Chairperson of the SAX Board, referred to the meeting held with the Committee in November the previous year. During that the meeting, the Board had informed Members that it was investigating the accounting irregularities at the organisation. The last three months had been torrid for the company and the board. The forensic audit was conducted on the three issues that were raised, internal discussions took place along with internal disciplinary processes, and the board was now convinced that there was never the intention to defraud or harm the company. What had taken place – sad to say – was the lack of skills and comprehension in the accounting area. Problems became compounded over a period of time. In November the board told the Committee that the audit committee had specifically commissioned the review of SAX’s internal controls during the year. The internal audit company did this and gave SAX a clean bill of health, so it was disappointing for the board to discover the internal controls had not been supervised and oversight was poor. There was nothing more seriousness than sloppiness and carelessness. The board was confident that these areas could be fixed and the problems would not recur.

Discussion
Ms Michael stated that she had never heard in her parliamentary career the excuse of sloppy accounting management where public management was concerned. She did not think that the public deserved an excuse of ignorance being the cause of all this. She found this excuse to be worrying. In the past SAX prided itself on being an entity that created money and was financially stable. In this case, it was important for someone to take responsibility for what happened with SAX. She wondered who it would be.

Ms Boyle explained that her comments that many of the problems occurred due to lack of skills and competence was not offered as an excuse. Of course someone would have to take responsibility – ultimately, it was the board that would have to take responsibility. It was devastating for the board to be faced with these problems, but it would see this process through.

Dr Koornhof stated that it was a sad state of affairs for an entity to withdraw its financial statements. It created a problem for Parliament as well. The Committee would have to report to Parliament. In November last year, the Committee had a meeting with SAX and approved the report. Now, the news had come out that the Annual Financial Statements had been withdrawn for the past three years, 2009-2011. He asked the National Treasury how the Committee should deal with this unique situation. Surely it had an impact on the parliamentary process. He asked SAX why no one had picked up on the problems it was having. Where was the audit committee when the problems arose? Where was the board? He could have misheard but wondered what SAX meant when it said there were “weak shareholder relations”? This was a serious statement and the Committee needed more clarity on it, especially as it implied that the board had a bad relationship with the Minister in charge of this entity.

Ms Matsotso Vuso, Non-Executive Member of the Audit and Risk Committee: SAX, explained that when auditors did their annual audits they looked at figures to see if they should be revised or if they should be accepted as the norm. The issues that were discovered dated back to years ago. As a result of audit methodologies that were applied, the problems were finally picked up. Usually management was asked to adjust figures that were not too different from what they should be. Therefore, it was a pity that the current errors were not picked up sooner. The Audit and Risk Committee of SAX has meetings, but unfortunately, it had to rely on information that was given to them by management because the committee was made up of non-executives that could not take part in the entity’s activities. The second level of information came from the internal auditors. The audit committee approved the internal auditors’ plans and once a year the auditors were requested to do a financial disciplinary review to look at financial controls within the organisation. The auditors report back to the audit committee. She had looked through all the reports and there were no major issues that had been highlighted. The third level of information came from the external auditors. The qualified audit opinion that SAX received was related to Congo Express and the fact that the auditors could not rely on the information they received from Congo Express. There was nothing in the audit opinion that said that SAX’s controls were weak. It was a sad state of affairs and the board was engaging on the issues to understand where it went wrong and what corrective action could be taken to ensure the same mistakes did not happen again.

Ms Boyle clarified that SAX did not mean to say “weak” stakeholder relationships – this was unintended. The board had an excellent relationship with the Minister and his team.

Mr Gololo referred to the employment freeze initiative. This initiative needed to be reviewed as it was in contrast to the country’s key objective, which was job creation.

Mr Ntshanga replied that the freeze was a short term initiative that was aimed at “cleaning up” and putting employees in the right jobs.

Mr Sonto said that it was a matter of concern when an entity received a qualified audit opinion. It was worrying that the external auditors did not pick up on the number of problems SAX was experiencing. He was concerned that the Committee was not getting a sense of whether SAX had the appropriate skills needed to implement its turnaround strategy.

Ms Boyle answered that the board believed that the SAX team was capable of applying the turnaround strategy and that there was an opportunity for training in the finance area and significant redeployment measures. These issues were being addressed right now.

Ms September noted that when the financial statements were handed to Parliament last year, the Committee deliberated on them and adopted the report. Now SAX had chosen to withdraw its financial statements. She wondered which prescripts of the PFMA it was going to follow regarding the withdrawal. The Committee needed clarity on this matter as there had not been communication on this matter. She wanted to know what guidance the National Treasury was giving the DPE and SAX on this matter. The Committee had to do what was needed of it in the case that Parliament was being misled by SAX.

Mr M Nhanha (COPE) noted that SAX withdrew its annual financial statements dating back to 2009. He wondered if this was when the problem was picked up.

Mr Mokoena noted that SAX’s problems were bigger than the Committee could conceive if the rot dated back to 2009. He wondered why the previous CEO of SAX and current CEO of SAA, Ms Siza Mzimela, had not disclosed the issues to the Committee before. There were three amounts that were worrying. The first was an amount of R42 million, which was wrongly classified as “VAT-able income”. He wondered who was responsible for receipt of this money. There was another amount of R32 million that appeared to be “posted”. He did not understand what this meant, but it sounded to him like accounting camouflage. There was a third amount of R16 million that was linked to SAA. It seemed that there were two ways to address these problems. The Committee could call the former CEO and ask her why she did not disclose this information to the Committee before she left SAX. Or, the Committee should consider asking the President to issue a proclamation on SAX and SAA – similar to the one issued on Eskom. The idea was that anyone in the company that new of any wrongdoing could go public with the information and would be protected by the proclamation. The withdrawal of the SAX financial statements by the board came as a result of information from a whistleblower, who was actually a hero or heroine.

