REPORT OF THE AUDITOR-GENERAL
1. AUDIT ASSIGNMENT
The financial statements as set out on pages seventeen to thirty
nine, for the year ended 31 March 1999 have been audited in terms
of section 188 of the Constitution of the Republic of South Africa,
1996 (Act No. 108 of 1996), read with section 3 and 5 of the Auditor-General
Act, 1995 (Act No. 12 of 1995), section 28(3) of the Legal Succession
to the South African Transport Services Act, 1989 (Act No. 9 of
1989) and section 12 of the Reporting by Public Entities Act,
1992 (Act No. 93 of 1992).
These financial statements, the maintenance of effective control
measures and compliance with relevant laws and regulations are
the responsibility of the Corporation's Board of Control. My responsibility
is to express an opinion on these financial statements and compliance
with relevant laws and regulations, applicable to financial matters,
based on the audit.
2.REGULARITY AUDIT
2.1 Nature and scope
2.1.1 Financial audit
The audit was conducted in accordance with generally accepted
government auditing standards which incorporate generally accepted
auditing standards. These standards require the audit to be planned
and performed to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes:
- examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements,
- assessing the accounting principles used and significant estimates
made by management, and
- evaluating the overall financial statement presentation.
The audit was also planned and performed to obtain reasonable
assurance that, in all material respects, the relevant requirements
of the Reporting by Public Entities Act, 1992 (Act No. 93 of 1992),
as amended, have been complied with.
I believe that the audit provides a reasonable basis for my opinion.
2.1.2 Compliance audit
Furthermore, an audit includes an examination, on a test basis,
of evidence supporting compliance in all material respects with
relevant laws and regulations applicable to financial matters.
I believe that the audit provides a reasonable basis for my opinion.
2.2 Qualification: Financial audit
(a) Fare Income The external auditors ofTransnet were again unable
to express an opinion on the completeness of fare income since
inadequate physical access and exit procedures, facilities and
resources at commuter stations did not provide sufficient assurance
that every commuter was in possession of a legitimate and valid
travel ticket during peak commuting periods. Under these circumstances
I am unable to express an opinion on the completeness of fare
income.
(b) Uncertainty of State compensation The State compensation,
which is received annually to finance the operational deficit
of the Corporation, is not guaranteed. Furthermore indications
are that it is decreasing relative to the operating deficit. State
compensation received for the 1998/99 financial year amounted
to R1 405 003 000, which represents 65 per cent of total operational
expenditure of the Corporation. Under these circumstances uncertainty
exists about the Corporation's ability to continue operations
without curtailment of services and/or reverting to borrowings
to finance working capital commitments.
2.3 Audit Opinion
2.3.1 Qualified opinion: Financial audit
In my opinion, except for the effect on the financial statements
of the matters referred to in paragraph 2.2, the financial statements
fairly present, in alt material respects, the financial position
of the Corporation and the Group at 31 March 1999 and the results
of their operations and cash flows for the year then ended in
accordance with prescribed accounting practice and other reporting
requirements as set out in the Reporting by Public Entities Act,
1992 (Act No. 93 of 1992), as amended, and the regulations thereto.
Furthermore, in my opinion, the information in terms of section
6 and 7 of the afore mentioned Act is fair in all material respects
and where applicable, on a basis consistent with that of the preceding
year.
2.3.2 Unqualified opinion: Compliance audit
The transactions of the Corporation and the Group that I have
examined during the course of the audit were in my opinion, in
all material respects, made in accordance with the relevant laws
and regulations, applicable to financial matters.
3. EMPHASIS OF MATTER
Without further qualifying the audit opinion expressed above,
attention is drawn to the following matters:
3.1 Operating results and financial position of the Corporation
and the Group
a) Operating results The operating deficit for the financial
year ended 31 March 1999 increased by R218 010 000 to R1 653 850
000. The state compensation for this period amoLinted to R1 405
003 000, leaving' a shortfall of R248 847 000. After taking into
account the net transfer of R9 483 000 to reserves the retained
deficit amounted to R258 330 000 for the financial year ended
31 March 1999, which includes depreciation of R163 997 000 (R154
564 000 in 1997/98), not funded by the State.
