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What will it take for Transnet to achieve a clean audit report?

Former president Jacob Zuma waves as he disembarks in one of the new locomotives that were unveiled by Transnet. Picture: Masi Losi

Former president Jacob Zuma waves as he disembarks in one of the new locomotives that were unveiled by Transnet. Picture: Masi Losi

Published Aug 2, 2022

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By Amos Zungu

The International Auditing and Assurance Standards Board distinguishes between modified and unmodified auditor’s opinions.

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Modified consists of a qualified opinion, an adverse opinion, and a disclaimer of opinion.

The auditor modifies the opinion If he/she comes into a conclusion that, based on the audit evidence obtained, the financial statements are not free from material misstatement; or is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements are free from material misstatement.

Unmodified opinion is expressed when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Unmodified opinion is made of unqualified audit report with findings and unqualified with no findings (clean audit report). Transnet received an unqualified audit report with findings, which is not a clean audit report.

A clean audit report is obtained when there were no material misstatements on the financial statements, no material findings on the audit of the annual performance report and no material non-compliance with applicable laws and regulations.

A clean audit report is a guarantee that the entity has complied with all the laws and regulations governing public sector financial management and that it was able to completely and accurately account for the use of its resources.

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All public sector institutions and entities, including Transnet, must get nothing less a clean audit report, as a clean audit report is the only audit report to ensure accountability for the resources under the entity’s control.

I am writing this article, to explain the audit outcomes of Transnet for the financial year ended 31 March 2022, and to share my understanding of the unqualified audit opinion received since 2018 as reported in the Mercury of 28 July 2022.

Below I explain and share my views on the unqualified audit report with findings received by Transnet:

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Unqualified audit report with findings on the audit of the annual financial statements

Transnet received an unqualified audit opinion with findings for the year financial ended 31 March 2022 (2021: Qualified opinion with findings).

The improvement in the audit outcomes is because the Auditor General did not express an opinion on the irregular expenditure, as the Minister of Finance granted an exemption to Transnet from recording and accounting for irregular expenditure in the financial statements for a period of three years ending 31 March 2024.

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The effect of the exemption was that irregular expenditure was not included as part of the annual financial statements. This means, unlike all other public sector entities, Transnet was exempted from accounting for irregular expenditure. My interpretation of this is that Transnet was enabled to avoid a qualified audit opinion through the ministerial exemption.

The exemption resulted in a technical improvement in audit outcomes rather than as a result of the improvement in the internal financial management control environment for the identification, recording and disclosure of irregular expenditure.

In the prior years, Transnet received qualified audit opinions because the entity did not fully and accurately record irregular expenditure in the financial statements.

This was due to inadequate systems to identity and report on irregular expenditure incurred as well as to detect, record and appropriately disclose the expenditure in the financial statements.

In addition, irregular expenditure reported did not agree to the supporting payment schedules. Without the political interference, and given that the entity has not provided verifiable evidence that the system of internal control for identification, recording and disclosure of irregular expenditure has improved, I have no doubt that if it was not for the exemption, Transnet would have received a qualified audit opinion. Transnet is at risk of regressing to a qualified audit opinion after expiry of the exemption beyond 2024, unless the progress on the management action plan to identify and keep accurate and reliable records and registers for irregular expenditure is at advanced stage to date.

Lack of diligence work ethic to prepare accurate, complete and credible annual financial statements

Some of the managers and staff of Transnet did not independently prepare accurate, complete and credible annual financial statements as they placed reliance from their external auditors to pick up the misstatements. Transnet relied on the audit findings from the external auditors after they submitted for auditing the initial set of annual financial statements that contained errors which were identified by the auditors, and used the findings to make their annual financial statements comply with section 55(1) of the PFMA. Transnet submitted for auditing annual financial statements that had many errors, that were not complete, accurate and credible. Transnet was not able to record and account for its investment properties, fair value adjustments, related party transactions and commitments. Had the auditors not identified these errors, the annual financial statements of Transnet would not have been fairly presented and would have misled the users. As part of the auditing processes, Transnet was given an opportunity to make adjustments and corrections on their annual financial statements based on the errors identified by the auditors. If this opportunity was not given or if Transnet failed to make the necessary corrections, or failed to subsequently submit the required supporting information, they would have received a qualified audit opinion on the financial statements.

