An analysis of South Africa’s State-owned enterprises (SOEs) shows most performed satisfactorily but 13 of 30 reviewed, including Denel, “are still performing dismally”.
The analysis by independent investment media company Moneyweb notes of Denel that the defence and technology conglomerate’s performance was worse than that of SAA and SA Express. The pair of state-owned airlines, along with national power producer Eskom, are widely seen as the worst when it comes to under-performing SOEs.
Denel showed a loss of R1.77 billion for the last financial year compared with a “small profit of R282 million in 2016” according to Moneyweb, as published by The Citizen. “Additionally, the figures seems dubious, with the Auditor-General stating it was impossible to give an opinion on the financial statements because he could not verify revenue, costs, inventories, trade debtors or liabilities”.
Among points made by the Auditor-General and an independent auditor and published as part of a document titled “Denel Integrated Report Twenty 17/18” are statements including “management did not implement basic financial management disciplines and controls over daily and monthly processing and reconciling of transactions”, “proper record keeping was not implemented”, “officials involved in the preparation and review of financial statements were not updated on the latest developments” and “review of compliance with applicable laws and regulations was ineffective”.
Of governance at Denel, the Auditor-General stated: “The internal audit unit was not adequately resourced to effectively assist in identifying internal control deficiencies and develop recommendations in respect of corrective action to be taken to address identified internal control deficiencies”.
An independent auditor’s report in the same document, which appears as part of the Auditor-General’s report also goes into detail on a number of issues.
One of these is irregular expenditure which according to the Public Finance Management Act requires publication of all irregular expenditure in the annual financial statements.
“The group did not have an adequate system for recognising all irregular expenditure and there were no satisfactory alternative procedures I could perform to obtain reasonable assurance that all irregular expenditure had been properly recorded. Consequently, I was unable to confirm the completeness of irregular expenditure relating to the current year stated at R513 million (2016-17: R116 million) as disclosed in note 38 to the consolidated and separate annual financial statements.”
On financial risk management the report notes Denel “did not adequately disclose the nature and risks arising from financial instruments to which they were exposed during the period and at the end of the period and how they were managing those risks”.
Fruitless and wasteful expenditure was not included in the notes to the Denel annual financial statements and the Group “did not have an adequate system for recognising all fruitless and wasteful expenditure”.
Denel, under its new chief executive Danie du Toit, is working to return the Group to financial stability.
One of the measures underway is a cost savings diagnostic project team. It has been working on cost reduction, liquidity and operations analytics.
This diagnostic work aims to identify where cost-cutting can be done; quantify the amount of cost-cutting; provide methods and tools to implement cost-cutting and provide a costed proposal to implement a second phase of cost-cutting. This would, according to a Denel bulletin, be subject to a decision to continue the cost-cutting exercise.