DENEL SOC LIMITED - Quarterly update regarding disclaimer of audit opinion - BIDEN

Quarterly update regarding disclaimer of audit opinion - BIDEN

DENEL SOC LIMITED
Registration number: 1992/001337/30
JSE Alpha Code: BIDEN
(“Denel” or the “Group” or the “Company”)

QUARTERLY UPDATE REGARDING DISCLAIMER OF AUDIT OPINION

Noteholders are referred to previous announcements released on SENS, with the latest quarterly
update released on 27 November 2020, providing updates on progress made in relation to the issues
that resulted in the disclaimer opinion as contained in the audit reports for the financial years ended
31 March 2018 and 31 March 2019 (the “Disclaimer”).

Following the publication of Denel’s integrated report and annual financial statements for the year
ended 31 March 2020 (“2020 AFS”) which contained a further disclaimer opinion in the audit report
of the Auditor-General South Africa (“AGSA”), the Company sets out below the matters raised by
the AGSA in their latest Disclaimer.

1. External Audit
1.1   The AGSA was unable to provide an opinion on the 2020 AFS which led to the latest
      Disclaimer. The Disclaimer relates to various matters contained in the 2020 AFS for which the
      AGSA was unable to obtain sufficient appropriate audit evidence.

      Following the finalisation of the 2020 AFS at the end of January 2021, Denel is currently
      assessing the corrective steps required in order to resolve the AGSA’s audit findings.
      Thereafter, the Audit and Risk Committee will consider and approve an audit fix plan for
      implementation.

2. Internal control and internal control deficiencies
2.1   The AGSA considered internal control relevant to the 2020 AFS but did not express any form
      of assurance. As a result of the above, the AGSA raised the following internal control
      deficiencies:

         •   a lack of credible financial reporting throughout the year to enable leadership to review
             and take appropriate action;
         •   a lack of adequate and regular review of existing policies;
         •   action plans developed were inadequate to address the internal control deficiencies
             identified during the testing of prior year errors;
         •   a lack of proper information management to timeously support queries raised;
         •   a lack of basic financial management disciplines;
         •   a lack of adequate controls to prevent non-compliance with legislation; and
         •   the effective functioning of the Audit and Risk Committee and internal audit was
             hampered by a lack of credible information.
2.2   Denel appointed Ernst & Young as independent internal audit service provider in July 2019.
      The internal audit plan was finalised in October 2019 and by March 2020 the internal audit
      execution was not yet complete, thus the AGSA did not rely on the internal audit work
      completed up to the year end of 31 March 2020. Internal audit provides a second line of
      defence in terms of Denel’s combined assurance model. As part of management’s
      representation responsibilities, we confirm that People, Systems and Processes are in place
      at Denel and that management is the first line of defence and does ensure that supervision
      and monitoring takes place, albeit that Denel does not have a formally documented
      management assurance process in place that we could provide to the AGSA to form part of
      their evidence to confirm this. Based on this assessment, the AGSA raised inadequacies in
      internal controls and more specifically on Denel’s information management, and provided
      management with recommendations on the improvements the AGSA would require to ensure
      sufficient comfort over the control environment.

2.3   As part of the audit remediation plan, a review of internal control processes to ensure
      improvement in the control environment is being implemented.

3. Going Concern
   The Disclaimer for the 2020 AFS included a statement by the AGSA that the AGSA was unable
   to confirm whether it is appropriate to prepare the 2020 AFS on the basis of accounting policies
   applicable to a going concern.
   As contained in the Report of the Audit Committee for the 2020 AFS, the Board of Directors of
   Denel concluded that the Company was a going concern. In performing its assessment, the
   Board acknowledged that Denel cannot solve its problems alone but required support from its
   shareholder.

4. Ongoing
   Denel will continue to resolve the matters raised in the Disclaimer and provide quarterly updates
   in this regard.


26 February 2021

Debt Sponsor: Nedbank Corporate and Investment Banking

Date: 26-02-2021 02:48:00
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