The practice of being assisted by the auditors in the fair presentation of annual financial statements is a course for concern. Transnet have not institutionalized internal controls that prevents, detects and correct errors in the annual financial statements independently without relying on the auditors to pick up the errors. The sustained extensive reliance on the external auditors for the fair presentation of the financial statements led to the material non-compliance with the Public Finance Management Act, and resulted Transnet not receiving and clean audit report on their financial statements.

Lack of diligence to prepare reliable and credible annual performance report

The purpose of the annual performance report is for the entity to account for its promises as included in their annual performance plan. Therefore, it is important for the performance report produced by the entity to be reliable, useful and credible as it will enable the public to assess the performance of the entity and be able to rely on such information. Should the annual performance report not meet these criteria, for the purposes of an audit, it will have a negative impact on the audit outcomes as the entity would not achieve a clean audit report. The auditors identified material misstatements and basic errors on the annual performance report that was submitted for auditing. But because Transnet was given an opportunity to go back and redo their annual performance report, the material findings that were identified by the external auditors were not reported in the audit report. Again, the entity, placed an over reliance on the external audit process to identify misstatements and errors on the annual performance report. It was not for this first time that Transnet failed to produce a reliable, useful and credible annual performance, as similar findings were reported in the prior year.

Procurement irregularities

Section 51(1)(b)(ii) of the Public Finance Management Act requires the Chief Executive Officer (CEO) as the accounting officer of Transnet, to put into place a system of internal controls to prevent irregular expenditure. However, year on year, Transnet incurred irregular expenditure but did not include the full extent of the irregular expenditure incurred in the financial statements. In addition, the Auditor General was unable to obtain sufficient appropriate audit evidence to confirm the irregular expenditure disclosed in the notes to the financial statements as the irregular expenditure could not be reconciled to the registers. Procurement irregularities was prevalent at Transnet, the audit report revealed that some of the contracts and quotations were awarded to bidders based on preference points that were not allocated or calculated in accordance with the requirements of the Preferential Procurement Policy, some of the contracts and quotations were awarded to bidders that did not score the highest points in the evaluation process, some of the contracts and quotations were awarded to bidders based on pre-qualification criteria that were not stipulated or differed from those stipulated in the original invitation for bidding and quotations. Additionally, Transnet did not support economic transformation in some of its procurement.

Protection of people who committed irregularities from disciplinary processes

The Auditor General was unable to obtain sufficient appropriate audit evidence that disciplinary steps were taken against officials who had incurred irregular, fruitless and wasteful expenditure as required by section 51(1)(e)(iii) of the PFMA. This was due to proper and complete records that were not maintained as evidence to support the investigations into irregular expenditure. Disciplinary steps were not taken against some of the officials who had incurred or permitted irregular, fruitless and wasteful expenditure. There was a number of irregularities committed by some of the individuals at Transnet. The audit further identified that the amounts of some of the contract entered into exceeded the tendered prices and some of the contracts were awarded to bidders that did not score the highest points. However, no action was taken against individuals who committed irregularities, in some instances, investigations were completed with concrete findings that recommended disciplinary actions to be taken, but disciplinary hearings were not held for confirmed cases of irregularities committed by certain individuals.

