South African Express Airline (“SAX”) Draft Report October 2011 Presented...

South African Express Airline(“SAX”)

Draft Report

October 2011

Presented by

20 Morris Street East, Woodmead, 2191P O Box 2939, Saxonwold, 2132

Tel. +27 11 231 0600 / 86 11 76877, Fax. +27 11 234 0933www.sizwentsaluba.co.za

03 October 2011

Ms Matsotso VusoChairperson Audit and Risk Committee South African Express AirlineP O Box 101O.R. Tambo International Airport1627

Dear Madam,

Draft Report: Forensic investigation services performed on behalf SA Express Airline (“SAX”) with respect to the receipt of two anonymous hotline tip-offs/allegations dated 04 August 2011 and 05 September 2011 respectively.

Attached hereto please find our draft report in respect of the above mentioned matter.

The report has been provided to you as a draft in order to allow an opportunity for you

to comment on the findings to date.

The draft report covers the background, mandate, findings, conclusions and

recommendations in respect of the above mentioned above-mentioned matter.

If you require any further information or have any queries, please do not hesitate to

contact me at telephone 011 231 0600 or 083 566 5256.

Yours faithfully

Lawrence Moepi

Director

SizweNtsaluba a member firm of Morison International

A list of Directors and Partners is available at our registered offices

SAX03 October 2011

Contents

CONTENTS ....................................................................................................... 3

1.GLOSSARY OF TERMS AND ABBREVIATIONS ....................................... 4

SAX Forensic Investigation of 28

SAX03 October 2011

1. GLOSSARY OF TERMS AND ABBREVIATIONS

Terms


SAX03 October 2011

2. BACKGROUND

2.1 You informed us that SA Express received two anonymous hotline tip offs/allegations dated 04 August 2011 and 05 September 2011. The reference numbers for the calls were T18273 and T18447 respectively. We summarise under the respective heading the allegations made:

Hotline reference number T18273

requested that the matter be investigated by the board. 2.4 The caller attached a fax detailing the allegations that need to be investigated. 2.5 The details of the caller’s fax have been captured as follows:

a) The caller alleges that SA Express has not declared true Annual Financial Statements. This is allegedly supported by R16 million invoiced by South


SAX03 October 2011

African Airways in February 2011 which was allegedly not accrued for the 31 March 2011 financial year end.

b) The caller also alleges in the fax that an amount of R42 million involving South African Revenue Services was “illegally” included in the financial statements.

4.5 This report was prepared solely for the purposes of reporting on our findings to SAX. No part may be quoted, referred to or disclosed in whole or in part, by any party, without our prior written consent.


SAX03 October 2011

5. PROCEDURES PERFORMED

5.1 We obtained and reviewed the following documentation:a) The Procurement Policy of SA Express;b) The submission made to the Tender Committee on 25 September 2009 to

deviate from the Tender procedures in terms of the policy;c) The Contractual Agreement signed between SA Express and Merlynn Pty

g) Ms Patricia De Kok (GL/Tax Accountant)h) Ms Jenean Green (Chief Information Officer)i) Dave Allanby (GM: Operations)j) Ms Mamo Ramashamole (Senior Specialist: Supply Chain)k) Mr. Peter Mashaba (GM: Risk & Compliance)l) Mr. Mandla Nkambule (Risk Manager)

m) Mr Jessie Amond (Revenue Auditor)


SAX03 October 2011

n) Ms Desiree Elliot (Head of Department – IT Business services)o) Mr. Brian van Wyk (Divisional Manger- Business Development &

Revenue)p) Ms Elschke’ Slabbert (Creditors Clerk)

5.3 We also performed various CIPRO searches with respect to Ms Welman to

ascertain the existence of a formal business relationship between her and Mr


SAX03 October 2011

6. OUTSTANDING MATTERS

6.1 We are still to consult with Mr Ntshanga in respect to his role on the procurement of services from Merlynn.

6.2 Evaluation of the performance of Merlynn in respect of having met the deliverables of its contractual agreement with SAX for which they already received payment.

fruitless and wasteful expenditure in terms of Sections 38(1) (g) and 76(2) (e) of the Public Finance Management Act, 1999.

7.3 The Procurement Policy of SAX requires the following key processes and procedures to be followed when procuring goods and services:


SAX03 October 2011

a) Goods and services between the value of R1 and R500 may be procured through petty cash;

b) Goods and services between R501 – R299,999.99 requires a requisition form to approved and signed by either a GM of the department or the CEO depending on the level the requisition is initiated;

7.5 Our investigations determined that Ms Este Welman received an invoice for R22 800 from Merlynn Intelligent Technologies (Merlynn) for the procurement of Automation of Software and Hand-held Scanners for the Congo Express (“COX”) project. According to the creditor’s clerk, Ms E Slabbert, Ms Welman verbally approved the invoice in order to ensure that the payment thereof is fast tracked through the normal payment route. Discussing the invoice with Ms Welman she noted that the process followed


SAX03 October 2011

by her did not deviate from the approve process. Refer to section 7.7 hereunder for Ms Welman’s comments. On paper i.e. the expense authorisation form in use at SAX, the invoice was approved by Mr Gandela and Mr Silver, Management Accountant.

