Thu, 02 Apr 2020

Denel readies to report back on audit cleanup

29 Feb 2020, 04:13 GMT+10

Denel says it has put in place an "audit fix plan" and will be submitting its first progress report in March after implementing several accounting reforms.

The state-owned arms manufacturer was given a disclaimer of audit opinion in its audit report for the financial years ended March 2018 and March 2019. This means the Auditor General (AG) was not given sufficient audit evidence to provide a basis for assessment.

In a statement on Friday, Denel said it had addressed issues relating to people, processes and systems across the group. These include implementing new processes and installing experts in oversight roles.

Denel, which recently had its outlook upgraded to stable by ratings agency Fitch, has been rolling out a turnaround plan after suffering reputational damage linked to allegations of state capture. Its reforms included cutting ties with Gupta-linked VR Laser.

On Friday, Denel said new accounting standards had been implemented uniformly across the group and position papers had been updated and signed off relating to construction contracts, leases, foreign exchange rates as well as property and equipment.

The group is also rolling out and updating all its financial records to ensure that the new standards are adhered to, it said. The outcome of this process will be audited by the AG in the 2019/20 audit cycle, and audit testing by the AG began on February 7.

Additionally, a specialist in financial disclosures has been tasked with checking that disclosures are correct and complete.

Meanwhile, Ernst & Young have kicked off the internal audit plan, with the first progress report expected to be submitted to management and the Audit Committee in March 2020, Denel said.

In preparation for the 2020 year-end audit, the AG performed a status of records review, and Denel agreed to submit all documents requested within the agreed timeframes. "Record management is a large determinant of the success of the audit," said Denel.

In terms of monitoring its status as a going concern, Denel says it submitted its shareholder compact - an agreement between government and the board of directors - to Public Enterprises Minister Pravin Gordhan in November 2019. "The Denel Board and Management are working with all the stakeholders to ensure that adequate steps are taken to improve liquidity management. This is monitored daily."

The group has been providing quarterly updates on its attempts to resolve the issues raised in the disclaimer of opinion and will continue to do so, it said.

According to Denel's annual report, which was tabled in Parliament late in 2019, the company's losses grew by two-thirds to R1.7 billion for the 2019/29 financial year. This was attributed largely to a decline in revenue, which was down 36% to R3.76 billion.

The company received a R1.8 billion bailout from government in the 2019/20 financial year, and was allocated R576 million for the 2020/21 financial year in Finance Minister Tito Mboweni's latest Budget. Apart from this, it had to rely on financial institutions to provide bridging finance due to a liquidity crisis, CEO Danie du Toit said in 2019.

Late last year, Denel's leadership told Parliament's Portfolio Committee on Public Enterprises that a new business the entity was looking into was providing assistance to the airline freight businesses of SA Express and South African Airways. But SAA has since gone into business rescue, while the Johannesburg High Court has also ruled that SA Express must be placed in business rescue, which it intends to appeal.

However, Denel has expressed confidence in its turnaround. Earlier in February, it said its exit from its Aerostructures Manufacturing business was at an advanced stage, and that it had taken "major steps" to stem the bleeding of jobs.

It also said the Fitch rating decision had given it "breathing space" and that the rating report had highlighted positive aspects of its turnaround plan.

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