The status of SOEs remains volatile, particularly their financial health, as many key financial indicators continued to deteriorate for the year under review. Many SOEs had to adjust their forecasts and outlook on whether they would be able to continue their operations due to covid-19. This caused their financial health to deteriorate, including a significant increase in reported deficits. Some SOEs continued to ask for – and receive – funding from government, which resulted in funds intended for primary service delivery being diverted. This concern was also raised by oversight bodies. Some SOEs continue to record significant losses, raising doubts about their ability to continue operating.
The overall control environment within SOEs also remains weak in the areas of financial and performance reporting, and compliance with laws and regulations. The key contributors to the unfavourable audit outcomes include poor governance processes, instability at senior management and executive levels, lack of consequence management, ineffective strategic planning and monitoring, and lack of regular reconciliation, reviews and reporting. Most SOEs struggle to comply with legislation, especially in the area of procurement, as irregular expenditure showed no signs of decreasing. The key contributors to this state of affairs need to be addressed urgently and decisively for there to be any improvement. Some actions taken include business rescue proceedings, selling of non-core assets and considering strategic equity partnerships. These actions were still in progress at the cut-off date for this report. As a result, the effectiveness of these actions cannot be assessed.
The number of SOEs that did not submit their financial statements and performance reports for auditing increased significantly during the current year, as did audit delays. This negatively affects the accountability chain because the various stakeholders are not able to evaluate the state of these entities. During the current year’s audit, we noted the following:
- The South African Airways audit has been outstanding since the 2017-18 financial year, and the entity only filed a notice of substantial implementation of the business rescue plan on 30 April 2021.
- South African Express Airways has not submitted financial statements for auditing since 2019-20, as it is currently under provisional liquidation.
- Denel did not submit financial statements for auditing due to the severity of the control deficiencies identified in the previous year, combined with staff shortages.
- The Independent Development Trust, Land and Agricultural Development Bank, South African Post Office and Trans-Caledon Tunnel Authority submitted financial statements for auditing, but these audits had not yet been completed by the cut-off date for this report.
During the year under review, we also took back and audited Transnet for the first time. Transnet is the second-largest SOE in the country and became the largest contributor (90,2%) to the irregular expenditure balance. The audit outcome, which was qualified on the completeness of irregular expenditure disclosed, was consistent with previous years. We also notified the accounting authorities of two material irregularities.
At the heart of the financial management deficiencies we identified during our audits are auditees that failed to institutionalise mature preventative controls that were responsive enough to prevent and detect misstatements, non-compliance, losses and signs of financial distress during the year, and to correct these timeously. Our detailed recommendations in the SOEs’ management reports can only succeed if the entities have sound internal control environments and effective governance structures and processes in place. This links directly with some of the initiatives government is implementing to strengthen the governance of SOEs, including establishing a Presidential State-Owned Enterprises Council. The council’s mandate covers strengthening the framework governing SOEs, which includes introducing an overarching act to regulate SOEs and determining an appropriate shareholder-ownership model. Government is also drafting an SOE bill that aims to:
- determine an appropriate shareholder ownership model
- inform institutional arrangements for overseeing SOEs, including the future role of the Presidential State-Owned Enterprises Council
- integrate lessons from various investigative commissions of enquiry
- ensure that competent people of integrity are appointed to SOE boards and executive positions via a transparent and robust process
- clarify the respective roles and responsibilities of the executive authority, boards and executives
- regularly review and update various guidelines.
Many SOEs continue to face challenging and tumultuous conditions, and boards need to be ruthless in executing their fiduciary duties to safeguard the entities’ best interests. Government as shareholder also needs to accelerate the bold and decisive implementation of initiatives and interventions for those SOEs facing governance, financial and other challenges.
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