The Trans-Caledon Tunnel Authority, one of South Africa’s major public enterprises, recently announced that there will be a delay in the completion of its audit and annual financial statements for the year ended March 31, 2019.
The Auditor-General (AG) was appointed as the external auditor on April 1 last year, replacing Ernst & Young. It has raised the bar in audit requirements. Or is it being over-zealous?”
This has resulted in significant differences of interpretation between the AG and Trans-Caledon over:
- The nature of the supporting documentation required to substantiate the payments made by Trans-Caledon to the Lesotho Highlands Development Authority and the Lesotho Highlands Water Commission, and
- The relevant accounting treatment in respect thereof.
Said payments are regulated by the Treaty on the Lesotho Highlands Water Project between South Africa and Lesotho.
The disagreements between the AG and Trans-Caledon in regard to the payments include:
- The disclosure of payments made to the authority on the water transfer portion of the project located in Lesotho,
- The royalty payments due to the Kingdom of Lesotho, and
- South Africa’s contribution to the operating costs of the commission.
A notable point of difference is that the AG is requesting supporting documents relating to the expenses and costs of the authority and the commission in the form of invoices, bill of quantities, contracts and so on.
However, Trans-Caledon asserts that it is mandated to pay the authority on presentation of monthly subventions (grants of money), which have been approved by the chief financial officer of the authority and the South African delegation to the commission.
Trans-Caledon contends that its mandate and powers in regard to payments are regulated by:
- The Notice of Establishment (1986, amended in 2000);
- The Lesotho Highlands Water Project Phase 2 Agreement (2011); and
- The memorandum of understanding (2005) between the Lesotho Highlands Development Authority and Trans-Caledon, which sets out the operating framework for the payment of money to the former.
Further, Trans-Caledon claims that the above do not give it jurisdiction over the authority, nor direct access to information in the possession of the authority.
In other words, Trans-Caledon is saying that it is not entitled to ask for any proof of expenditure.
Am I the only one hearing the discordant clamouring of alarm bells?
The treaty provides for the commission to exercise oversight over the authority and to be accountable for the project.
The commission, established in terms of the treaty, comprises two equal delegations from Lesotho and SA. It has approval, monitoring and advisory powers over the activities of the authority to safeguard the respective interests of the two governments. It is also the channel of all government inputs relating to the project.
The South African delegation to the commission reports to the Department of Water and Sanitation (DWS).
Where to from here
Trans-Caledon has sought the assistance of the accountant-general at National Treasury in resolving the matter, and has approached the Office of the Chief State Law Adviser for advice.
However, no matter what is advised, can any authority, or any agreement – even if between two sovereign states – override basic audit procedures?
Perhaps the AG should request the Independent Regulatory Board for Auditors (Irba) to enter the fray.
Consequences of the delay
A delay in publishing the audited financial statements has various legal and regulatory implications since their timely submission is:
- A legal requirement in terms of the Public Finance Management Act,
- A regulatory requirement under the Financial Markets Act, the Financial Sector Regulation Act, the JSE Debt Listing Requirements, and
- A contractual requirement (in terms of various loan agreements).
But does any regulatory authority care if these requirements are not met?
There are times one has to resort to some whataboutery to drive home a point – what about SAA, Coega and SA Express, which have not yet published their 2018 annual financial reports? None have suffered any dire consequences, and SAA continues to require (and receive) more government handouts.
However, external loan providers and rating agencies will take note.
Trans-Caledon is of the view that “the breaches do not emanate from any act of bad faith, or illegality on the part of Trans-Caledon”, but reflect a difference of opinion on a technical matter. This should “allow its lenders to reserve their rights under the relevant instruments of debt until the matter is finalised”.
Trans-Caledon “believes” that “a successful engagement” between the AG, the DWS, the commission and the authority would “likely result in the completion of the process by the end of October 2019”.
The JSE may suspend Trans-Caledon’s debt if the audited financial statements are still outstanding after the end of November 2019. However, Trans-Caledon is also hoping to persuade the JSE to exercise its discretion in terms of section 7.8 of its debt listing requirements in regard to the suspension of its notes should this happen.
Should citizens be alarmed?
It should be noted that the commission and the authority are both audited by reputable audit firms “and to the best of Trans-Caledon’s knowledge neither have ever had an adverse audit opinion”.
The more cynical public does not put much store in such trust.