The Botswana Accountancy Oversight Authority (BAOA) continues to monitor the South Africa situation involving auditing giant, KPMG, with keen interest following a well-publicised saga involving Gupta Group of Companies.
BAOA Chief Executive Officer (CEO), Duncan Majinda told this publication this week that there are notable occurrences including some key KPMG clients having migrated away from the KPMG client portfolio. “These included the South African Auditor General, in addition there are allegations of a possible loss of 400 jobs,” Majinda said.
“While the problem is localised in South Africa, there is a concern that global network could also be affected. Botswana is concerned that worst-case may reflect KPMG’s going concern status being threatened, potentially with a significant impact upon the country’s auditing landscape as KPMG audits about 70 percent of the commercial banks in Botswana.” Majinda indicated that another concern is that under normal circumstances, standard international practice has established the Mandatory Audit Firm Rotation which is now in progress in South African and other parts of the world.
“Under the circumstances, the KPMG situation could compromise the audit rotation and other aspects across all firms in Botswana, particularly that some decisions are taken at global firm level,” argued Majinda. The investigations in South Africa on the KPMG saga are still ongoing from various investigating authorities including the South African Audit Regulator, and Independent Regulator Board of Auditors (IRBA).
The results are expected in late November to December 2018 according to BAOA supremo. “Pending the outcome of the investigations, the Authorities in Botswana will rely on undertakings by the global firm which has instituted a regime of clinical internal control protocols at firm level,” he said. “These monitoring control ecosystems are aimed at the review strengthening of controls and governance frame works within the firm along the lines of King IV. We believe a set of remedial actions by the global firm have been introduced in the area of the audit quality control.”
PERFORMANCE OF LOCAL AUDITORS
BAOA has a broad mandate as an independent regulator of the accounting and auditing profession in Botswana and oversees among others; the auditors and audits firms; professional bodies like BICA, ACCA, CIMA; financial reporting of public interest entities and their corporate governance and, standards setting of auditing, financial reporting, accounting education and code of ethics. “In essence, the Authority has an across the board and the overall oversight of the entire accountancy profession in the country,” said Majinda.
“Our main interest is audit quality and the compliance with international standards on auditing and that the assurance they give on financial statements is credible and appropriate.” According the BAOA CEO, in summary, 70 percent of the auditors largely meet the required auditing standards while 30 percent require some improvement in their quality.
Majinda noted that auditors and audit firms that do not meet the expected standards lose their practising licenses, indicating that so far, three sole practitioners have lost their practising certificates since the Authority started its reviews in 2013. Interestingly, Majinda observed following an introduction of a new area in the mandate of the institution, regarding corporate governance and financial reporting monitoring, it has merged that private and listed companies, and banks perform significantly better than state-owned enterprises
DIFFERENTIAL PERFORMANCES BETWEEN PRIVATE AND PUBLIC SECTOR
According to Majinda, poorly constituted boards without requisite balance of knowledge, skills and expertise are the main problems of poorly performing entities. “The engine of a car is the most important component of the car without which it cannot operate. By the same token, in an organisation, the Board and executive management is the engine of the entity,” he argued.
“Private and listed companies have very strong boards constituted along best international practice through corporate governance codes like King III and King IV. Parastatals on the other hand are dominated by pre-determined ex-officio appointments so that if there is such a balance, it is by coincidence rather than design.” Majinda said committees such as Remuneration, Nominations, Risk are not common with parastatals.
He however said, other determining factor maybe the fact that these public institutions have different mandates, as some are commercially oriented while others are geared towards providing a public good or service where commercial initiatives are constrained through, for example, controlled prices and levies. “That notwithstanding, good corporate governance can be applied right across industries and sectors, public or private, profit making or non-profit making, to ensure efficiency, effectiveness and economy in doing business,” he insisted.
Majinda stated that entities that fall short of expected standards may end up losing their practising certificate. “For other entities the law provides for heavy penalties and the regulator can also report them to their corresponding regulators and shareholders,” he said. BAOA recently signed a Memorandum of Understanding (MoU) with Public Enterprises Evaluations and Privatisation Agency (PEEPA) and together they will agree a coordinated way of instituting performances monitoring and compliance controls.
