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Necsa and Auditor-General poles apart on 2018 financial report

Lack of audit evidence cause for alarm.
Former Necsa chair Dr Kelvin Kemm was replaced, along with the entire board, by energy minister Jeff Radebe in December last year. Image: Supplied

The release of the South African Nuclear Energy Corporation (Necsa) annual report for the year to March 31, 2018 was pushed out to February 2019 due to ‘auditing complications’.

Now finally in the public doman, a repeated refrain throughout the Auditor-General’s report in this set of results is “I was not able to obtain sufficient appropriate audit evidence …”.

Accordingly, the Auditor-General (AG) issued a disclaimer of opinion.

Necsa was purported to be one of the best run state-owned entities. Its 2017 annual report received a clean bill of health from the AG, who was satisfied that he had obtained “reasonable assurance” that the annual financial statements were free of material misstatement.

However, reading further, the financial statements were not prepared in accordance with the prescribed financial reporting framework as required by the Public Finance Management Act (PFMA) and the Companies Act of 2008. These had to be corrected by the AG. “Material misstatements of current assets and revenue identified by the auditors in the submitted financial statements of the group and the entity were corrected, resulting in the financial statements receiving an unqualified audit opinion.”

So perhaps Necsa’s financial reporting was not on such a solid footing prior to 2018.

Going concern status

Necsa’s going concern status was previously dependent on government guarantees.

It is now threatened by the lack of sufficient appropriate audit evidence, and there is a question mark over whether the entity and the group have met the going concern status.

Despite the AG having issued a disclaimer of opinion, the 2018 directors of Necsa “believe that the group has complied in all material respects, with the provisions of the Companies Act, PFMA and the Nuclear Energy Act and other applicable legislation during the year under review”.

The directors further washed away any concerns in regard to the going concern status by saying that the “ability of the company to continue as a going concern is dependent on various factors including growth of sales, government grant, curtailing costs, the application of a new grant fund for mandates that are unfunded and have to be executed”.

And thus we have polarised positions of the AG and the board of directors.

Of course, the going concern status cannot be determined by an opinion alone. It must be substantiated by facts. In this case, there is a lack of facts. Hence, the disclaimer of opinion issued by the AG must surely hold sway?

Replacement of board

In December 2018, energy minister Jeff Radebe replaced the entire Necsa board, including the chairman, Dr Kelvin Kemm. The CEO, Phumzile Tshelane, was placed on suspension. The new board members are Dr Robert Adam (chairman), Dr Ramatsemela Masango, Aadil Patel, Bishen Singh, Pulane Kingston, Matlhodi Ngwenya, Jabulani Ndhlovu and Dr Pulane Molokwane. Don Robertson has been appointed as acting CEO.

External audit report – disclaimer of opinion

The lack of sufficient appropriate audit evidence can result in misstatements and unreliable financial statements. In reading the financial statements, cognisance should be taken of the following issues:

  • There is uncertainty over whether the accounting authority had fulfilled its responsibility for the preparation and fair presentation of the financial statements.
  • The consolidation of the financial statements could not be substantiated with supporting workings, and there was an unreconciled overall difference of R17.5 million.
  • The figures for cost of sales, trade and other payables, provisions, inventory, cash and cash equivalent, revenue and trade and other receivables on the financial statements of Pelchem are tainted due to a breakdown in internal controls surrounding the accounting records at the subsidiary.
  • The entity’s current liabilities exceed it current assets by R153.1 million and it made a loss of R133 million during the year, with accumulated losses of R510.7 at year-end.
  • The entity and group did not estimate the impact of standards not yet brought into effect such as IFRS 9 (financial instruments) and IFRS 15 (revenue from contracts).
  • Sales of goods were not necessarily recognised in the correct financial year; in other words, revenue is misstated.
  • The gross investment in subsidiaries and the impairment of investment in subsidiaries are overstated by R115 million respectively.
  • The AG was unable to confirm the impairment loss on the investment in Pelchem of R23 million, and was unable to determine whether any further adjustments were necessary to the investment in subsidiaries stated at R243.7 million.
  • The AG was unable to verify the capital work-in-progress amount reflected in Property, Plant and Equipment stated at R993.4 million for the entity and R1 405.5 million for the group.
  • The prior year impairment loss was not reversed, resulting in the reported year impairment loss being overstated by R33.7 million. Consequently, trade and other receivables were understated and total expenditure was overstated by R33.7 million.
  • Irregular expenditure of R29.9 million resulted from payments made in contravention of the supply chain management requirements. Appropriate audit evidence was not provided. Irregular expenditure was not included in the notes to the financial statements, as required by the PFMA.
  • Total expenditure was underestimated by R27.2 million in government grants that were not properly accounted for in recognising Stages 1 and 2 of the decommissioning and decontamination provisions.

Material issues facing Necsa

  • Going concern status – does Necsa meet the test for 2019?
  • An amount owing by subsidiary Pelchem of R115 million was capitalised into the investment in Pelchem after March 31, 2018. The AG is of the view that the separate gross investment in subsidiaries and the separate impairment of investments in subsidiaries are overstated by R115 million.
  • Necsa signed a memorandum of understanding with Russian nuclear medicine company Rusatom Healthcare, allegedly against the minister’s instruction not to. Dr Kemm refers to this agreement as: “A significant strategy agreement”. It was signed between Necsa and Rusatom Health alongside the Brics 10th anniversary meeting in Sandton in July 2018. Kemm is of the view that this agreement will expand Necsa’s nuclear medicine production capacity and sales.
  • Whether a decommissioning and decontamination plan is in place for the Safari-1 reactor.
  • Ageing nuclear facilities require extensive maintenance. Budgetary constraints are a concern.
  • Necsa has formed a business development and innovation department in order to exploit its intellectual property, and has entered into various business partnerships. The financial ramifications and necessary approvals of these partnerships should be investigated.
  • Necsa has invested in unit trusts (a collective investment scheme) in the amount of R408.3 million for 2018 (2017: R221.5 million). Why?

Necsa will soon close its 2019 books. Perhaps the AG should send a separate team to Necsa, one that will not be involved in the audit, to ensure that there are proper financial records and appropriate audit evidence. This team should also commence the implementation of IFRS 9 and 15 for 2019.

The consequences that could emanate from the financial unravelling of the state’s nuclear energy company are too awful to contemplate.

Can South Africa afford to wait until February 2020 to find out the state of Necsa’s affairs?

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Well it is obvious the only reason these people sit on these boards is so that they can garner some cash for the criminal government and of course themselves. With a minister of Radebe’s ilk and history you have to wonder how this bunch are going to find the cookies let alone the cookie jar. Maybe they are there to support Zuma’s future nuclear deals

Until we rid this country of racist BEE policies, we will not survive economically.

Are you sure that this is not another “Durban Hit Squad” story that will prove to be based on false information. If I recall correctly the production of medical isotopes was halted last year for reasons that did not appear significant. How an organisation that is a world leader in medical isotope production cannot be a going concern is strange unless there is unprecedented theft of revenue.

They need Financial Fitness

End of comments.

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