Lack record keeping

Some of the records to support certain transactions and events were not submitted for independent verification by the auditors. Because of the unavailability of some of the records, the Auditor General could not perform her work satisfactorily, and the audit report highlighted some of the frustrations with the audit. In her report, the Auditor General reported that due to non-availability of tender records, she was unable to obtain sufficient appropriate audit evidence that goods, works and services were procured through a procurement process which was fair, equitable, transparent and competitive, and whether contracts and quotations were awarded to bidders based on points given for criteria that were stipulated in the original invitation for bidding and quotations. Furthermore, the Auditor General did not obtain sufficient appropriate evidence that tender requirements for contracts above R30 million included a condition for mandatory subcontracting to advance designated groups, and whether construction contracts were awarded to contractors that were registered with the Construction Industry Development Board and qualified for the contract. Evidence was not submitted for auditing to confirm that disciplinary steps were taken against officials who had incurred irregular, fruitless and wasteful expenditure.

Way forward for the achievement of a clean audit report by Transnet

The mandate of Transnet is to assist in lowering the cost of doing business in South Africa, enabling economic growth and ensuring security of supply through providing appropriate port, rail and pipeline infrastructure in a cost- effective and efficient manner, within acceptable benchmarks. It is difficult to engage on the mandate of Transnet as a State-Owned Entity, leave alone its obligations for service delivery as well the desired contribution to fighting the social challenges of unemployment, poverty and inequality facing South Africa. I will contribute to the discussion on the implementation of the mandate, service delivery and socio-economic role of Transnet once the entity has begun to scratch the surface on accountability and on achieving value for money on the use of its resources.

At the moment, my pre-occupation is the entity’s failure to comply with the Public Finance Management Act due to the lack of internal control systems to prevent procurement irregularities and lack of consequence management against individuals who committed financial misconduct. Additionally, there was no consequence management for lack of diligent work ethic and poor performance by some of the managers and staff responsible for annual financial statements preparation and annual performance reporting as they placed reliance on the auditors to detect errors on their reports. The audit outcomes of Transnet are far worse than some of the local municipalities in South Africa. It is a course for concern that such a prestigious national state-owned entity is unable to achieve a clean audit report. A clean audit report will be obtained once Transnet reaches the point where they do not need the Auditor General to assist them in preparing the annual financial statements with fair presentation with the relevant requirements of the PFMA, companies Act and International Financial Reporting Framework. In addition, the entity must prevent irregular and fruitless and wasteful expenditures and implement consequence management for financial misconduct in order to receive a clean audit report.

In my view, key role players such as the collective political leadership, the minister for public enterprises, portfolio committee on public enterprises and Standing Committee on Public Accounts (SCOPA) on public enterprises, and the board of directors must play their part in order to ensure accountability, and achievement of value for money through the economical, efficient and effective use of the resources for Transnet.

Collective political leadership:

Politicians must provide collective political leadership to ensure that Transnet fulfils its mandate, provide the required service delivery and contribute in the fight against unemployment. There must be a commitment and political will collectively to stop procurement irregularities and to adhere to transparent and fair employment processes for executives, managers and staff at Transnet.

Minister for public enterprises, portfolio committee on public enterprises and SCOPA on public enterprises.

The minister must set a leadership tone at the top for accountability, effective, economical and efficient use of resources, and intolerance for poor performance. The minister must oversee the speedy finalization of investigations for irregularities and appropriate implementation of consequence management for individuals that committed financial misconduct. Furthermore, the minister must enforce clean administration from the board of directors.

The portfolio committee and SCOPA must exercise oversight over the board of directors and the minister to ensure that there is consequence management for poor performance and for committing irregularities. The portfolio committee and SCOPA must provide effective oversight over the policies for the prevention of irregular and fruitless and wasteful expenditures. In addition, the portfolio community and SCOPA must exercise effective oversight to ensure that the entity achieve a clean audit report

The board of directors

The board of must set as an annual performance target, the achievement of a clean audit report. Clean administration, the achievement and maintenance of the clean audit report must be a standing agenda item for board meetings. The board must enforce policies for the prevention of procurement irregularities and fraud at Transnet. The board must implement consequence management for poor performance and for committing irregularities and fraud.

Amos Zungu is a lecturer: Auditing and Taxation at Durban University of Technology. He holds a Master’s degree in accountancy and is a Registered Government Auditor (RGA).

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