There was much fanfare in July last year when transport minister Fikile Mbalula, flanked by Road Accident Fund (RAF) CEO Collins Letsoalo and board chair Thembelihle Msibi, announced that the fund had turned the corner and posted a R3.2bn surplus for the first time in years.
However, this appears not to have been a fair reflection of the RAF’s financial health.
A court fight between the RAF and auditor-general Tsakani Maluleke has highlighted that the fund has liabilities amounting to more than R300bn on its books.
One RAF insider told the Sunday Times this week that the fund owes more than R14.8bn in claims settlements, that it settled but which it did not have money to pay for in 2020/2021.
In addition, it has outstanding claims of about R14.6bn over the same period that are still being assessed.
Last year, the RAF successfully approached the Pretoria high court to suspend hundreds of warrants of execution and attachments brought against it by unpaid victims.
The fight between the RAF and the auditor-general follows a decision by the fund, on advice from audit firm PriceWaterhouseCoopers (PwC), to use an accounting model that has not been approved by the Accounting Standards Board (ASB) — the regulatory body that develops and issues financial accounting standards.
This means the RAF’s R300bn liability is the second-highest financial exposure for SA’s fiscus after Eskom’s R480bn.
The RAF is a state-supported insurance fund that compensates victims of road accidents. It is funded through a special levy, currently R2.18/l, added into the fuel price.
Letsoalo and Msibi now face embarrassment as Maluleke in December issued the fund with a disclaimer audit opinion — her worst possible sanction — for the 2020/2021 financial year.
A dispute over this led to the RAF launching an urgent application before the Pretoria high court in January to interdict Maluleke from making the disclaimer opinion public pending a review application.
In court, the RAF argued that if she made her opinion public, it would reflect badly on the fund’s officials and prejudice attempts to secure loans.
The RAF said in court papers it changed its accounting policy early last year because it was inaccurately classified as a commercial insurer whereas it is a social insurer. It argues that it provides public insurance against risks such as loss of income due to car accidents.
Armed with PwC’s opinion, and by a stroke of a pen, the RAF has managed to remove liability of more than R300bn from its books
— Auditor-general Tsakani Maluleke
The RAF said it decided not to apply an accounting standard that forced it to acknowledge liability to pay compensation for a claim as soon as a motor vehicle accident occurs.
Msibi said the fund, on PwC’s advice, decided to use an accounting standard befitting a social insurer. This resulted in the RAF no longer being required to account for current and prospective claims but only confirmed and approved claims — which set it on a collision course with Maluleke’s office.
The RAF also appears to have contravened an ASB directive issued in September that the fund cannot use the social benefit standard, called IPSAS 42.
The auditor-general said in court papers: “In essence the RAF effectively wants this court to sanction the opinion of PwC (a private firm) and suppress the audit report of a chapter 9 institution. The RAF is emboldened in its stance because it has relied on the opinion of PwC in changing its accounting policy. Thus armed with PwC’s opinion, and by a stroke of a pen, the RAF has managed to remove liability of more than R300bn from its books.
“The review court must determine whether it was lawful for it to do so.”
Maluleke attached to her papers the ASB directive sent to CFOs at various state entities, including the RAF, prohibiting the use of the IPSAS 42 accounting standard.
The directive states: “The board did not support aspects of both the insurance and general approach in IPSAS 42 … [which] may not result in the fair presentation of scheme liabilities.”
Maluleke said the RAF’s new accounting methodology did not accurately present its financial affairs and the organisation was understating its liabilities by about R300bn when compared to the previous year.
In her affidavit, she dismissed the RAF’s contention that the publication of a disclaimer audit opinion would prevent it from obtaining loans, saying as a responsible borrower it would have to “disclose to any financier that there is a dispute in relation to the disclaimer of audit opinion, as well as what the dispute is about”.
Judgment has been reserved in the case.
Chartered accountant, academic and activist Khaya Sithole said though the RAF was correct in regarding itself as a social benefit organisation, not an ordinary insurer, it was not entitled to operate outside ASB rules.
“It doesn’t matter what Collins [Letsoalo] and I think … Until the ASB says you can use IPSAS 42, it is not available to us — end of story,” he said, adding: “Whatever accounting standards the RAF chooses, it can’t wish away its historical liabilities.
“Under normal accounting rules, an entity like the RAF reports on annual performance — which determines the surplus or deficit for the year — and on cumulative performance which is reflected on its balance sheet.
"For its annual performance, the RAF essentially compares its income — which is primarily the fuel levy — against its expenses, which relate to claims associated with road accidents.
“The historical problem for the RAF is that its annual performance always results in a deficit position as its claims and employee costs are always higher than the income it collects from the fuel levy. Additionally, its inability to honour claims timeously means such claims remain as liabilities on its balance sheet.”
PwC did not respond to requests for comment.
RAF spokesperson William Maphutha said he could not comment because of the outstanding court order.
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