Big changes for reporting irregular expenditure at Eskom, Transnet and other SOEs
National Treasury has briefed the Standing Committee on Public Accounts (Scopa) on an instruction sent to all accounting officers of state-owned companies in January 2023, which will effectively allow them to downplay the impact of “irregular expenditure” in financial statements.
The instruction, called Instruction No. 4 of 2022/23, overhauls the way “irregular expenditure” is accounted for in annual statements.
Previously, when reporting on irregular expenditure, state-owned companies – and all companies subject to the Public Finance Management Act (PFMA) – were required to keep track of and account for all instances of irregular expenditure on the books.
Any irregular spending that was not accounted for had to be carried forward to the next reporting period.
However, with Instruction No. 4, the National Treasury has restructured this reporting to deal with irregular expenditure on a shorter-term basis (effectively over the last three years), while opening up some of the spending to be “condoned” by the board (ie, written off the books).
Under the instruction, irregular expenditure that was previously disclosed must still remain in the “register” in reporting, but only if it has not been “addressed”.
According to the Democratic Alliance, the instruction note is akin to a “stealth bailout” for state-run companies, given the historical instances of irregular expenditure could simply disappear over time, leading to better audit outcomes.
“The regulation will enable SOEs to attract more funding under false pretenses, as it would make them appear more viable and financially attractive than they actually are,” it said.
“It is fundamentally dishonest and misrepresents the true financial health of these entities and the burden they place on taxpayers.”
The party said the instruction is particularly egregious considering the exemption given to Eskom in March not to have to report on irregular spending for three years. This was subsequently withdrawn following wide public backlash and eventually all plans to do so were cancelled.
However, as Eskom is a state company subject to the PFMA, Instruction No. 4 could see it do almost the same thing.
National Treasury explains
In its presentation to Scopa, Treasury attempted to allay any fears about the instruction giving state companies a free pass or clean slate.
It stressed that the instruction does not exempt state companies from reporting on irregular expenditure.
It also has no bearing on the reporting of wasteful, fruitless and criminal losses.
When dealing with historic irregular spending, the department noted that boards would not simply be able to “condone” irregular expenditure in reporting without the necessary discovery, recognition, investigation, recovery and consequence management processes taking place.
For irregular spending to be “condoned”, the board must:
- Confirm that a determination test was conducted;
- Confirm that the matter is free of fraudulent, corrupt or other criminal conduct;
- If the matter has fraudulent, corrupt or other criminal conduct, confirm a case number showing that a case was opened with the South African Police Services;
- Confirm that no loss was incurred and that value for money was achieved;
- Confirm that disciplinary action was taken or in the process of being taken against the responsible official or officials; and
- Confirm remedial actions taken or being taken by the accounting officer/authority to prevent the recurrence of irregular expenditure in similar circumstances.
In terms of consequence management, the board must also report on the outcomes of the disciplinary processes and related matters.
The problem with irregular expenditure
Treasury has taken a big issue with “irregular expenditure” and has again flagged the problems with the definition and the processing of this data.
By definition, irregular expenditure encompasses anything from minor accounting transgressions that do not lead to any losses or criminal conduct all the way to more egregious overstepping of the public finance laws.
However, on the books, they are counted the same.
Because of this, it is often one of the root causes of state companies getting qualified audits by the Auditor General of South Africa (AGSA), making it more difficult and more expensive to raise funding.
The finance minister has stressed in the past that “we must differentiate between corruption and minor transgressions of the rules of policy prescripts that are audited as irregular expenditure”, which has seen a clear push from the government to navigate away from the term and to focus more on criminal behaviour.
Treasury has argued that state companies, in particular, already face onerous reporting requirements, and among the various operational inefficiencies and governance failures, lack the capacity to uncover and report all irregular expenditure incurred – in the past and i the present.
However, most of the irregular expenditure relates to “legacy issues”, it said, hence the changes.
In its presentation to Scopa, Treasury said that the country needs to get back to the original spirit of the PFMA, which is to let managers manage, but hold them accountable.
Thus, the instruction is set up to strengthen reporting and consequence management but also reduce the burden placed on SOEs.
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