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After the Bell: Let’s lower Eskom’s accounting standards — that’s bound to help

After the Bell: Let’s lower Eskom’s accounting standards — that’s bound to help
Illustrative image | Sources: The cooling towers of Eskom’s Lethabo coal-fired power station in Vereeniging. (Photo: Leon Sadiki / Bloomberg via Getty Images) | South African coins. (Photo: Waldo Swiegers / Bloomberg via Getty Images)

What do we make of the decision by the Treasury to exempt Eskom from the reporting requirements of the Public Finance Management Act? Well, I think the short answer is that we are suspicious (if not offended).

For the Treasury to exempt Eskom from legislation designed to root out corruption from an organisation less than a month after its previous CEO claimed senior ANC officials were involved in criminal activity is, let’s face it, not a good look.

Unfortunately, it’s not quite as simple as that. First, that same previous CEO, André de Ruyter, also complained about the onerousness of this legislation. The main problem is that the Public Finance Management Act (PFMA) requires organisations to report on three things: irregular, fruitless and wasteful expenditure. These requirements are well beyond what private sector companies must report, and consequently, they are not true auditing concepts.

And it should be noted that Eskom will not be entirely exempt: it will still have to report on irregular, fruitless and wasteful expenditure; just not in the financial statements, but in its annual report. But it should be noted that huge numbers of state organisations have dispensed with producing annual reports entirely, and when they are produced, they tend to arrive so late they are extremely unhelpful.

Anyway, you can’t say with a straight face that it’s not a sensible idea for companies in the public sector to a) be held to a higher account; they are after all at least to some extent leaning on the public purse, and to b) be on the particular lookout for skulduggery, given SA’s recent history.

Tricky beasts

From the outside, the concepts of irregular, fruitless and wasteful expenditure are not irrational reporting ideas. If you were running one of these organisations, knowing those three things ought to be useful. But with the best will in the world, you have to acknowledge they are tricky beasts.

I think the toughest is “irregular”. Irregular expenditure could be anything from spending that took place without the deputy director-general, for absolutely normal routine expenditure, not signing off on the correct form with the correct stamp. Or it could be where, for example, you sell a coal mine to the president’s mates, and lend them the money to buy it. But the other concepts are pretty tricky too; one person’s “fruitless”, say, taking a potential client out to lunch, could be another person’s “fruitful”, even if it doesn’t show an immediate return.

Still, lots of auditing concepts are complicated; that is why auditing is an art. Just think of something like depreciation. Plant depreciation is pretty critical because at some point that equipment will have to be replaced, and you need to make sure you have the necessary cash. But how do you know? It’s complicated.

But even so, if private sector companies can do without these concepts — and they seem to operate fairly well in general — why are we putting this extra burden on state-owned companies? Part of the problem is that when the Auditor-General says X amount of Eskom’s total expenditure was “irregular”, the public out there thinks that this money was stolen, when in fact, lots of it could just have been misclassified.

It’s worth noting that the requirements of the PFMA apparently didn’t prevent Eskom from signing a billion-rand contract with a company that had as a shareholder the then acting CEO’s stepdaughter. In fact, at the time, the contract was not “irregular” in the categorisation of the PFMA, it was just corrupt.

Treasury justification

One thing does stick in my craw, however, and that is National Treasury’s justification for the exemption, which is also applied to Transnet, as it happens. The Treasury claims that there is a “major risk” that non-material, non-corrupt transactions reported in the financial statements mean a higher likelihood of a qualified audit opinion. That, says Treasury, could trigger loan covenants.

Well, that depends on the exact phraseology in the covenants, but my guess is that this is a bit of a flimsy excuse. In a sense, the Treasury is leveraging the financial weakness of Eskom, positing it as a reason it should not be held too tightly accountable. Banks, surely, know the difference between government and private sector auditing requirements.

There is another problem too. The PFMA applies to hundreds, if not thousands, of state organisations and departments. Plenty of them seem to deal with the complications of the legislation pretty well; quite a lot of them, as it happens, in the Western Cape. If SA’s two biggest parastatals now suddenly are exempt, what does that mean for all the other organisations that have been jumping through hoops for years to get this right? Wouldn’t they be within their rights to question whether they should be going through all this extra effort?

My podcast colleague, investment banker Mark Barnes, who as a former CEO of the Post Office has seen this all very close up, makes two interesting points in our forthcoming podcast (out on Wednesday). One is that in a large organisation, you really can’t create a corruption-free environment by enforcing a complicated tick-box system. Everything depends on the ethics of all the people working there, and that is not something you can legislate into force.

His second point is that the auditing process is like having your homework marked after you have done it. It’s an ex-post facto function. Auditing on its own doesn’t help you decide, for example, whether to expand into China or focus on a new product line.

Both are good points, of course. The main problem facing Eskom and other state-owned enterprises is not so much the niceties of their auditing process; it’s that they have been run so badly for so long, the staff are demoralised and many of the best have drifted away. Eskom has had 14 CEOs over the past 26 years. That is just not the way to run an organisation. To think that dumping some onerous reporting standards is going to help is, I suspect, putting the cart before the horse. DM/BM

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