Sharenet Sites 
Sharenet Sites
Update regarding disclaimer of audit opinion - BIDEN
DENEL SOC LIMITED
Registration number: 1992/001337/30
JSE Alpha Code: BIDEN
(“Denel” or the “Company”)
UPDATE REGARDING DISCLAIMER OF AUDIT OPINION
1. Background
Noteholders are referred to announcement released on SENS on 31 October 2018 relating to
the availability of Denel’s audited annual financial statements for the year ended 31 March 2018
and reference that the audit report (the “Audit Report”) contained a disclaimer of opinion (the
“Disclaimer”) for the 2017/18 financial year (the “2017/18 Audit”).
Following the release of the Audit Report, the JSE Limited (“JSE”) had major concerns on the
nature and extent of the Disclaimer and initiated a process with Denel in terms of which the
Company needed to provide clarity to the market. This process includes ensuring that Denel
provides regular quarterly market updates on the progress being made in dealing with the
Disclaimer. In this regard, the Denel board of directors (the “Board”) acknowledges the
seriousness of the Disclaimer and the matters arising therefrom and sets out below full details
regarding the Disclaimer and action taken in this regard.
2. The Disclaimer
The main issues which resulted in the Disclaimer by the auditors of Denel, being the Auditor
General South Africa (“AGSA”), were in respect of:
- revenue - incorrect IFRS application (applied IAS 18 as opposed to IAS11) and translation
of prepayments;
- property, plant and equipment - assets understated at zero book value and the non-
capitalisation of the site restoration cost of leased space and possible impairment of
investments;
- revaluation reserve - incorrect accounting for revaluation of investment property - profit
or loss instead of the revaluation surplus;
- post-retirement benefit fund - net defined medical benefit asset not accounted for as an
asset;
- operating leases - insufficient audit evidence to support transactions relating to non-
cancellable leases;
- financial risk management - inadequate disclosure of the nature and risks arising from
financial instruments and how those risks were managed;
- restatement of financial information previously presented - insufficient audit evidence
supporting the restatement of corresponding figures;
- investment in subsidiaries - inadequate evidence was provided to the auditors for
“investment in associates” relating to the purchase of Turbomeca Africa Proprietary
Limited;
- deferred tax and income tax - tax disclosures as the prior year period could not be
quantified at the conclusion of the 2017/18 Audit; and
- irregular and fruitless and wasteful expenditure – inadequate systems / processes to
control irregular and fruitless and wasteful expense, including additional expenditure
identified by AGSA.
The full Audit Report is available on Denel’s website at http://www.denel.co.za/financials.
3. The Governance Turnaround Plan
In addressing the key issues of the 2017/18 Audit, Denel implemented a comprehensive
governance framework and turnaround plan (the “Governance Turnaround Plan”) in order to
restore investor confidence and to avoid a reoccurrence of the issues that resulted in the
Disclaimer. The key focus areas contained in the Governance Turnaround Plan and action taken
are as follows:
3.1 Address the lapses in governance within the organisation
The Board, with the support of its shareholder, the Department of Public Enterprises
(the “Shareholder”) have been making significant progress in reinstating good
corporate governance within Denel. At the beginning of the current financial year, the
Shareholder dissolved the previous Board and appointed the new Board with Ms
Monhla Hlahla as its chairperson. Steps already taken by the Board include inter alia:
- the termination of the group chief financial officer’s (“GCFO”) contract and the
appointment of an interim GCFO, Mr Wim de Klerk;
- the resignation of the previous group chief executive officer (“GCEO”) and the
subsequent appointment of an executive management official as Acting GCEO; and
- the process of appointing a new GCEO has been concluded by the Board and
recommendations have been made to the Shareholder and it is expected that an
announcement will be made by mid December 2018 in this regard.
3.2 Improve IFRS reporting
The Board has emphasised the need to improve the IFRS reporting and steps have been
taken to do so. This includes the strengthening of the finance function for compliance
with IFRS with external resources where appropriate. The Board approved the
appointment of an independent audit firm to bridge the skills gap on IFRS reporting until
such time that a permanent resource is finalised. To ensure continued compliance, staff
training on IFRS 15 has occurred and training with regards to upcoming updates will be
incorporated within the Denel finance culture.
The deficiencies in record keeping identified by the AGSA will be addressed by
streamlined processes for review throughout the group and an update in the
procedures where required. In instances where there have been improper systems in
place, a system walkthrough will be performed in order to identify deficiencies so that
these may be corrected either by a complete replacement or adjustment.
The Board’s Audit Committee is meeting regularly to review progress made to resolve
the AGSA’s findings which resulted in the Disclaimer. The AGSA will also perform an
interim audit during commencing the first week of February 2019 until March 2019 to
review Denel’s progress in resolving the issues identified. The outcome of such interim
audit will be announced on SENS.
3.3 Quantify prior period errors
As the investors are key stakeholders in the business it is important that the impact of
the prior year errors is correctly quantified and communicated. The independent audit
firm appointed will assist Denel to quantify the prior year errors with the commitment
to announce the impact thereof during March 2019.
3.4 Compliance to Public Finance Management Act (“PFMA”)
The increase in “irregular, fruitless and wasteful expenditure” indicates weaknesses in
internal controls. This has necessitated an improvement of the systems to prevent and
detect such expenditure in the future. All possible irregular and fruitless, wasteful
expenditure is reported to the Board for consideration and the Board decides on further
action to be taken. The review of internal processes and policies is in process in order
to ensure compliance to the PFMA.
3. Details of Denel notes (“Notes”)
Denel currently has the following Notes in issue:
Code Security ISIN Maturity date Nominal value
Rm
DEN80 Unsecured ZAG000152026 11 December 290
2018
DENG83 Government ZAG000154030 11 September 1 463
guaranteed 2019
DENG84 Government ZAG000154238 23 September 263
guaranteed 2019
DENG85 Government ZAG000154246 21 September 30
guaranteed 2021
DENG86 Government ZAG000154469 27 September 958
guaranteed 2019
DENG87 Government ZAG000154451 28 September 50
guaranteed 2021
DENG88 Government ZAG000154444 28 September 100
guaranteed 2023
Total 3 154
The South African Government has issued a 5 year guarantee in the amount of R3.43 billion (the
“Government Guarantee”) in favour of Denel noteholders, which limits the risk of noteholders
in that noteholders invest in Government guaranteed bonds and not in Denel debt on a stand
alone basis.
In regard to the current Notes in issue, the Board, together with Denel’s audit committee, can
confirm that Denel is able to punctually pay all amounts due and payable to noteholders.
4. Undertakings
Until such time as the Board, Denel’s audit committee and the AGSA are satisfied that the issues
identified in the Disclaimer have been resolved, Denel undertakes that:
4.1 it will only list Government guaranteed Notes on the JSE’s interest rate market;
4.2 the Government Guarantee will be in place so long as any Notes are listed on the JSE’s
interest rate market; and
4.3 at all times, the outstanding nominal value, including any accrued interest, of the Notes
listed on the JSE’s interest rate market will not exceed the Government guaranteed
value of R3.43 billion.
Denel further undertakes to continue engaging with the JSE to rectify the situation and will
advise the JSE of any changes in respect thereof.
Noteholders are requested to exercise caution when dealing in the Notes until a further quarterly
update on progress made in dealing with the Disclaimer is issued, which is expected to be on or about
28 February 2019.
27 November 2018
Debt Sponsor: Nedbank Corporate and Investment Banking
Date: 27/11/2018 04:39:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
