In a decisive move, South African Finance Minister Enoch Godongwana has concluded that Eskom, the state power company, will not be granted a partial exemption from disclosing irregular, fruitless, and wasteful expenditure, and significant losses from criminal conduct in its annual financial reports, as announced by the National Treasury on Wednesday.
Controversial Exemption Revoked
In April, the minister had retracted a contentious exemption accorded to Eskom after substantial public disapproval and to pave the way for comprehensive engagement and written technical inputs from all pertinent stakeholders on the matter.
Treasury Consults Stakeholders
According to a statement, the Treasury engaged with the auditor-general and studied all 56 public responses encompassing a wide array of accounting and reporting, auditing, governance, legal principles, and public interest topics. It also held discussions with audit firms, professional auditing and accounting bodies, a rating agency, and other relevant authorities to tackle the challenges and seemingly burdensome compliance reporting requirements relevant to state-owned entities (SOEs) like Eskom.
Understanding Irregular Expenditure
While irregular expenditure doesn’t necessarily imply fraud and corruption, the Treasury acknowledged that many comments submitted view it as a sign of how SOEs are managing their finances.
SOEs vs Commercial Companies
Accounting and auditing specialists pointed out that SOEs, unlike commercial firms, are currently subject to more stringent accounting and reporting standards. They must comply with the Public Finance Management Act (PFMA), the Companies Act, as well as the International Financial Reporting Standards (IFRS) and JSE Debt Listing Requirements.
Increased Reporting Obligations
Moreover, the Finance Minister has imposed additional reporting obligations on Eskom as part of the debt relief arrangement, which the entity is now mandated to submit to Parliament and oversight structures.
Eskom’s Commitment Recognized
The Treasury noted Godongwana’s recognition of Eskom’s dedication to combating and exposing fraud and corruption, along with the extra compliance and reporting load that Eskom and other SOEs face.
Need for Operational Improvements
Nevertheless, it emphasized that Eskom must make operational improvements to minimize the extent of fraud and corruption before such an exemption can be considered and become effective.
Building a Credible Anti-Corruption Strategy
The Treasury stressed the importance of Eskom establishing a credible anti-corruption strategy, with the support of key stakeholders such as investors, lenders, suppliers, customers, and the public, as it strives to bounce back from the crippling effects of state capture.
The Treasury’s Pledge
“National Treasury stands firm in upholding the highest standards of financial governance in managing Eskom’s finances and will not jeopardize the PFMA’s ethos,” it said.
The Treasury committed to continuing its aid to Eskom in bolstering its mechanisms to prevent, detect, and investigate any financial irregularities and ensure that fraud and corruption are fully and appropriately reported, irrespective of the reporting requirements.
Challenges Facing SOEs
The National Treasury acknowledged the legitimate technical challenges that SOEs face concerning compliance reporting. It recognized the need to differentiate between corrupt and suspicious transactions and expenditures made in good faith that may not fully comply with the myriad of financial and non-financial laws and rules.
The professional bodies and experts’ feedback will serve as the foundation for further engagement on the accounting and compliance reporting challenges and assist in formulating a better framework for compliance reporting in SOEs.
The Treasury further announced that it will cooperate with the auditor-general to develop a revised irregular, fruitless, and wasteful expenditure framework as part of the PFMA reforms. These and other financial and compliance reporting challenges will be addressed and finalized after an appropriate consultation process, with implementation planned for 2024 and beyond.