Ms Boyle disputed the comment that the rot dated back to 2009. The issues had been “creeping in” for a much longer period than that. The R16 million dated back to 2006 and is part of an ongoing discussion. SAA provided a lot of services to SAX and also collected its revenue, so there was a lot of money going back and forth between the two entities. If, however, this was not a legitimate debt owing to SAX, it would be written off. 

Mr Ntshanga added that the SAX had an initiative called the “Ethics Hotline”, which was part of an internal assurance process. Any report stemming from the hotline was treated with the dignity it deserved and the people that contributed to it were protected as well, whether they were known or unknown.

Ms Borman stated that it was quite scary that the Committee did not pick up on any problems in 2009/10. When the Committee met with SAX in November last year, the chairperson of the board said that she was confident that she would be able to report back to the Committee by the end of that month. She wondered if the problem had turned out to be a lot bigger than the board anticipated. It seemed that SAX was taking far too long to resolve the issues. She wondered why SAX was freezing employment if there were talks of expanding the organisation’s operations.

Ms Boyle explained that the investigation was taking a long time because the forensic audit had created more questions than answers. The board had asked the auditors to go back and do more digging. Part of this process was to give an indication to the board as to where the responsibility for the problems would lie. The board then made a decision to withdraw its financial statements for 2011. But, what had emerged from the investigation was that many of the errors had occurred in previous years and adjustments had to be made to prior years’ financial statements. The board was faced with the external auditors’ reports of irregularities on 26 or 27 November 2011 and it was obliged to withdraw the financial statements. The board also had to convince the auditors that steps were being taken to ensure that these sorts of irregularities would not happen again. She apologised for not concluding the exercise by the end of November as expected.

Ms Boyle noted that there were two queries about the employment freeze initiative. She reassured Members that the freeze was part of the short term emergency measures to restore sustainability of profits in the SAX, only after which expansion of SAX operations would take place. She added that it was never her intention to imply that the problems were small.

The Chairperson asked SAX what it had to say about the charge that Parliament was misled regarding the entity’s financial statements.

Ms Boyle explained that if the Committee thought in terms of the timing – the year-end in March – when the financials were concluded and the audit was completed. The Annual Report was then approved on 18 August 2011. This was based on the information available to SAX and its assurance providers at the time. It was subsequent to that, in the first week of September when the whistle-blowing incident happened. The board had been acting vigorously since then to collect as much information as possible. They were all misled and the withdrawal of the Annual Financial Statements (AFS) for the period to March 2011 was exactly to address this matter – to withdraw the AFS, do the analysis, reconstruct the AFS and re-present them.

The Chairperson stated that the Committee was also worried about the organisation’s early warning systems. If not for the whistleblower, these issues may not have been discovered. He asked the DPE and the Treasury to comment.

A representative from the DPE commented that the situation was more complex than the Department initially thought. However, the board had been keeping the Minister informed and in January it presented the situation to him as it currently stood. The reconstruction of the SAX’s financials had not yet been completed, and there were still efforts from the DPE’s side to get the AG involved in overseeing the reconstruction process. This was still in the initial stages so there was not much information to share with the Committee. The Minister would communicate with Members once the situation was clearer. The DPE was not aware of any specific PFMA prescripts relating to the withdrawal or reconstruction of the financials.

The representative of the National Treasury added that it had been made aware of SAX’s situation at an official level. In terms of Section 55(1)(d) of the PFMA, the financials were submitted last year and there should be a formal notification to the AG and National Treasury of a withdrawal.

Ms September stated that it was clear there were a number of things amiss. She could not let it slip by that Parliament was ignored in this process. However, now that the problems were on the table, it was time to see how the Committee could assist in resolving them. She suggested that the Committee ask SAX to come before the Committee twice every quarter. This was not to punish them; it was for the Committee to keep track of what SAX was doing to get things back on track. Also, the Committee would have to request the National Assembly to consider a report on this matter. She appreciated what the board was doing but it did not mean that the Committee could do its own thing. The Committee had to be guided by Parliament’s legal department to put this report together. It had been confirmed in this meeting that Parliament was misled; therefore, the Committee was required to do this.  

Mr Nhanha added that the Committee should not be shielded from this matter anymore – it was not a matter that started recently. His advise was to “come straight” with the Committee if the issues started years ago. It was unacceptable for a member of the audit committee to tell the Committee that they could not be expected to know everything that was happening because they were reliant on information taken from the top management of SAX. The Committee had the expectation that they would perform their fiduciary duties to the letter.

Ms Borman stated that she still wanted to know who was going to be held responsible for the problems within SAX. She also wanted to know what punitive actions would be taken.

Mr Sonto said that it would be a good idea if the Committee asked SAX for timeframes for managing issues. A timeline had to be negotiated before the matter could proceed.

Ms Boyle replied that the board was confident that the internal reconstruction of the 2011 financial statements would be completed by the end of March 2012. The financial statements would then have to be audited; however, SAX was not in a position to put pressure on the auditors to perform the audit quickly. She wondered if it would be helpful if SAX sent short updates to the Committee at least once a month.

The Chairperson agreed that it would be helpful, but the Committee still wanted to meet with SAX at the end of March. He noted Ms September’s proposal that the Committee meet with SAX twice every quarter. He suggested that SAX look at the role their external auditors played in the problems that were discovered, and whether or not they should still keep them. He thanked SAX for attending the meeting.

The meeting was adjourned.