Written by Staff Writer

There was outrage when National Treasury abruptly announced last month that it was exempting Eskom from reporting irregular, fruitless and wasteful expenditure in its financial statements. A decision that was reversed faster than you can say Des van Rooyen.

However, seasoned finance professional, Thabo Maake believes that National Treasury was correct in its decision. He unpacked his argument in recent CFOClub Convo webinar.


Why Maake believes Treasury was right

A core point of Maake’s argument is that State Owned Companies (SOCs) like Eskom are expected to not only adhere to IFRS and the Companies Act, but also the PFMA.

In a submission, Maake argues, “These SOC’s operate in open global markets, raise funds on the international bond markets, and enter complex debt instruments to expand their operations for growth. All these elements are covered under IFRS. Additional PFMA reporting requirements (such as section 55(2)(b)(i)), which puts additional reporting requirements on these SOCs at odds with the global requirements. (IFRS)”

Maake told the audience, “This grey area where the PFMA creates a conflict with IFRS in the Companies Act needs to be closed. How do you close it? You need to issue a guideline that will protect these SOCs from losing their credibility in the market, but at the same time make sure that you still hold management accountable.”

“Where there are instances of fruitless, wasteful and irregular expenditure, it should not be buried like it should not be put aside. But there must be an alternative way of making management to be accountable.”

The debt danger

Maake says that because Eskom and other SOCs have additional disclosure requirements not faced by private sector companies, it can severely affect its ability to lend.

“If that disclosure of [IF&W expenditure] affects your audit opinion and you are qualified, you are doomed. . . Markets, any credible bank out there or any credible institutional investors, your pension funds they would never buy your bonds if your financials are qualified.”

Maake points out that a qualified opinion could affect existing debt.

“If your audit opinion regresses. What happens is that those financial institutions have got the right to call back their debt with immediate effect from long term to current, which means they must be repaid within a year.”

The fickleness of irregular expenditure

Maake’s arguments are nuanced. For instance has no problems with IF&W expenditure when it applies to municipalities or provincial governments. He also told the audience, “What can not be forgiven is instances of fruitless and wasteful expendture. Fruitless and wasteful expenditure is corruption and must be dealt with using serious consequence management.”

However, when it comes to irregular expenditure Maake said this does not always relate to corruption. He gave the example of a large tender issued, with the requirement that directors attach their municipal account statement together with any bid.

Should the successful tenderer have failed to include the correct statement for one of its ten directors, the auditor then labels an otherwise clean bid as irregular expenditure.

“The auditors initially they flagged it as what? As irregular expenditure. By the time you investigate, the report is already out in the market.”

This CFOClubConvo was fuelled by ‘n heated debate on LinkedIn, with CIBA CEO Nicolaas van Wyk, leading the charge on the discussion. “… there’s no one-size-fits-all solution. We need to consider the potential consequences, unique challenges, and the overall health of our economy. It’s all about finding the sweet spot between accountability, sustainability, and public interest.” Read more about it, here.


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