Auditor general reports on RAF as it's deficit nears R24bn

Question

The auditor generals office has raised serious concerns at parliament over the financial statements of the road accident fund (RAF), which remains in the red with an accumulated deficit of R23,9bn.

Audito general office official lwazi kuse told parliament standing committe on public accounts on Wednesday that auditor general remained concerned about the RAF financial reporting standards and had maintained its adverse audit opinion.
The overall audit outcome of the RAF is an adverse opinion for the the 2022/23 financial year.it is therefore our opinion that the financial statements do not present fairly, in all material respects ,the financial position of the RAF , and financial performance and cash flows in accordance with the standards of generally recognised accounting practice (grap) the auditor general report reads.

It details the RAFs accumulated deficit of R23.9bn, up from R15.5bn reported the previous financial year, and warns the deficit could cripple the entity 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 ability to continue as a going concern. Kuse described the RAFs 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 generals have been engaged In a legal showdown for three years over accounting practice.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 an accounting methodology different to one used in previous years.the effect of this change in accounting methodology was that the RAFs liabilities fell from R327bn in 2019/2020 on 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 years , some of whom were wealthy. Letsoalo cited as an example three Belgian nationals who each claimed social benefits R151m from the fund.

The biggest payout was to a foreigner. thats a fact , he said
He expressed on the rnyp (request 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 mudawo, a Zimbabwean man, who subscribed severe facial injuries but was unable to lodge a claim due to his lapsed asylum permit.

I'n march ,the Pretoria high court ordered the fund to provide compensation to all road users , regardless of immigration status.

The road accident fund provides compulsory cover to all users of South African roads , citizens and foreigners, against injuries sustained or death from. Arising from accident involving motor vehicles within the borders of South Africa, letsoalo said.

We sit with legal cost of R3.8bn.you can see what when we started in 2020, that was sitting at R8.4bn. through the new strategy we have saved about R24bn in legal costs.

Answer this questions

2.2.1.analyse the case study and indicate the real concern of the auditor general of South Africa (AGSA)

2.2.2.how much is the % increase of accumulated deficit of R23.9bn and RR15.5 BN reported in the previous financial year.

2.2.3. what RAF stands for?

2.2.4. investment and write three duties and functions of RAF .

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 analyse the case study , then name two procedures not followed by RAF .justify you answer by quoting from the report.

Answer 1

2.2.1. Real Concern of the Auditor General of South Africa (AGSA)

The primary concern raised by the AGSA relates to the financial health and reporting standards of the Road Accident Fund (RAF). Specifically, the AGSA noted that the RAF presented an accumulated deficit of R23.9 billion, which is significantly higher than the previous year’s R15.5 billion. This growing deficit indicates potential insolvency and raises doubts about the entity's ability to continue as a going concern. The AGSA also issued an adverse audit opinion, emphasizing that the financial statements of the RAF are not credible or fairly stated in accordance with generally recognized accounting practices.

2.2.2. Percentage Increase of Accumulated Deficit

To calculate the percentage increase in the accumulated deficit from R15.5 billion to R23.9 billion:

1. Calculate the increase: R23.9 billion - R15.5 billion = R8.4 billion.
2. Calculate the percentage increase: \[ \text{Percentage Increase} = \left(\frac{\text{Increase}}{\text{Old Value}}\right) \times 100 = \left(\frac{8.4}{15.5}\right) \times 100 \approx 54.19% \]

The accumulated deficit increased by approximately 54.19%.

2.2.3. What RAF Stands For

RAF stands for the Road Accident Fund.

2.2.4. Duties and Functions of RAF

The Road Accident Fund has several critical duties and functions, including:

1. Compensation: Providing compulsory compensation to all road users in South Africa who suffer injuries or death as a result of motor vehicle accidents.
2. Legal Advocacy: Engaging in legal processes to defend claims made against the fund and to uphold regulations regarding compensation for road accident victims.
3. Financial Management: Managing its financial resources effectively to ensure sustainability and the ability to settle claims.

2.2.5. Three Findings by AGSA on RAF Financial Reports

1. Adverse Audit Opinion: The AGSA maintained an adverse audit opinion, indicating that the financial statements are not fairly presented.
2. Credibility Issues: The AGSA described the RAF's financial statements as lacking credibility, which suggests there are substantial inaccuracies or misrepresentations in reporting.
3. Material Uncertainty: The AGSA pointed out that total liabilities exceeded total assets, raising significant doubts about the RAF's ability to continue operations as a going concern.

2.2.6. Overall Audit Outcome from 2021-2024

The overall audit outcome raised by the AGSA for the RAF from 2021 to 2024 has been an adverse opinion. This means that the financial statements do not accurately reflect the financial position or performance of the RAF according to standard accounting practices. An adverse opinion warns stakeholders that they cannot rely on the financial statements for decision-making as they may not depict the true financial status of the organization.

2.2.7. Procedures Not Followed by RAF

Two procedures that the RAF did not follow, as indicated by the case study, include:

1. Change in Accounting Methodology: The RAF adopted a different accounting methodology in 2021, which was not consistent with prior years. This change led to a significant decrease in reported liabilities from R327 billion in 2019/20 to only R34 billion in 2020/21. This inconsistency raises concerns about the accuracy and reliability of their financial reporting.

   Quote: "The auditor general argued that during the 2021 financial year the RAF adopted an accounting methodology different to one used in previous years."

2. Inability to Lodge Claims Based on Immigration Status: The RAF failed to implement regulations that would require foreign claimants to prove their legal status in South Africa, which had implications for liability and compensation.

   Quote: "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."