Auditor-general report on RAF as its deficit near R25 billion

Question

The auditor-general's office has raised serious concern at Parliament over the financial statements of the RAF, which remains in the red with an accumulated deficit of R23.9bn.
Auditor-general office official lwazi kuse told parliament's standing commetee on public accounts on Wednesday that auditor-general ramained concerned about the RAF's financial reporting standards and had maintained its adverse audit opinion.
"The overall audit outcome of the RAF is an adverse opinion for the 2022/23 financial year. It is, therefore, our opinion that the financial statements do not present fairly, and in all material respects, the financial position of the RAF, and the financial performance and cash flows in accordance with the standards of generally recognised accounting practice (GRAP)." The auditor-general's report reads.
It details the RAF's accumulated deficit of R23.9bn, up from R15.5bn reported the previous financial year, and warns the deficit could cripple the entity's services.
" [The] RAF reported a deficit of R8.4bn for the 2022/23 year. The entity has an accumulated deficit of R23.9bn and the total liabilities exceeded its total assets by R23.8bn. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity's ability to continue as a going concern."
Kuse described the RAF's financial statements as" not credible".
They had a clean audit in 2019/20. Our adverse opinion for 2022/23 is that the financial statements produced by RAF are not fairly stated. They are not credible. We want to emphasise that." he said.
The RAF and the auditor-general's have been engaged Ina legal showdown for the three years over accounting practices. In December 2021, the RAF launched an application for a review of 2020/21 audit outcomes.
The auditor-general argued that during the 2021 financial year the RAF adopted a accounting methodology different to one used in previous years. The effect of this change in accounting methodology was that the RAF's liabilities fell from R327bn in 2019/2020 to only R34bn in 2020/2021.
The auditor-general won the initial stages of the legal battle, but the RAF took matters to the Supreme Court of Appeal. Kuse said affidavits were filed by the auditor-general and the RAF in August and September and they were awaiting the outcome of court processes.
This week, RAF CEO Collins Letsoalo said the fund was troubled by large payout claims made by foreigners over the three years, some of whom were wealthy. Letsoalo cited as an example three Belgian nationals who each claimed social benefits of R151m from the fund.
"The biggest payout was to a foreigner. That's a fact," he said.
He expressed concerns about claims by individuals who may not have been in SA legally when had their accident.
"The amount on the RNYP(Requests Not Yet Paid) to foreigners is R1.5bn. Imagine what we can do with R1.5bn," he said.
He said in 2008 the fund paid a Swiss billionaire more than R500,000 after the person lost two limbs in a motorcycle accident in Cape Town.
Despite pushback on claims from foreigners, the RAF previously lost a court battle to implement new regulations requiring foreigners to prove their legal status in SA at the time of their accidents. This decision stemmed from a case involving Adam Muwado, a Zimbabwean man, a who sustained severe facial injuries but was unable to lodge a claim due to his lapsed asylum permit.
In March, the Protea High Court ordered the fund to provide compensation to all road users, regardless of immigration status.
The RAF provides compulsory cover to all users of South African roads, citizens and foreigners, against injuries sustained or death arising from accidents involving motor vehicles within the borders of South Africa," Letsoalo said.
"We sit with legal costs of R3.8bn. You can see that when we started in 2020, that was sitting at R9.4bn. Through the new strategy we have saved about R34bn in legal costs."

2.2.1. Analyse the case study and indicate the real reason concern of the Auditor General of South Africa(AGSA)?

2.2.5. List three findings discovered by AGSA on RAF financial reports to arrive to her opinion.

2.2.6. What is the overall audit outcome raised by AGSA in between 2021-2024? Explain the meaning that audit outcome.

2.2.7. Read and analyze the case study, the name Two audit procedures not followed by RAF. Justify your answer by quoting from the report.

Answer 1

2.2.1. Analysis of the Case Study and Real Concern of the Auditor General of South Africa (AGSA)

The primary concern of the Auditor General of South Africa (AGSA) regarding the Road Accident Fund (RAF) stems from its severe financial instability and lack of credible financial reporting. The AGSA's adverse audit opinion highlights that the RAF’s financial statements do not accurately reflect its financial position and performance, which raises significant questions about the entity’s ability to continue operating as a going concern. The growing deficit, which has escalated from R15.5 billion to R23.9 billion, and the assertion that total liabilities exceed total assets by R23.8 billion further exacerbate fears that the RAF may be unable to meet its obligations and provide adequate services to road users.

2.2.5. Three Findings Discovered by AGSA on RAF Financial Reports

1. Adverse Opinion on Financial Statements: The AGSA maintained an adverse opinion on the RAF’s financial statements for the 2022/23 financial year, indicating significant departures from Generally Recognized Accounting Practice (GRAP). This opinion was based on the overall incompleteness and inaccuracy of the financial data presented by the RAF.

2. Accumulated Deficit: The AGSA highlighted a substantial accumulated deficit of R23.9 billion, which increased from R15.5 billion in the previous year. The report stated that the entity reported a deficit of R8.4 billion for the current financial year, emphasizing how this growing deficit could potentially cripple the services provided by the RAF.

3. Material Uncertainty about Going Concern: The AGSA pointed out that the significant deficit and excess of liabilities over assets raised material uncertainty about the RAF's ability to continue as a going concern. This indicates potential risks that could hinder the entity's operational sustainability.

2.2.6. Overall Audit Outcome Raised by AGSA (2021-2024)

The overall audit outcome raised by the AGSA for the RAF in the 2022/23 financial year is an "adverse opinion." This reflects a severe level of concern regarding the financial statements' reliability and transparency. An adverse opinion means that the financial statements do not fairly represent the financial position, performance, and cash flows of the entity according to the required accounting standards. This type of outcome suggests significant deficiencies in accounting practices and poses considerable risk to stakeholders relying on accurate financial reporting for decision-making.

2.2.7. Two Audit Procedures Not Followed by RAF

1. Inconsistent Accounting Methodology: The AGSA indicated that during the 2021 financial year, the RAF altered its accounting methodologies without adhering to consistent practices used in previous years. The report notes, "The RAF adopted an accounting methodology different to one used in previous years," which has led to inconsistencies in reporting that undermine the integrity of the financial statements.

2. Failure to Address Liabilities Accurately: The drastic drop in reported liabilities from R327 billion in the 2019/2020 to R34 billion in 2020/2021 due to a change in accounting methodology raises serious concerns about transparency. The AGSA's statement emphasizes that “the financial statements produced by RAF are not fairly stated,” indicating a lack of proper procedure in recognizing and reporting liabilities which must be accurately accounted for to reflect the true financial state of the organization.

These inadequacies highlight the lack of adherence to sound accounting principles and the need for the RAF to improve its financial reporting mechanisms to regain credibility and public trust.