Denel belatedly submits financial statements for auditing

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The audit of state-owned defence conglomerate Denel’s financial statements is two years behind, as the company only submitted its 2021/22 financial year statements to the Auditor General of South Africa at the end of January, nearly a year late.

In a Standing Committee on Public Accounts (SCOPA) briefing note on Denel and its subsidiaries, the Auditor General of South Africa (AGSA) on 28 February gave an overview of the status of the external audit of Denel.

The AGSA noted that the audits of two consecutive years are outstanding (2020/21 and 2021/22). “Denel did not timeously submit the annual financial statements (AFS) for auditing for the 2020/21 and 2021/22 financial year. The financial statements for the 2020/21 financial year were due on 31 May 2021 but were only submitted 18 months later on 30 November 2022. The financial statements for the 2021/22 financial year where due on 31 May 2022, but they were only received on 31 January 2023 (8 months later).”

These delays were due to continued operational and solvency challenges faced by the company, which caused an exodus of skills across the entity. As a result, the company did not have capacity to produce a credible set of financial statements, the AGSA said.

The latest available audited financial statements are for the year ended 31 March 2020, on which a disclaimer opinion was issued (similar to the previous two years).

The AGSA hopes to complete the 2020/21 and 2021/22 audits in July this year, while Denel hopes to submit its 2022/23 financial statements by the end of May.

Standing Committee on Public Accounts chair Mkhuleko Hlengwa said the late submission of annual financial statements by SOEs such as Denel, South African Airways, and Alexkor is “the highest level of disdain in terms of doing the right things and it’s the absence of consequence management to the powers that be…that is of concern.”

Hlengwa said that auditing “must not be at the pleasure and comfort of the auditee,” and added that “something is rotten in the state of SOEs. I hope the AG doesn’t fall into the trap of this being normalised.” Although the Public Finance Management Act (PFMA) allows for delays in submissions, Hlengwa said there needs to be tighter regulations in allowing delays.

Denel is trying to implement its new 5.Y turnaround plan, and the state has committed to implementing strategic initiatives to strengthen the governance of state-owned entities (SOEs) but the AGSA noted that “there is slow progress in the implementation of key SOE reforms announced by government e.g. shareholder management bill, funding criteria for SOE, etc. This creates policy uncertainty in the SOE environment with SOEs struggling to deliver on their mandates.”

The AGSA urged the Denel board together with the shareholder representative (the Department of Public Enterprises) to ensure that measures planned for the turnaround plan are implemented and monitored timeously to turn around the entity and to avoid its total collapse.

Denel has received several billion rand in government bailouts, but is still struggling to pay salaries or manufacture anything. During the 2021/22 financial year, Denel was allocated R3 billion for the settlement of guaranteed debt and interest, reducing Denel’s government guaranteed debt to R290 million as at end of March 2022.

A further R204.7 million was allocated to Denel during the 2022/23 financial year to settle a portion of the remaining government guaranteed debt plus interest. The remaining government guaranteed debt is R100 million which is maturing on 23 September 2023. These remaining bonds are held by Aluwani Capital Partners.

In February 2022, Denel’s listed bonds were suspended from the Johannesburg Stock Exchange (JSE) because it failed to submit annual financial results for the 2020/21 financial year. The suspension means the bondholders cannot trade Denel’s bonds on the JSE, nor can Denel sell more debt. Should the remaining investors call on their bonds, it will be against the government guarantee.

Last year Denel was allocated R3.4 billion from the medium-term budget to pay off debt and complete the implementation of its turnaround plan. The company needs an estimated R5.2 billion to implement its turnaround plan. An additional R990 million was received from the Denel Medical Benefit Trust, while another R1.8 billion is planned to come from the sale of non-core assets.