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[2020] ZAWCHC 50
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Member of the Executive Council for Economic Opportunities, Western Cape v Auditor General of South Africa and Another (19259/2018) [2020] ZAWCHC 50; [2020] 3 All SA 524 (WCC); 2021 (1) SA 455 (WCC) (8 June 2020)
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Case No.: 19259/2018
In
the matter between:
MEMBER
OF THE EXECUTIVE COUNCIL FOR ECONOMIC
OPPORTUNITIES,
WESTERN CAPE
Applicant
and
AUDITOR-GENERAL OF SOUTH AFRICA
First
respondent
NATIONAL
TREASURY
Second
respondent
JUDGMENT DELIVERED ON 8 JUNE 2020
Vos, AJ
Introduction
[1]
In this application the applicant applies for the
following relief:
“
1.
The following findings of the first respondent
in his audit report on the financial statements of the Western Cape
Department of
Agriculture (the Department) for the year ending 31
March 2017 are reviewed and set aside:
1.1.
The
qualification of his opinion that the financial statements present
fairly, in all material respects, the financial position
of the
Department as at 31 March 2017 and its financial performance and
cashflows for the year then ended;
1.2.
The
finding that the Department did not account for payments made to
implementing agents in accordance with the requirements of
the
Modified Cash Standard;
1.3.
The
finding that the Department incorrectly budgeted and accounted for
these payments as transfers and subsidies instead of either
expenditure for capital assets or goods and services, and the
findings consequential upon that finding;
1.4.
The
finding that the Department irregularly entered into contracts with
implementing agents without applying Treasury Regulations.
2. The following
findings of the first respondent in his audit report on the financial
statements
of the Western Cape Department of Agriculture for the year
ended 31 March 2018 are reviewed and set aside:
2.1 The qualification of his
opinion that the financial statements present fairly, in all material
respects, the
financial position of the Department as at 31 March
2018 and its financial performance and cashflows for the year then
ended;
2.2 The finding that the Department
did not account for payments made to “implementing agents”
in
accordance with the requirements of the Modified Cash Standard;
2.3 The finding that the Department
incorrectly budgeted and accounted for these payments as transfers
and subsidies
instead of either expenditure for capital assets or
goods and services, and the findings consequential upon that finding;
2.4 The finding that
principal-agent relationships were not disclosed;
2.5 The finding that the Department
irregularly entered into contracts with implementing agents without
applying
Treasury Regulations.
”
Background
[2]
The
Western Cape Department of Agriculture (“the Department”)
is responsible for a wide range of development, research,
support
functions and services to the agricultural community in the Western
Cape.
[3]
In
the performance of its functions, the Department has made certain
payments to:
[3.1]
Casidra
SOC Limited (“Casidra”), a provincial government business
enterprise which is wholly owned by the Western Cape
Government; and
[3.2]
The
Deciduous Fruit Producers Trust (“Hortgro”), an entity
established by the deciduous fruit industry.
[4]
The
funds that were transferred to Casidra, were intended for and were
used by Casidra for the purpose of farmer settlement, drought
relief,
flood relief, LandCare Projects and Extended Public Works Projects.
The funds that were transferred to Hortgro, were intended
for and
were used by Hortgro for the purpose of farmer settlement.
[5]
Various
agricultural commodity groups requested Casidra to provide them with
support services. The deciduous fruit and citrus industry
established
its own business enterprise in the form of Hortgro. Casidra and
Hortgro do not levy a fee for their services. The Department
provides
funding to both, because their activities promote the growth and
development of agriculture in the Western Cape.
[6]
The
Department provides the funding to Hortgro and Casidra, much in the
same way that the government supports other entities which
have
mandates that overlap with, and support the government’s
service delivery goals, and which use government grants to
carry out
their operations and functions.
[7]
The
key question in this application is whether these payments constitute
subsidies, or whether they are payments for fees, or reward
for
services, or payments for goods and services, or capital expenditure.
