Did auditors turn blind eye at Eskom?
In looking back six years, Eskom has uncovered R19.6bn in irregular expenditure. Many board members, committee members and executives churned through the troubled institution over this time, while the auditors signed off on the financials year in and out. But it’s anyone’s guess who will pay back the money.
As Eskom executives noted at its results presentation last week, irregular expenditure is not the same as fruitless and wasteful spending, and it was not to say that the utility derived no value from the deals in question. Treasury guidelines dictate that the accounting officer can request an official responsible for irregular spend to pay the money back; can take the matter to the state attorney; or, if unrecoverable, can write the debt off.
But Iraj Abedian, economist and adviser to both private and public sector institutions, says blame needs to be shared among executives, the internal audit division and the external auditors. "The reality is that such colossal plundering can only happen if these three groups collaborate and/or turn a blind eye to the irregularities."
Eskom says actions have been taken and the executives have since exited Eskom. Although the board has changed, this does not preclude Eskom, which is working closely with all authorities, from taking legal action against directors where appropriate.
Atop the leap in irregular spend — up from R3bn in 2017 — 16 reportable irregularities are detailed in the latest annual financial statements. These date back to the year ended March 31 2017, but are listed and detailed for the first time.
A reportable irregularity is any unlawful act or omission committed by any person responsible for the management of an entity. An auditor is required to report this. Between 2012 and 2017, one other irregularity was reported in the year ended March 31 2015, where a nonexecutive director was reported to be in breach of his fiduciary duty.
"The question has to be asked … where were the auditors when these corrupt acts were going on?" Public Enterprises Minister Pravin Gordhan said at the release of Eskom’s dismal financials.
SizweNtsalubaGobodo (SNG) has audited Eskom’s books since 2012 — first as a joint auditor alongside KPMG from 2012 to 2014 and then as the sole auditor from the year ended March 31 2015 until now. It was SNG that audited the financials this year where the cumulative irregular spend and 16 irregularities were reported.
"Such massive irregularities could not have gone unnoticed," says Abedian, who also serves on the advisory board of the auditor-general. "In my view, both KPMG and SNG have much to account for."
KPMG says it did not have access to the information, "now disclosed as instances of prior period irregular expenditure", and was engaging with Eskom and SNG to understand the matter further. SNG says it has at every year end detailed its concerns in the respective audit and management reports to the accounting authority.
In its published report for 2015 and 2016, SNG flagged that effective steps to prevent irregular expenditure at Eskom were not taken and noted deficiencies in internal controls. In 2017’s annual financial statements for Eskom, the report was far more detailed.
SNG says it could not obtain reasonable assurance that all irregular expenditure had been properly recorded. It also says it has found and submitted reportable irregularities to the Independent Regulatory Board for Auditors (Irba). But the question of an auditors’ culpability is not necessarily just for the Irba to deal with.
Paul Hoffman, founder of Accountability Now, an NGO, points out that the auditors can be sued for losses. "You would have to prove causal negligence in the auditors and the way they went about their audit in how their client, Eskom, lost funds or finance," he says.
In a prominent case, the Thoroughbred Breeders Association of SA took auditing firm PriceWaterhouse to court for breach of contract. The association argued that the firm, in the course of a routine audit, failed to realise that the client’s own financial manager, a man with a criminal record for theft, had been stealing from it.
The Supreme Court of Appeal concluded that it was common cause that, in terms of the contract, the auditors would conduct the work in accordance with the accepted accounting standards and without negligence. The court found that the auditors had indeed been negligent in the performance of their duties and would be held liable for the damages suffered by their client.
"It could be argued in a case relating to Eskom that the well-known ravages of illegal cadre deployment in the public sector ought to alert any professional auditor worth his salt to the possibility of incompetence or corruption, and therefore should have their green pens carefully poised to detect said loss due to incompetence or corruption," says Hoffman.