Transnet disputes qualified audit finding

Transnet is unhappy with the qualified audit opinion received from its external auditors SizweNtsalubaGobodo (now SNG Grant Thornton) for its 2018/2019 financial results, published on Monday.

The dispute saw the state-owned ports and logistics giant almost missing its statutory deadline: to publish its full-year results within six months of its year-end on March 31, 2019. It was scheduled to release its results last Friday, but had to move this to Monday because of this issue.

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Moneyweb understands that Transnet executives, Public Enterprises Minister Pravin Gordhan and officials from his department, as well as National Treasury, met last week hoping to resolve the matter and secure an unqualified audit for Transnet ahead of the release of its results.

“We had a robust and difficult debate on the issue and had hoped that the matter would have been finalised before the release of our results,” Mohammed Mahomedy, Transnet acting group CEO said during a media briefing on Monday.

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“We don’t agree with their audit opinion,” he added. “We even have the support of National Treasury to dispute our case with the external auditors. However, we did not come to a resolution and had to go ahead with publishing Transnet’s latest results with the qualified audit opinion. Rules dictate that we have to publish our results within six months of our year-end.”

Pre-qualification ‘did not make tender irregular’

Mahomedy explained that the issue being disputed relates to a tender pre-qualification process back in 2017, for contracts worth around R1.9 billion. He says that while the pre-qualification was in line with government’s preferential procurement regulations, the auditors believed it was nonetheless inconsistent with the legislation.

Giving more detail on the issue, Transnet acting chief financial officer Mark Gregg-Macdonald said the dispute came up “very late” in the external audit process.

“Essentially, they [the external auditors] say that the pre-qualification makes the tender irregular. We have divergent views on this and have the support of Treasury, who also believe that it is not irregular.”

Delay ‘not in anyone’s interest’

Mahomedy says discussions aimed at resolving the issue are continuing. “It was not in anyone’s interest to delay our financial results any longer,” he told Moneyweb. “The audit qualification is the primary reason behind the initial delay. We are confident that we will have finality on this matter within the next few weeks.”

In its results, Transnet reported that irregular expenditure had hit R49 billion. However, Mahomedy noted that most of this relates to locomotive contracts going as far back as 2012.

“Around R41 billion of the irregular expenditure is related to locomotive contracts entered into between 2012 and 2015, so most of the reported irregular expenditure is not related to Transnet’s 2018/19 financial year,” he said.

“As we go through the state capture clean-up process, it is expected that irregular expenditure will increase [as a result of] the additional scrutiny.”

Mahomedy added that Transnet has enhanced its ability to identify and remediate new instances of irregular expenditure, with the appointment of the Auditor-General to provide additional oversight in relation to complying with the Public Finance Management Act (PFMA).

“It is also important to note that irregular expenditure is not the same as fruitless and wasteful expenditure,” he said. “In many cases the contracts are being delivered but may not have followed the correct processes.

“The issue of irregular expenditure is peculiar to state-owned companies and organisations due to the PFMA. The private sector is not required to report on possible irregular expenditure.”

Transnet reported a 1.6% increase in revenue to R74.1 billion for its full-year to March. The group’s after-tax profit was up 24.7% to just over R6 billion.

Mahomedy said that while “top-line growth was marginal” due to tough conditions in the local economy affecting freight volumes, Transnet delivered stronger operational performance.

“Operating expenditure was contained. In fact, it decreased slightly by 0.1%, which is worth noting in the context of significantly higher electricity and fuel costs.”

The group’s capital investment for the year came in at R17.9 billion, bringing total expenditure over the past seven years to R183.5 billion.