The National Assembly’s Standing Committee on Public Accounts (SCOPA) has called for the restructuring of the leadership of the Road Accident Fund (RAF), following the fund’s defeat in its legal battle against the Auditor-General of South Africa (AG).
On 19 April, the High Court in Pretoria dismissed the RAF’s application to review and set aside the AG’s disclaimer of the fund’s 2020/21 financial results and to declare the disclaimer invalid and unlawful. The court ruled that the RAF had no ground to stand on, and none of its arguments withstood scrutiny. It was ordered to pay the AG’s costs, including the cost of three counsel.
At the heart of the disagreement is whether the RAF is an insurer or a social benefit fund and the subsequent application or use of the relevant accounting standards.
The AG argues that the RAF is an insurer that must apply International Financial Reporting Standards (IFRS) 4, a standard for insurance contracts. This standard has been discontinued since 1 January 2023 and replaced with IFRS 17.
The RAF maintains it is a social benefit fund as classified in the 2017 Institutional Sector Classification Guide published by the South African Reserve Bank (SARB). It says this position was confirmed in December 2022 by the Public Sector Classifications Committee. The RAF is also classified by the National Development Plan 2030 as a social security fund.
Back in April 2021, the RAF transitioned from IFRS 4 to the International Public Sector Accounting Standards (IPSAS) 42 when compiling its financial results.
IPSAS 42 provides guidance on accounting for social benefits expenditure.
The change had a significant impact: the RAF’s potential liabilities were R300 billion less, and its financial health seemed to improve dramatically from being only 3% solvent to a much healthier 54%. These changes can be seen in the fund’s financial reports for the 2020/21 year.
Not only was the new accounting policy rejected by the Accounting Standards Board (ASB), the AG and National Treasury, but it also resulted in the RAF receiving a disclaimer – the worst audit opinion – from the AG for its 2021/22 financial statements.
A disclaimer means the entity could not provide sufficient evidence on which to base an audit opinion.
The RAF approached the courts to prevent the publication of the disclaimer (Part A of the application) and to have the audit disclaimer set aside (Part B). Part A was dismissed with costs, including the cost of two counsel, in February 2022.
The High Court rules on Part B last week.
Welcoming the ruling, the AG said the RAF had lost its court bid to change the accounting standard used to compile its annual financial statements “in defiance of the ASB, the Auditor-General, and its line department, the Department of Transport”.
The chairperson of the Standing Committee on the Auditor-General, Sakhumzi Somyo, said the ruling clarified and “settled the matter that was very protracted”.
“We are hoping that the RAF will comply and table the annual financial report to Parliament as prescribed by the court,” said Somyo.
However, it appears this hope is misguided.
Within hours of the judgment, the RAF issued a long media statement that reads more like a lawyer’s letter. Quoting from the SARB’s Institutional Sector Classification Guide, the Financial Services Board’s Directive 1 (RAF) of 2011, and the judgment itself, the RAF listed “a few examples of what we note as the court having misapplied and misdirected itself to the facts before it”.
RAF spokesperson McIntosh Polela said the decision failed to meet the constitutional standard of rationality and legality, and the fund was “profoundly disappointed” by the decision.
“We put forward for the court 17 grounds on why the RAF is not an insurance company but a social benefit scheme. None of those 17 grounds were traversed by the court,” he said.
Polela held that the RAF had been classified by “several organisations, including the Reserve Bank”, as a social benefit scheme.
“And we insist that it is that: a social benefit scheme. We have asked our lawyers to file for appeal on this decision of the North Gauteng High Court, and we’re very confident that a different court will arrive at a totally different outcome,” he said.
‘Reckless and irresponsible court action’
In an interview with Newzroom Afrika, SCOPA chairperson Mkhuleko Hlengwa (pictured) said a change of the RAF’s board and executives was needed.
“They are not fit for purpose. I have put it to them as well in the last interaction that we had that they are not doing the things which are helping the entity, and this outcome of the court is a vindication of what we told them some two-and-a-half years ago,” said Hlengwa.
Describing the RAF as “allergic” to advice, Hlengwa said SCOPA, together with National Treasury, the ASB and the AG, have on numerous occasions advised the RAF “to desist from this fishing expedition”.
He said the RAF, “literally with the stroke of a signature”, wrote off its liabilities by changing the accounting standards.
Hlengwa said that based on assessments, all these entities had concluded that the IPSAS 42 accounting standard was not applicable in South Africa.
“And they (the RAF) fully chose it,” he said. “What we advised them to do was that if there were changes that were required in law, then they must process that in the normal legislative reform process that takes place in Parliament.”
Last December, Business Day reported that Transport Minister Sindisiwe Chikunga urged the RAF and Auditor-General Tsakani Maluleke to settle their differences without going to court. Speaking at a SCOPA meeting, the minister encouraged the RAF board and AG to explore ways to resolve their conflict other than resorting to protracted legal battles.
Regarding the RAF’s decision to pursue legal action regardless, Hlengwa remarked that it was wasteful expenditure.
“We should not have been in court in the first place … So, in our view, this has been a very reckless and irresponsible court action that should not have arisen.”
Hlengwa added that SCOPA’s position is that the RAF board and the executives – having gone against sound advice – should be held personally liable for the cost of the court action.
‘The reign of terror’
Last year June, SCOPA told the Ministry of Transport to investigate “the reign of terror” at the RAF after members of the committee visited the fund’s claims office in Menlyn, Pretoria.
Read: ‘Road Accident Fund is in ICU with one foot in the grave,’ says SCOPA chairperson
Hlengwa told Newzroom Africa that the RAF was not focused on the right issues, “which is the digitisation of work, the speed with which payments must be made to applicants”.
According to Hlengwa, there is a high level of dysfunctionality at the RAF.
“There is a toxic environment … Instead of focusing on those things, they went on (with) this now disastrous outcome which would not have happened; wasting time, money, and other resources.”