[8]
In
its 2016/2017 annual financial statements, the Department classified
these payments as “
subsidies
and transfers
”
.
It had classified and accounted for such expenditure in this manner
since the 2007/2008 financial year. The Auditor General (“the
AGSA”)
[1]
had
previously not raised any objection to the preparation of the
Department’s accounts on this basis, and had repeatedly
given
the Department’s financial statements an unqualified audit.
[9]
In
respect of the 2016/2017 financial year, the AGSA qualified his audit
on the grounds that the Department had not accounted for
payments
made to Casidra and Hortgro in accordance with the requirements of a
reporting standard known as the Modified Cash Standard.
He found that
the relationship between the Department and Casidra and Hortgro was a
relationship of principal and agent, and that
on this basis, the
payments should have been classified as goods and services, or
capital expenditure.
[10]
The
Department disputed the correctness of these findings. Extensive
engagement took place between the Department, the AGSA and
the
National Treasury.
[11]
When
those engagements had been concluded, the AGSA stood by his previous
findings. By this time, the 2017/2018 financial year had
also been
concluded. The AGSA made the same findings in respect of the
Department’s 2017/2018 financial statements as he
had done in
respect of the 2016/2017 financial statements.
[12]
The
applicant, being the political head of the Department, seeks to have
these findings set aside on review. He contends that the
findings of
the AGSA rest on fundamental misdirections on his part. The complaint
is that the Department has suffered severe reputational
damage as a
result of the incorrect qualified audit reports.
[13]
The
applicant accepts that the Department is legally obliged to present
its financial statements on a “
modified
cash basis
”
,
but contends that the detailed processes set out in the Modified Cash
Standard are not legally binding on the Department. But
in any event,
the applicant’s case is that the Department’s allocation
of the expenditure as “
transfer
payments
”
is
in any event in accordance with the Modified Cash Standard. The
Modified Cash Standard was issued by the Office of the Accountant
General in the National Treasury.
[14]
The
applicant further contends that it is fundamentally unfair for the
AGSA to change his attitude, with retrospective effect, in
respect of
a year in which the Department has continued to account in the manner
previously accepted by the AGSA, and then to issue
a qualified audit.
The legal nature of the AGSA’S
decisions
[15]
In
the founding affidavit, the applicant alleges:
“
I
am advised that the AG’s making of audit findings, and
qualifying the accounts of the Department, constitutes administrative
action. In so acting, the AG exercises his powers in terms of
the Constitution and New Economic Reporting Format and forms
a public
function in terms of legislation, including the Public Audit Act 25
of 2005, and the PFMA. His decision adversely
affects the
rights of the Department, and has a direct, external legal effect
.
……
If the findings of the
Auditor-General are administrative action, as I am advised and submit
is the case, a review is subject to
the provisions of the Promotion
of Administrative Justice Act 3 of 2000 (PAJA). In the alternative,
even if this was not administrative
action, it is the exercise of
public power and must comply with the requirements of the principle
of legality.
This review
is therefore brought in terms of both PAJA and the principle of
legality under section 1(c) of the Constitution.
”
[2]
[16]
The
Supreme Court of Appeal has considered whether the decisions of the
Public Protector, another Chapter 9 institution, constitute
administrative action.
[3]
Most
parts of the definition of “
administrative
action
”
were
found to apply to decisions of the Public Protector. The only
question in issue was whether they are decisions of an administrative
nature. The Supreme Court of Appeal held that they are not, for the
following reasons:
“
[37]
First, the office of the Public Protector is
a unique institution designed to strengthen constitutional
democracy.
It does not fit into the institutions of public administration but
stands apart from them. Secondly, it is a purpose-built
watchdog that
is independent and answerable not to the executive branch of
government but to the National Assembly. Thirdly, although
the
State
Liability Act 20 of 1957
applies to the office of the Public
Protector to enable it to sue and be sued, it is not a department of
state and is functionally
separate from the state administration: it
is only an organ of state because it exercises constitutional powers
and other statutory
powers of a public nature. Fourthly, its function
is not to administer but to investigate, report on and remedy
maladministration.
