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Quarterly update regarding disclaimer of audit opinion
DENEL SOC LIMITED
Registration number: 1992/001337/30
JSE Alpha Code: BIDEN
(“Denel” or the “Company”)
QUARTERLY UPDATE REGARDING DISCLAIMER OF AUDIT OPINION
Noteholders are referred to the announcements released on SENS, with the latest announcement
released on 30 August 2019, giving status updates on progress made in relation to the disclaimer of
opinion contained in the audit report for the year ended 31 March 2018. Following the release of
Denel’s annual financial statements for the year ended 31 March 2019 on 4 October 2019 which
contained a further disclaimer of opinion (the “Disclaimer”), Denel now provides the following update
on the Disclaimer.
1. 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 implementation of IFRS15 revenue recognition;
• Inventories – inadequate evidence provided for audit purposes;
• Property, plant and equipment – inadequate assessment of asset useful lives, residual
values, impairment of assets and the inadequate audit evidence for properties;
• Trade and other receivables, contract losses and financial liabilities – inadequate
implementation of IFRS9 financial instruments;
• Trade and other payables – inadequate records for goods received and not yet invoiced;
• Investment in subsidiaries – inadequate evidence was provided to the auditors for
“investment in associates” relating to the purchase of Turbomeca Africa (Pty)Ltd,
inadequate assessment of impairment of assets and incorrect elimination of intragroup with
associates;
• Retirement benefit obligation – incorrect accounting of service costs and net interest on
defined benefit asset and actuarial losses;
• Operating expenditure – inadequate evidence provided for audit purposes;
• Contingent liabilities – inadequate evidence provided for audit purposes;
• Correction of prior period errors – inadequate audit evidence for the correction of prior
period errors;
• Non-current assets held for sales – inadequate disclosure of possible disposal of an
associate (Hensoldt Optronics (Pty) Ltd);
• Change in accounting policy – incomplete disclosure of IFRS9 implementation and the
impact thereof;
• Financial instruments and risk management - inadequate disclosure of the nature and risks
arising from financial instruments;
• Related parties – inadequate disclosure of related party transactions;
• Statement of cash flows – inadequate disclosure of gross cash receipts and gross cash
payments from operating activities;
• Deferred tax and income tax – tax implications as the qualification of other areas could not
be quantified at the conclusion of the 2018/19 Audit;
• Irregular, fruitless and wasteful expenditure – inadequate systems / processes to record
irregular and fruitless and wasteful expense, including additional irregular expenditure
identified by the AGSA;
• Annual performance report - inadequate evidence provided for audit purposes.
2. High-level plan to address the Disclaimer
Denel has put in place a high level plan which aims to restore investor confidence and has two
components, the first is an audit fix plan (the “Audit Fix Plan”) and the second is to address
issues of People, Processes and Systems across the Denel group.
2.1 Audit Fix Plan
In addressing the key issues of the 2018/19 audit, Denel has implemented the Audit Fix Plan
to avoid a recurrence of the issues that resulted in the Disclaimer. The key focus areas
contained in the audit fix plan are as follows:
2.1.1 Mandatory assessed IFRS training and appointment of an IFRS Specialist – to improve
adherence to accounting standards. Training was mandatory for all Finance teams to keep
them abreast of technical accounting developments that impact the preparation of key
accounts and accounting records. This intervention was to deal with the findings relating to the
implementation of new accounting standards (IFRS15, IFRS9 and IFRS16). The appointment
of the internal IFRS Specialist has also been supplemented, where necessary by external
resources sourced in to assist with ensuring the correct interpretation and application of
accounting standards. Specifically, for IFRS15, Denel has implemented a process to review
all revenue contracts in the business to identify gaps, document corrective IFRS principles on
each of the contracts and implement changes. Denel has further agreed a process with the
AGSA to confirm principles adopted prior to the finalisation of the corrective process in order
to ensure alignment.
2.1.2 Develop documented business processes – this intervention is aimed at developing business
processes that are readily available and regularly updated. Business processes, supported by
key internal controls, are being assessed and documented to ensure adequate design of the
control and operating effectiveness. The business transformation process includes
communication, monitoring, performance and consequence management.
2.1.3 Quarterly walkthroughs of Key Accounts by each division – the introduction of quarterly reviews
of business processes and reconciliations to test the implementation of applicable accounting
standards timeously and improve the Group’s audit readiness.
2.1.4 Recurring review of Key Accounts and Key Program Reviews – monthly review of key accounts
to be performed by management to review, standardise and supervise work performed by the
various finance staff members.
2.2 People, Processes and Systems
2.2.1 Improving credibility of financial reporting – improvement of the current financial reporting tools
to ensure compliance with all new accounting requirements and relevant required disclosures.
2.2.2 Setting up an internal audit function – Ernst and Young (“E&Y) were appointed as internal
auditors and commenced their work during September 2019, to assist with overseeing and
auditing the financial information as well as performing interim audits of information before it is
submitted for the year-end audit to the AGSA.. Refer additional information in section 3.
2.2.3 Finance Function effectiveness – building a strategic finance function that adds value to the
business and its stakeholders in respect of the quality of its people, the operating model and
a finance architecture that enables a fit-for-future organisation.
2.2.4 ICT and Supply Chain – the internal audit function has been extended to assist with General
Computer Control reviews. Denel’s Supply Chain policy and processes are currently under
review to ensure a clear understanding of the Public Finance and Management Act, No 1 of
1999 (“PFMA”) processes in respect of irregular, fruitless and wasteful expenditure with
relevance to Denel as a commercial business competing in global markets.
3. Internal controls and Internal control deficiencies
Instability in the key leadership roles has been one of the key issues identified by the AGSA to
contributing towards the stagnation of internal controls. Subsequent to year-end, a full
executive team has been appointed and this will ensure the alignment and improvement of
governance processes within the business through oversight by the Board and its committees
to ensure the execution of the turnaround strategy for Denel.
3.1 Internal Audit
In the current financial year 2019/20, the focus of the internal audit function will include:
• External audit remediation and readiness programme;
• Financial statements review prior to submission for audit;
• Programme execution and assurance;
• Inventory management review; and
• Supply chain management review including the review of controls to detect and prevent the
occurrence of irregular, fruitless and wasteful expenditure and compliance to the PFMA.
3.2 External Audit – status of records review by AGSA
In preparation for the 2020 year-end audit, the AGSA will perform a status of records review.
This process will identify and highlight deficiencies in record-keeping of Denel so that corrective
measures are implemented in preparation for the 2020 year-end audit.
4. Going Concern
Through the implementation of the turnaround strategy, the Denel board is confident that
adequate mitigating steps are in place in order to improve the liquidity of Denel and monitors
this on a regular basis.
Denel will continue to resolve the matters raised in the Disclaimer and provide quarterly updates in
this regard.
6 December 2019
Debt Sponsor: Nedbank Corporate and Investment Banking
Date: 06-12-2019 01:22:00
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