Majinda said, as President Mokgweetsi Masisi and Minister of Finance and Economic Development indicated their expectation of BAOA in the inauguration speech and budget speech respectively, it is in the interest of the public public for the state-owned entities to perform to expected standards and achieve the objectives for which they were established. “The other expectation is that of proper accountability so that the true figure of taxes due to government are declared and paid. The expectations are, therefore, legitimate and subject to the availability of resources to implement them, the profession should react accordingly,” he said.
ON HAVING TOO MANY REGULATORS
There is believe that Botswana have too many regulators such that they end up of cancelling each other’s work therefore creating a duplication. Majinda however does not believe this is necessarily true, indicating that the occurrence is bound to happen where an institution is regulated by various regulators. Majind said, an example can be a listed bank with an insurance arm for its loan book and a pension fund.
“Since the bank is listed, the BSE will regulate it to ensure that it complies with listings requirent; the Bank of Botswana will regulate it to ensure compliance with the banks’s prudential requirement; NBFIRA will regulate its insurance and pension business and BAOA will regulate it to ensure compliance with financial reporting, auditing and corporate governance,” he argued. “By the virtue of its presence in all these sectors, this bank could find itself being subject to regulation by four different regulators.”
Majinda contended that while there is a potential albeit limited overlap in the regulators’ mandates, albeit in a limited number of cases, the regulators have signed MoUs to buttress the potential duplication effort.“The allegations of multiple regulation are by those entities that are active in many different sectors and therefore do not want regulation by many regulators, however, it is not possible for one regulator to take care of all these difference business segments.,” he said.
Stanbic Bank Botswana Quarterly Economic Review indicates that Botswana will fail to meet some of its Vision 2036 targets, particularly unemployment reduction and reaching high-income status.
The report says this is mainly due to the slow economic growth that the country is currently experiencing. This Quarterly Economic Review focuses on the 2020 Budget Speech.
The first paper reviews the entire budget with its key observations being that this budget is prepared as prescribed by the Public Finance Management Act; the priorities it seeks to address are drawn from Vision 2036 and the eleventh
The 2020 budget Speech, which was the maiden speech by the Minister of Finance and Economic Development, Dr. Thapelo Matsheka, and the first after the 2019 general elections, was delivered to Parliament on the 4th of February 2020.
It has been well received by the labour unions, business community, and the public at large as well as international organisations such as the International Monetary Fund (IMF).
It mainly derived its support from key facets including, emphasis on changing the business-as-usual approach to development; outlining the transformation agenda; fiscal reform that minimizes the negative impact on economic development and human welfare, competiveness and the decision to implement the 2019 negotiated and agreed public sector.
The budget’s progress review shows that economic growth was consistent with the NDP 11 projections, with growth of around 4 percent. At this growth rate, the country would neither ascend to a high-income status nor reduce unemployment towards the Vision 2036 target of a single digit.
Simple calculations of this review confirm that the economy will need to grow the Vision 2036’s target of 6 percent over the next 16 years for per capita income to increase from around USD 8,000.00 to above USD 12,000.00 in current prices.
Further, the population is anticipated to grow by only 2 percent per annum.
For this reason, the focal areas for the forthcoming FY’s budget include measures to increase economic growth towards an average of 6 percent per annum.
Economic diversification is reportedly progressing fairly well. The report says, the share of the non-mining private sector in value added has risen to 66 percent in 2018 from to 63 percent in 2015.
The sectoral pattern of growth showed that the performance of services sector (particularly transport & communications, trade, hotels & restaurants, and finance & business services) has been the silver lining and that of mining sector was subdued whilst the utility sector disappointed.
The drive towards the service sector of the economy, especially to low-productivity activities (tourism, public administration, wholesaling and retailing) does not bode well for the country’s development aspirations.
In the previous versions of this Quarterly Review, it was noted that there is need for the rethinking of economic diversification. Since the country’s domestic market is small, it is inevitable that economic diversification not only focus on broadening the product mix, but also the composition of exports and markets.
This understanding of economic diversification has not been embraced by this year’s budget. Consequently, Botswana’s exports are still overwhelmingly diamonds, which means that the rest of economic sectors are still highly dependent on foreign-exchange earnings from diamonds. Thus, “the transformation programme requires a review of the country’s entire ecosystem”.
The budget review of the economic context also depicts that an economy with positive medium-term prospects, with growth expected to recover to 4.4 percent in 2020 from the expected growth of 36 percent in 2019 largely due to faster growth of services sectors and, thereafter, to slow-down to 4 percent in 2021.