7.6 The invoice was dated 27 February 2011 and paid on the 10 March 2011 i.e.

7.10 Inspecting the invoice of R22 800 in question it also appears that the invoice entails billing for work not covered by the original agreement between SAX and Merlynn. The original contract was to develop applications for the Operational Control Centre, the Technical Area and Fuel Optimisation area. The invoice represents payment for an application system to be used in the Revenue Management department which is to date not yet in used. Included


SAX03 October 2011

on the invoice is an amount of R2, 500 for the procurement of two hand-held scanners for the Congo Express project. Payment was thus effected for work not yet fully completed.

7.11 We further noted that the contractual agreement between SAX and Merlynn had expired on the 31 July 2010 and was not in force when Ms Welman procured the said goods through Merlynn. The sourcing of these goods

telephone application which Mr Carl Wocke of Merlynn was helping her with to find application developers who could wrote a programme for the proposed application. According to her Mr Wocke was helping her to find potential financiers for the project of which he would have been one.


SAX03 October 2011

7.16 The said CC was never registered and the business idea was dropped as Ms Welman and Mr Wocke learned that it would be expensive to make the venture feasible. Our company and directorship searches also confirmed that the CC was never registered and or that Ms Welman and Mr Wocke had no direct business relationship in the form of a partnership, joint membership and directorship in a formally registered enterprise.

Comair.

7.20 We were however provided with a report dated 24 July 2009 which appears to be the outcome of a scoping exercise which Merlynn has already completed for SAX. The proposal for the scoping exercise was accepted and approved on the 7 July 2009. It therefor appears that the appeal to the


SAX03 October 2011

Tender Committee was done post the fact that work to be performed by Merlynn had already been done and accepted by SAX represented by Mr Inathi Ntshanga.

7.21 Investigating the anomaly further we determined that Merlynn had already invoiced SAX on 31 August 2009 for the scoping exercise performed, while SAX had effected a payment to Merlynn for R48 000 on the 23 September

2009 and January 2010 and the FO Project between February and July 2010. We observed that the project work was not completed within 12 months resulting in an alleged extension until end of April 2011. The contract extension was however approved on the 6 April 2011 for the period 1 February 2011 until 30 April 2011 after the work has already progressed. We however couldn’t find any proof of the existence of a development agreement between Merlynn and SAX until the end of January 2011 which


SAX03 October 2011

means that there was no contract in place between Merlynn and SAX for the period 1 August 2010 to 31 January 2011.

7.25 Therefore we conclude that the extension of the contract to end April 2011 to be invalid. It supports our view that when the payment of the R22 800 invoice occurred during March 2011, the procurement happened without there being a valid agreement in place between SAX and Merlynn.


SAX03 October 2011

the invoice relates was not part of the Contractual Agreements signed between SAX and Merlynn (Pty) Ltd. Furthermore there appears to be substance to the caller’s allegation that the appropriate procurement procedure was not followed to effect the payment.


SAX03 October 2011

7.32 Reviewing the Contractual Agreements between SAX and Merlynn it appears that Merlynn either exceeded the agreed contract fee and timeline and or was performed out of contract. No evidence has been seen that the exceeding of the contract fee has been approved by appropriately authorised and mandated employees.

ACSA service fees as part of the ticket price payments due from SAA and must pay it over to ACSA as soon as the monies have been received. The aforementioned does not result in an expense for SAX and is only money collected on behalf of a third party.


SAX03 October 2011

7.36 SAA is of the view that it makes the pay overs to SAX in good faith after SAX has invoiced them for the Passenger Revenue, Y/R Taxes and other charges and levies due based on the confirmed numbers of passengers carried by SAX. The aforementioned numbers and charges are also calculated based on an agreed formula and the data to be used between SAA and SAX.

kept and that the agreements apparently reached are being disputed between the parties. In fact the only minutes available are from SAA which has been recorded on an e-mail to Mr. Jessie Amond and the other individuals involved in the said meetings. SAA is of the opinion that Ms Welman in her capacity as CFO for SAX agreed to disagree who is really liable for the debt and that neither party is going to pay the other party. The alleged agreement


SAX03 October 2011

reached and the understanding thereof was that both parties would have to write off the amount and put it the matter in the past.

7.40 We learned from our discussions with the SAX finance staff that they i.e. the Divisional Manager Finance: Ayanda Ntsho, the Senior Management Accountant: Mlindeli Gandela, the Tax Manager: Patricia De Kok and the

method applied by SAA to be correct. He however advised that Mr Jessie Amond will be tasked to re-perform the same calculation to ensure there were no errors made by SAA, as well review the method applied by Jessie Amond to compare the results. SAA again is the only party who kept minutes of the meeting and send it off to SAX on 3 March 2011 which SAX did not dispute the order of the discussions held and the agreement reached.