(b) Accumulated deficit The net accumulated deficit increased
by R258 330 000 (R225 735 000 in 1997/98) to R1 311 437 000 (1997/98
- R1 053 107 000) which includes accumulated depreciation of R1
135948000 (R973 544 000 in 1997/98).
(c) Cash flow statement Cash applied to operations increased
by R100 963 000 to R1 208 176 000 for the financial year ended
31 March 1999.
(d) Net current liabilities Net current liabilities amounted
to R2 046 766 000 as at 31 March 1999, including short-term loans
amounting to R1 801 000 000. Short-term loans have increased by
R389 000 000 from the 1997/98 financial year to the 1998/99 financial
year, which represents an increase of 27,55 per cent. Short term
loans represent 85 per cent of the total current liabilities.
3.2 Fixed assets
With reference to paragraph 3.4 of the audit report for the 1997/98
financial year, control over the timely updating of the fixed
asset register is still inadequate. Various projects, amounting
to RIO 752 000 were found in the work in progress register which
showed no movement from the 1997/98 financial year to the 1998/99
financial year.
3.3 Business agreement
For the 1998/99 financial year, Transnet Limited operated the
Corporation's Metro train service for the transportation of commuters
in terms of a business agreement. In terms of this agreement the
Corporation had to pay a management fee based on 10 per cent of
the actual fare income and an agency fee amounting to the actual
operating expenses to Transnet for the operation of the train
service. As mentioned in paragraph 3(1) of the report for the
1993/94 financial year, it was brought to the attention of the
contracting parties by the external auditors of Transnet that
as a result of the changes in the systems and other matters, many
of the clauses of the business agreement concerning the audit
has lost their relevance.
The phasing out of the above-mentioned agreement was however
completed by 31 March 1999 and a new agreement was implemented
from 1 April 1999. In terms of this agreement Metrorail shall
collect, and, as of the effective date or as promptly as practicable
thereafter, administer and account for, commuter service fares
for all Agreed Services for a period of four years, after which
the entire commuter rail network wilt be opened for competitive
bidding.
3.4 Tenders and contracts
Although progress has been made with prosecutions in respect of
fraudulent activities committed by a former employee of the Corporation
and other parties during 1992, legal proceedings were, at the
date of this report not completed.
3.5 Computer auditing
A computer audit of the general controls at the Corporation was
completed during February 1999 and the findings were brought to
the attention of the managing director. The audit focused on the
network and the financial system that was operated as a stand-alone
system separate from the network. The following key findings arising
from the audit indicate that the general control measures with
regard to the information technology (IT) environment required
improvement:
(a) Although the Corporation had implemented logical access polices,
these did not address access approval and the introduction of
software onto the systems.
(b) Due to the Corporation not having a database manager and
the fact that responsibilities for logical access and administration
had not been fully defined, the segregation of duties was inadequate
to determine accountability and responsibility for actions taken.
(c) A written policy for monitoring the network did not exist,
audit trails were not maintained and privileged user access was
not always monitored.
(d) There were no fire detection and prevention equipment in
the Corporation's building, nor were there any hand-held fire
extinguishers in the computer room.
(e) Although an adequate change management process for project
management was in place, the effectiveness of change management
relating to the support function could not be measured, since
procedures for logging changes and a change classification policy
did not exist.
3.6 Public Finance Management Act
The Corporation is listed under Schedule 3, Part B of the Public
Finance Management Act, 1999 (Act 1 of 1999) and must, with effect
from 1 April 2000, comply with the requirements set out in Chapter
6 of this Act.
3.7 Internal audit and audit committees
The internal audit function as well as the audit committee of
the Corporation were evaluated and found to be operating effectively.
3.8 Extension of time for the completion of the financial statements.
In terms of Section 3(3) of the Auditor-General Act, 1995 (Act
12 of 1995), it is a requirement that the financial statements
of statutory bodies be submitted to the Auditor-General not later
than six months subsequent to the end of the financial year. Extension
of time may be granted for the submission thereof in exceptional
circumstances. A request from the Corporation for the extension
of time until 31 October 1999 was granted.
4. APPRECIATION
The assistance rendered by the Corporation's personnel during
the audit is sincerely appreciated.
S.A. Fakie
for Auditor-General
Johannesburg
2000-03-30