These projected growth rates are comparable to those of the IMF staff’s baseline scenario of 4.2 percent in 2020 and 4 percent in 2021. Thus, the business-as-usual scenario produces growth rates that are still too low to achieve Botswana’s development objectives and create enough jobs to absorb the new entrants into the labour market.
Trade tensions between the two major markets for diamond exports, viz., the United States of America and China, is one of the factors that are cited as contributing to, indeed, undermining not only the domestic growth, but also the fiscal position.
Another notable downside risk to both global and domestic growth is outbreak of the coronavirus in China around January 2020. This has been declared as a global health emergency. In an attempt to contain the spread of the novel coronavirus pneumonia, the Chinese authorities have ordered city lockdowns and extended holidays, of course, at the expense of near- term economic growth, according to the new Stanbic Bank Botswana report.
According to Nomura Holdings Inc., fewer migrant workers returned for work than in previous years and business activities have been slow to pick up. The havoc wreaked by the virus on the world’s second largest economy is likely to spill over to the global economy. In fact, it has resulted in a glut in crude oil and, thereby placed oil markets into a contango, i.e., a market structure where near-term prices trade at a discount to future contracts.
It also presents significant risks one of Botswana’s main drivers of economic growth, diversification and foreign exchange earnings. According to the Financial Times (February 13, 2020), Chinese tourists spent $130 billion overseas in 2018. Regardless of whether the growth materializes, the projected domestic growth rate would not transform the economy to a high-income one.
Progress towards reduction of unemployment, to a target of single digit, and poverty and achieving inclusive growth has also been relatively slow, the Stanbic Bank Botswana Review says.
Ministry of Presidential Affairs, Governance and Public Administration (MOPAGPA) has through the Office of the President (OP) proposed to avail Orapa House for use by private training institutions as well as research institutions involved in the area of technology development.
For a very long time the monumental building located in the heart of the city has been a white elephant, despite government purchasing it for nearly P80 million from De Beers in 2012.
However, government has now identified a productive use for the iconic building. “The overall vision is for the building to be transformed into a hub for digital technology research and development to be carried-out by institutions, such as; Limkokwing University, BIUST, BITRI and other relevant stakeholders.”
The decision was taken as government traverse a new path of transforming the economy from a mineral led economy to a knowledge based economy through the promotion of research and innovation. However, the facility will need major maintenance to be carried-out in order to meet the requirements of the proposed change in use.
“The work will include provision of laboratories, work stations, production areas and seminar rooms; audio visual centre, high speed internet connectivity, exhibition areas and offices,” reads the proposal note for the development.
These developments will be done through the refurbishment and maintenance of the main building, workshop, and ablution block, gate house, parking area, grounds, and access control and security service.
“There will be minimal modifications to the structure as it stands. The project is estimated to cost approximately P50, 000, 000,” says the report. In this regard, it is said, the initial scope of the OP facility will be modified to accommodate the envisaged digital technology research and development hub.
With funds needed to improve the building, OP has requested that; “the 2020/21 annual budget provision for Orapa House will need to be increased by P37,500,000 from P2,500,000 to P40,000,000 to kick start the maintenance works.” Funds will be sourced from the projects that have been delayed due to Covid-19 protocols during the 2020/21 financial year.
The building has been a thorny issue for government for years. Initially, OP was expected to move there but the move never materialised. At one point it was a question of whether the Office of the President and the Ministry of Finance and Economic Development were planning to override a decision by Parliament which rejected the proposal to buy Orapa House under the belief that government may be buying its own property. The building was to be bought at a negotiated cost of P79 million.
Again in 2012, Government had wanted to buy Orapa House for a negotiated P79m but the Finance and Estimates Committee of Parliament had rejected the request because of the inconsistencies realised in the supporting documents of the proposed procurement. The valuation of the building was put at P74 million.
The Ministry of Lands and Housing had initially offered De Beers P73, 000,000 as the purchase price. However, De Beers countered with P85, 000,000. On negotiation and converging of the minds, the selling price was finally agreed at P79, 000,000.
Auditor General, Pulane Letebele, has expressed discontentment at the worrying and deteriorating state of brigades in the country.