SAX03 October 2011

If SAX was in agreement with the calculation and the result reached by SAA, SAA would have send an invoice on 7 March 2011 to SAX for R16, 266,429 to finalise the matter.

7.44 On 22 September 2011 SAA send a followed up e-mail to Mr Jessie Amond to advise SAX that they never came back to SAA to confirm the calculation

amount of R16 million was never brought up to them as an issue and that they never audited it specifically as a long outstanding balance within debtors. They now believe it is perhaps material depending on the outcome of the R42m issue.


SAX03 October 2011

Conclusions in respect of the R16 million disputes between SAX and SAA

7.48 The R16 million in dispute between SAX and SAA have been in existence since 2008 and is now longer than 24 months. Prudent accounting requires that the amount should have been provided for Bad Debts for the year ended 31 March 2009 already. The Net Profit for the 2011 financial year appears to

the year ended 31 March 2011.

DESCRIPTION YEAR-END BALANCE

VAT CONTROL 25,843,845.91VAT OUTPUT (53,295,356.24VAT INPUT 73,617,515.14CUSTOMS VAT 18,750,316.12


SAX03 October 2011

WRITE-OFF TO I/S (773,666.93)NET BALANCE OF VAT ACCOUNT 64,142,654.00

7.52 This table explains the outstanding VAT claims totalling R20 588 065.94 already submitted to SARS

DESCRIPTION AMOUNT DATE OF REFUND:RMB

INVOICE - 10139696 22,519,153.58 17 JULY 2006INVOICE - 10128978 116,322.51 9 MAY 2006INVOICE - 10128460 18,844,247.79 28 APRIL 2006TOTAL VAT 41,479,723.88


SAX03 October 2011

7.55 At this stage i.e. during the month of May 2011, the Tax Manager, as well as the acting CFO, Ms Welman, believed that the above amount forms part of the balance of the VAT Accounts and that it represents a recoverable amount from SARS. The tax manager however couldn’t reconcile the VAT Accounts or find traces that the Customs and Exercise Duty on the

7.59 Mr Wienand then requested Ms De Kok to follow the matter up with VATit to gain a better understanding of the transaction and its tax consequences following the Audit and Risk Committee meeting. She learned that VATit had advised and assisted SAX to submit a claim for the amount of R41 479,723.88 to SARS. She also learned that SARS has unfortunately rejected the said VAT claim on 12 August 2008 on the basis that SAX was never a party to the transaction to acquire the aircraft.


SAX03 October 2011

7.60 VATit informed Ms De Kok that the reason the claim was submitted to SARS was because the Bill of Entry, as well as the Bombardier Aerospace invoices, was in the name of SAX. It was then decided to submit the claim while no entries or updates were made to the accounting records of SAX until they have received a response from SARS. VATit however learned that

that the amount of R42 million can be divided into two categories with similar characteristics. The one set totalling approximately R32 million represents various items that have been processed as direct journals between the Retained Earnings account and various VAT related accounts on SAX’s Chart of Accounts. The table hereunder details the breakdown of this cluster:


SAX03 October 2011

DATE POSTED NET AMOUNT

PERIOD IT RELATES TO

30 MARCH 2009 11,737,311.31 31 MARCH 200809 MARCH 2010 6,619,346.95 31 MARCH 200908 JULY 2010 14,130,109.14 31 MARCH 2010TOTAL 32,486,767.40

7.64 The table above represents the net amount of various direct journals that

the assessment and the expected refund from SARS, a payment of the said amount was made to SARS. The erroneous payment and receipt of the amount was confirmed with SARS being R4 381 247.01 exactly.

7.67 There was however still a net balance of R1 485 088 left in the VAT Accounts that was unexplained which the Tax Manager later learned belongs


SAX03 October 2011

to the 2009 financial year representing a Skills Levy Refund claim that was erroneously claimed from SARS. SAX has requested SARS to amend their claim, while the amount has been written-off for 2011.

Conclusion in respect of the R42 million SARS/VAT issue


SAX03 October 2011

8. RECOMMENDATIONS

Based on the findings in the report it is recommended that:

8.1 SAX should consider corrective measure against Ms Welman for the following:

8.8 SAX should not take any action based on this draft report until the investigation is finalised and a final report is issued.

9. MATTERS FOR YOUR ATTENTION AND OR FURTHER INVESTIGATION


SAX03 October 2011

Kindly note that although we highlight the matters hereunder, we have not performed detail procedures on them in order for us to present it as detail findings from which we can make findings and conclusions.

a) Our investigation into reference T18273 indicates that some of the developments performed by Merlynn may not be in alignment with the


South African Express Airline (“SAX”) Draft Report October 2011 Presented...

Documents

Transcript of South African Express Airline (“SAX”) Draft Report October 2011 Presented...