Audit outcomes for SAA have regressed mainly because of poor management and governance that the airline failed to establish after exiting business rescue in 2021.
This is according to the auditor general’s report on the national carrier presented to parliament’s standing committee on public accounts (Scopa) on Tuesday.
The report covers the four-year period from 2018-19 to 2021-22, after the board in 2019 requested the suspension of audits when the airline was under financial stress. The board said it wanted to focus on finding solutions to address the liquidity and solvency problems of SAA, which was put under business rescue in December 2019.
The auditor general’s report noted that SAA “experienced significant financial difficulty and operational challenges in the years leading to the 2018 financial year which necessitated a number of equity injections-recapitalisations from the government”. It said that from 1 April 2018 to date, the government had injected R38.1 billion, of which R27.6 billion was for post-business rescue operations.
The national carrier has since been operating on equity or bailouts and all loans were paid out through a dividend process, according to the report. The funds for the post-business rescue are meant to drive the company’s expansion plans to ensure operations can continue, but because of the failure to appoint a managerial board, the plans were not properly implemented.
“When you look at the restart plan or the expansion plan, the entity is still delayed, and the main cause of that is that there is a lack of funding. The entity is fully funded based on the capital injection. There are no loans so the entity struggled to get the funding to fund the expansion plan,” said Thato Kunene, the senior manager responsible for the SAA Group audit.
After the business rescue, the number of aircrafts decreased to six from 44 and the number of employees were reduced from 4 708 to 810. Kunene said the airline failed to preserve skills after the business rescue, meaning there was poor capacity and unskilled workers who could not prepare credible financial statements and support the audit process.
This led to a disclaimed audit opinion, which is issued when the auditee fails to provide sufficient evidence in the form of documentation.
“In 2017-18, the outcome was qualified, and then during the audit that we performed, there was actually a regression to a disclaimer audit opinion,” Kunene said.
“During the four-year period that we audited, the annual performance report was not prepared and submitted for audit as compared to 2017-18. That area was also one of the areas that we had to disclaim.
“So this disclaimed audit opinion paints that SAA has an environment that is failing to implement robust financial management systems and credible records and also we have noted that the action plans are not actually prepared by management to address some of the qualification areas that we had.”
SAA is the holding company for Mango, SAA Technical and Air Chefs.
Mango was placed under business rescue in July 2021 after receiving R420 million from the 2020 medium-term budget, but Kunene said there were no prospects to revive the airline. He said the other two subsidiaries are “a going concern with material uncertainty” and are highly dependent on the performance of SAA as a whole.
The auditor general’s report shows that SAA’s irregular expenditure was at R22 billion in 2017-18 and had doubled by 2022 to R44.5 billion. Fruitless and wasteful expenditure increased from R24.78 million to R207.3 million over the four-year period of the audit.
“It was a huge jump,” said Kunene, while expressing concerns about accuracy as a result of poor record-keeping.
“From our side we were not able to test whether the regular expenditure nodes were actually completed as management did not have proper record keeping to ensure there is a complete and relevant and accurate information, and also they did not implement processes to identify and quantify regular expenditure as well as fruitless and wasteful expenditure.”
He said the auditor general also noted poor consequence management in SAA.
“Actions were not taken against officials who had incurred irregular and fruitless expenditure and that is applicable throughout the four years, and also we could not get sufficient audit evidence that the investigations were conducted against the allegations of the financial misconduct committed by the officials and that is applicable for the four years.”
He said a disclaimer of opinion audits on the financial statements rendered them not reliable for purposes of decision-making and recommended that the board and management stabilise the governance and internal capacity of SAA, and fill vacant executive positions with skilled staff to improve financial outcomes and business operations.
The 2022-23 audit outcomes have been completed but have not been signed off yet, and the auditor general said it had not received the 2023-24 financial statements.
The auditor general’s report on the Passenger Railway Agency of South Africa (Prasa) for the 2022-23 financial year showed an improvement.
“They actually moved from a disclaimer in the previous years to a qualified opinion in 2022-23,” Corné Myburgh, the business leader responsible for the Prasa audit, told parliament.
She said the improvement was attributed to management making a concerted effort in ensuring the asset register.
“For the first time, I think since 2017, they were in a position to provide us with an asset register that we could actually audit and conclude on during the 2022-23 year,” Myburgh said.
“We’ve also seen that in terms of the performance information that there was a significant improvement. Previously in the 2021-22 year, they’ve only managed to achieve 19% of their indicators. In 2022-23, they managed to improve that to 59%.”
According to the auditor-general report, Prasa received R7.2 billion in the form of subsidies from the department of transport and R12.3 billion for capital expenditure during the 2022-23 financial year.
It generated a revenue of R119 million from fare revenue and R620 million from operating lease rental income from its properties. It also generated R181 million from other forms of income and its biggest source of income came from interest received of R1.7 billion, which was mainly on capital grants that it managed to retain.
Ilza Dippenaar, who was part of the Prasa audit team, said the agency had “emerged from years of disclaimed opinions”.
“So this really signifies a major milestone in the 2022-23 financial year where we were actually able to express an opinion,” Dippenaar added.
Although Prasa improved its indicators to 59% during the period under review, Dippenaar said it was still not satisfactory.
“We still have concerns in terms of the service delivery to citizens and whether or not rail commuter services are free and accessible to the extent where citizens would want it to be,” she told Scopa.
Myburgh alluded to compliance concerns, specifically related to supply chain and procurement processes.
“They didn’t follow proper processes to make sure that procurement is fair and equitable, and then relating to that, because of the increase in irregular expenditure, they didn’t necessarily implement the necessary consequence management,” she said.
Irregular expenditure incurred at the rail agency increased to R3.8 billion in 2022-23 from R3.3 billion in 2021-22, some of it as a result of vandalism and theft of infrastructure.
Fruitless and wasteful expenditure decreased to R179 million in 2022-23 from R302 million during the previous financial year.
The losses in the year under review “concerningly included losses through criminal conduct amounting to R14.8 million (after some recoveries) as a result of cybersecurity incidents, highlighting the critical weaknesses noted in Prasa’s ICT environment noted during the audit process”, the report said.
Among the recommendations was better consequence management. Dippenaar also emphasised Prasa’s need to improve its information technology to prevent financial losses.
“We said that these systems were not sufficient to ensure the reliability and the availability, accuracy and protection of information. The controls were insufficient to mitigate the risk of potential irregularities and/or fraudulent activities being perpetrated in the IT environment,” she told the parliament committee.