In an audit inspection which was carried out at Tshwaragano Brigade in Gabane, a number of observations showed weaknesses and shortcomings in the conduct of the financial affairs of the institution.
According to Letebele’s report, former students of the brigade had been engaged to carry out maintenance works on the school premises, comprising of painting, tiling, plumbing and electrical works, which covered the period from July 2017 to June 2018.
Although the agreed maintenance period had elapsed, the works had not been completed because of unavailability of funds and this situation had persisted up till the time of inspection in November 2019.
Auditor General says arrangements should have been made in time for funds to be available to complete these relatively minor works even before the works commenced.
Various contractors had been engaged for clearing the bush and for the supply of concrete stones, pit and river sand and hiring equipment for digging the trench towards the construction of an auto mechanics workshop, the report said.
It stated that the cost of services and supplies provided totalled P117 949.80. However, despite the services and the supplies having been paid for, the construction works had not commenced for a long period afterwards, resulting in the trench filling back in.
The audit inquiries had not elicited satisfactory responses as both the institution and the Ministry had not accepted the responsibility for the project, although orders for the provision for the supplies had been made. For their part, the Ministry had stated that they had sub warranted funds for the purchase of porta cabins.
Letebele indicated that it is therefore confusing that a project which is critical to the functioning of an institution such as this one would commence without a well-defined plan.
Furthermore, the accounting and maintenance of records for the supplies items were not of the standard prescribed by the Supplies Regulations and Procedures in that the supplies ledger cards, the main accounting records for Government assets, were not properly maintained for the recording of receipts and issues.
This had resulted in significant discrepancies between physical and ledger balances, while in other instances the supplies items had not been recorded at all.
The report says 24 of the 91 new computers found in the computer laboratory at Kumakwane ABC campus were not recorded anywhere, as were the other computers in the storeroom which could not be counted due to the disorderly storage conditions.
The institution had entered into a contract agreement with a security company for the provision of security services at Tshwaragano Brigade, ABC and Horticulture campuses at Kumakwane for a 2-year period which ended in June 2018, WeekendPost learnt.
After the contract expired in June 2018, an extension was granted till the 30th September 2018. Since then, there has been no security service coverage for the institution to-date. According to Auditor General, in the face of prevailing crimes, it is of paramount importance that government properties be protected by provision of security services at all times.
At Tlokweng Brigade, it was noted that the kitchen staff were working under difficult conditions as the kitchen facilities and equipment, such as the cold room, tilting pot, food warmers and solar power for hot water were dysfunctional. The kitchen roof was leaking and men’s restrooms was not working. All these need to be brought to a reasonable and functional state of repair.
The kitchen staff should use a purpose-designed Rations Ledger for the recording of receipts and issues of foodstuffs to reflect the usage of those items. As far back as 2014 the Department of Buildings and Engineering Services had found that the house occupied by the bursar was uninhabitable on account of structural defects, the report said.
A site visit during the audit had established that the house was indeed unfit for occupation as there were cracks on the walls, power switches were not working and the roof was leaking. On a sadder note, there were a number of finished items of clothing, such as dresses, shirts, and jackets from students’ practical exercises from the Fashion Design Textiles Workshop.
Auditor General shared her take on this, saying: “I have not been able to ascertain the policy on the disposal of products from these practicals. A trace of 103 green acid-proof overalls which had been purchased in August 2018 had indicated that there was no record of these items having been recorded or issued, nor were they available in stock. I was not able to obtain any explanation for this situation.”
Kgatleng brigade was also audited and inspected by Auditor General who observed that the brigade has 26 institutional houses at Bokaa, both old campus and new campus. Some of these houses are very old and dilapidated, with two declared uninhabitable. The condition of the houses is a clear indication of lack of care and maintenance of these properties.
At the time of the audit, there was no contractor engaged for the provision of security guard services at the new campus, after expiry of the previous one in July 2019. It is hoped that steps would be taken to safeguard the security of the premises and government properties against any acts of hooliganism.
In August 2019, there was a break-in at the electrical and at the plumbing maintenance workshops and a number of high value items, such as drilling machines, bolt cutters, spanners and cables, were stolen. The break-in and theft were reported to the police.
“However, at the time of writing this report I was not aware of the outcome of the police investigation, nor of any loss report submitted in terms of the Supplies Regulations and Procedures,” Letebele said.