REPORT OF THE AUDITOR.GENERAL TO PARLIAMENT ON THE FINANCIAL STATEMENTS OF THE SOUTH AFRICAN RAIL COMMUTER CORPORATION LIMITED (SARCC) GROUP FOR THE YEAR ENDED 31 MARCH 2005

REPORT OF THE AUDITOR-GENERAL FOR THE YEAR ENDED 31 MARCH 2005


1. AUDIT ASSIGNMENT

The group financial statements as set out on pages 24 to 47, for the year ended 31 March 2005, have been audited in terms of section 188 of the Constitution of the Republic of South Africa, 1996 (Act No. 108 of 1996), read with sections 4 and 20 of the Public Audit Act, 2004 (Act No. 25 of 2004) and section 28(3) of the Legal Succession to the South African Transport Services Act, 1989 (Act NO.9 of 1989). These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibility of the accounting authority. My responsibility is to express an opinion on these group financial statements, based on the audit.

2. NATURE AND SCOPE

The audit was conducted in accordance with Statements of South African Auditing Standards. Those standards require that I plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement.

An audit includes:

· examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,

· assessing the accounting principles used and significant estimates made by management, and

· evaluating the overall financial statement presentation.

Furthermore, an audit includes an examination, on a test basis, of evidence supporting compliance in all material respects with the relevant laws and regulations, which came to my attention and are applicable to financial matters.

The audit was completed in accordance with Auditor-General Directive NO.1 of 2005.

I believe that the audit provides a reasonable basis for my opinion.

3. QUALIFICATION

3.1 Fixed Assets

3.1.1 Impairment of assets

South African Statement of Generally Accepted Accounting Practice, IAS 36 (AC 128) Impairment of Assets, requires an entity to assess at each reporting date whether there is any indication that an asset may be impaired and if any such indication exists, the entity should estimate the recoverable amount of the asset. Various coaches require significant maintenance to continue operating as intended. In addition, vandalism of coaches and weather conditions at coastal regions, are indications that the assets may be impaired. The Corporation did not estimate the recoverable amount of the assets and the extent of any impairment loss that should be expensed in the income statement. All the information and explanations we considered necessary to satisfy this office as to the valuation of these assets, could not be obtained.

3.1.2 Depreciation of property, plant and equipment

South African Statement of Generally Accepted Accounting Practice, IAS 16 (AC 123) Property, Plant and Equipment, requires each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item to be depreciated separately.

The Statement furthermore requires the depreciable amount of an asset to be allocated on a systematic basis over its useful life and that the residual value and the useful life of an asset to be reviewed at least at each financial year-end. If the expectation differs from previous estimates, the change should be accounted for as a change in the accounting estimate.

The various components on the coaches (motor, under carriage, side panels and interior) had distinctly different lifespans which were depreciated using a single depreciation rate. Indications also existed that the rolling stock fleet acquired on 1 April 1990 were depreciated over periods exceeding the estimated useful lives' of the assets. Consequently, a significant number of the coaches shown on the balance sheet should have been fully depreciated. The effect on the financial statements was not quantified.

3.1.3 Derecognition of replaced components

South African Statement of Generally Accepted Accounting Practice, IAS 16 (AC 123) Property, Plant and Equipment, requires the carrying amount of an item of property, plant and equipment to be derecognised on disposal or when no future economic benefits are expected from its use or disposal. General overhaul costs were capitalised against rolling stock without derecognition of the original component that was replaced. The effect on the financial statements was not quantified.

4. ADVERSE AUDIT OPINION

In my opinion, because of the effect on the group financial statements of the matters referred to in paragraph 3, the financial statements do not fairly present, in all material respects, the financial position of the South African Rail Commuter Corporation Limited (SARCC) Group at 31 March 2005 and the results of its operations and cash flows for the year then ended, in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner required by the Public Finance Management Act, 1999 (Act No. 1 of 1999) as amended.

5. EMPHASIS OF MATTER

Without further qualifying the audit opinion expressed above, attention is drawn to the following matters:

5.1 Non-compliance with legislation and regulations

The discounted lease agreements as disclosed in note 9 to the financial statements entered into, were in contravention of the Legal Succession to the South African Transport Services Act, 1989 (Act NO.9 of 1989), as amended.

Section 66(7) of the Public Finance Management Act, 1999 (Act No.1 of 1999), as amended, requires that the entity must submit a borrowing programme for the year. The South African Rail Commuter Corporation did have borrowings but did not submit a borrowing programme for the year under review.

5.2 Disclosure of remuneration

Treasury Regulation 28.1.1 states that the annual financial statements of a public entity must include a report by the accounting authority which must include the disclosure of remuneration in respect of the chief executive officer, the chief financial officer and persons serving on the public entity's senior management. The remuneration of the chief executive Officer, chief financial officer and senior management was not disclosed in the annual financial statements.

5.3 Investment policy

SARCC did not comply in all respects with its investment policy.

5.4 Content of corporate plan

Contrary to Treasury Regulation 29.1.1, the corporate plan of the Corporation did not address the following:

· Risk management plan

· Fraud prevention plan .

· Materiality and significance framework approved by the Minister of Transport

· Asset and liability management

· Cash flow projections

5.5 Weaknesses in the Computer Information Technology (IT) Environment: Computer Audit

The Information System Audit performed at the SARCC focused on determining the extent to which management adequately resolved control issues raised during the prior year review and further evaluating the current control environment.

A number of weaknesses still existed in the IT general control environment. The most significant control weaknesses identified, were the following:

i) Although procedures were initiated to develop a disaster recovery plan (DRP), no finalised DRP existed.

ii) Security control weaknesses were identified on the operating system.

iii) Several physical security control weaknesses were identified during the review of the application server rooms.

Weaknesses pertaining to disaster recovery planning and logical access controls raised concerns regarding the integrity of data.

5.6 Consolidation

Attention is drawn to the chairman's statement paragraph regarding the consolidation of passenger rail entities, namely SARCC, Metrorail and Shosholoza Meyl into one entity that will report to the Department of Transport.

6. APPRECIATION

The assistance rendered by the staff of the South African Rail Commuter Corporation Limited Group during the audit is sincerely appreciated.

I Vanker for Auditor-General Johannesburg

22 August 2005

AUDITOR-GENERAL