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SAA: Futile to bail out an organisation which has no internal and financial control


Simon Mantell served articles with a big four audit firm and runs a biscuit factory in Cape Town.

The Auditor-General’s damning audit opinion on SAA Group AFS identifies incompetent directors and everything the previous external auditors missed.

The Auditor General, Thembekile Makwetu, recently released his audit opinions on the financial statements of SAA and Mango for the year ending 31 March 2017 and they suggest delinquent conduct on the part of the directors and provide further evidence to support the Independent Regulatory Board for Auditors’ (IRBA) proposals for auditor rotation.

Makwetu’s qualified audit opinions warrant closer analysis, especially when juxtaposed with the consistently “clean” audit opinions supplied by large international audit firms for the same SoEs. It must be asked whether the AG and his team possess unique talent, allowing the AG to unearth the SAA Group financial misadventures which these international audit firms consistently missed, or whether it is a just a coincidence that the SAA Group went rogue in the first year for which the AG was responsible for the audits?

If truth be told, the track record of mismanagement at SAA confirms that the likelihood of SAA only “going bad” in the past 12 months shares the same probability as Donald Trump changing his Agent Orange hairstyle or committing to retain key staff for longer than a year.

While the media has reported on the massive losses incurred by SAA for the 2017 financial year, it has not focused on the detail of Makwetu’s audit opinions which are a portend of what is to come, especially with regard to throwing more good money after bad.

In his preamble to the tabling of his audit opinions, Makwetu is at pains to explain the importance of the adherence to Section 55 and Section 65 of the Public Finance Management Act (PFMA).

Section 55(1) (c) and (d) and Section 55(3) require that the accounting authority (the board of directors) submit its financial statements for auditing within two months of the financial year-end and that within five months the accounting authority must submit the annual report, audited financial statements and audit report to the relevant executive authority responsible for the entity and that in terms of S 65 (1) (a) the executive authority must then table same within one month before Parliament.

Makwetu confirms that the accounting authority for SAA only submitted its financial statements for auditing on 31 October 2017 in clear breach of S 51(1) (c) and that the AG completed the audit on 8 December 2017. He adds that the executive authority has not tabled the relevant reports before Parliament in breach of S 55(3) and S 65 (1) (a) and that he is obliged to publish his audit report for Mango and SAA in terms of S 21(3) of the Public Audit Act (PAA) notwithstanding the absence of financial statements and the annual report. In other words, the release of the SAA Group AFS is now six months overdue.

Even when faced with shambolic sets of accounts, the audit profession, for reasons best known to itself, adopts a curious “walking on eggshells diplomacy” and in certain aspects Makwetu stays true to his vocation. Yet, it is in the detail of his audit opinions that Makwetu provides concise insight and targets the disgraceful state of affairs at the SAA group.

His audit opinion for the unreleased SAA financial statements for 2017 is qualified under a number of sub-headings including property, aircraft and equipment; inventory; maintenance costs; irregular and fruitless and wasteful expenditure.

Property, Aircraft and Equipment

Makwetu records that SAA did not adequately review the useful lives and residual values of the these assets and some were not even recorded and that he was unable to obtain sufficient evidence to assess impairments and was unable to determine the correct net carrying value of these assets. In other words, a material R4-billion balance sheet line item cannot be verified owing to serious financial maladministration.


With respect to inventory (aircraft spares and parts), the AG was unable to obtain reasonable audit assurance that inventory at SAA Technical (SAAT) was fairly valued owing to the fact that the assumptions SAAT applied in calculating net realisable value could not be supported by appropriate audit evidence meaning that an almost R1-billion balance sheet line item could not be verified.

Maintenance Costs

SAA was unable to recognise maintenance costs in accordance with international accounting standards and maintenance costs were also recognised in wrong accounting periods and/or recognised using incorrect exchange rates. Maintenance and trade payables were understated by over R500-million meaning that losses have been under-stated.

Irregular and fruitless and wasteful expenditure

The AG concluded that SAA did not establish adequate controls to maintain records of irregular and fruitless and wasteful expenditure and that he was unable to establish what these amounts should be in rand terms – consequently a further breach of the PFMA S 55(2) (b)(i).

Makwetu then adds context to his report and explains that the previous financial statements, audited by a predecessor auditor, received an unqualified audit opinion.

In terms of compliance with legislation the AG concludes that the financial statements have not been submitted timeously and he adds that the directors have not taken steps to prevent fruitless and wasteful and irregular expenditure and that all of the above represent further breaches of the PFMA.

The AG also highlights additional breaches of the PFMA by the directors who have failed to ensure that assets are properly managed and safeguarded and failed to ensure that all goods and services were procured in a manner which is fair, equitable, transparent and competitive.

Equally troubling is his concern with respect to “internal control deficiencies” where he confirms a decline in the internal control environment, lack of decisive action to mitigate emerging risks, failure of leadership to address non-performance, failure to address audit findings timeously, failure to ensure that human resources were sufficiently skilled and that individuals were accountable for non-performance and lack of governance in Information Technology.

Regarding financial and performance management, the AG found that SAA did not implement proper record keeping in a timeous manner to ensure that complete and accurate information was accessible and available and regular reconciliations were not conducted and that effective financial systems of internal controls and their management had not been implemented to ensure accurate financial statement preparation and that the review of the financial statements was not adequately planned.

The above snapshot of the dysfunction at SAA serves to highlight not only a delinquent board, but also the futility of bailing out an organisation which has no internal and financial control. The findings of Makwetu ask serious questions of the performance of the external auditors in previous years where SAA has received clean audit opinions and his findings provide compelling evidence to support the IRBA’s plan to implement compulsory audit rotation.

In conclusion, one must ask whether an executive team and board incapable of managing and overseeing elementary financial accounting principles can be entrusted with the overall responsibility of vital aircraft maintenance and safety and is it not a matter of time before there is a catastrophic incident, the cause of which is not pilot error? DM


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