Fifthly, the Public Protector is given broad
discretionary powers as to what complaints to accept, what
allegations of maladministration
to investigate, how to investigate
them and what remedial action to order — as close as one can
get to a free hand to fulfil
the mandate of the Constitution. These
factors point away from decisions of the Public Protector being of an
administrative nature,
and hence constituting administrative action.
That being so, PAJA does not apply to the review of exercises of
power by the Public
Protector in terms of s 182 of the Constitution
and s 6 of the Public Protector Act. That means that the principle of
legality
applies to the review of the decisions in issue in this
case.
”
[17]
I
think that the AGSA differs from the Public Protector, because the
AGSA fits squarely into the institutions of public administration.
The AGSA’s function is indeed to administer, by auditing the
accounts and financial statements of the relevant organs of
state.
The AGSA does not have broad discretionary powers as to what work he
undertakes. He is obliged to audit and report on the
accounts,
financial statements and financial management of the departments and
entities listed in section 108(1) of the Constitution.
[18]
In
my view the decisions of the AGSA are administrative action, and
therefore subject to the Promotion of Administrative Justice
Act
[4]
(“PAJA”).
If I am incorrect in this regard, then as in the Public Protector’s
case,
“
the
principle of legality applies to the review of the decisions in issue
in this case
”
.
[5]
[19]
In
either event, the grounds of review on which the applicant relies are
applicable. As the Supreme Court of Appeal held in the
Public
Protector’s case:
[6]
“
At
present, in respect of the principle of legality, not every ground of
review has been defined by the courts with the precision
one finds in
PAJA. That said, however, broad grounds going to the lawfulness,
procedural fairness and reasonableness of official
decisions have
been recognised …. The only difference in the grounds of
review that I can discern at present is that
those exercising
executive power have been exempted from having to act fairly …,
and disproportionality (as an aspect of
unreasonableness) has not yet
been recognised as a ground of review, except in a minority judgment
in the Constitutional Court….
”
[20]
The
AGSA contends that in this review “
(t)he
inquiry is confined to an evaluation of the reasonableness or
rationality of the Auditor-General’s finding in the light
of
the information it audited.
”
[7]
[21]
I
do not think that the enquiry is limited, as the AGSA suggests. The
AGSA’s decision must also comply with the following
requirements in order for it to be lawful and valid – if not,
it is liable to be set aside on review:
[21.1]
He
must have acted in a procedurally fair manner;
[21.2]
He
must have complied with the principle of legality;
[21.3]
He
must not have made a material mistake of law;
[21.4]
He
must not have misconstrued the facts, and must have acted on the
basis of the true facts;
[8]
[21.5]
He
must not have considered irrelevant considerations, or ignored
relevant considerations.
Procedural
unfairness
and
retrospectivity?
[22]
Section
3(1) of PAJA states that administrative action must be procedurally
fair. That obligation is not limited to the
audi
principle,
which the act spells out in some detail. The same must apply to the
procedural fairness which is inherent in legality.
[23]
I
turn to consider the sequence of events. From the 2007/2008 financial
year, the Department dealt with the payments as “
transfers
and subsidies
”
.
No
objection was raised by the AGSA. The Modified Cash Standard
was
issued on 1 April 2013, and updated in December 2016.
[9]
The
Department continued to deal with the payments in the manner in which
it had always done. No objection was raised by the AGSA,
and clean
audits were given. In the 2015/2016 financial year (ending on 31
March 2016), the Department again dealt with the payments
in this
manner. Again, no objection was raised. The Department not only
received a clean audit from the AGSA, the AGSA also gave
it an award
in this regard.
[24]
In
the 2016/2017 year, the Department dealt with the payments in the
same manner. Discussions about the question of the appropriate
classification of the payments took place while the 2017/2018
financial year was in progress. Meanwhile, the Department
continued with its existing practice.
[25]
At
a meeting on 2 May 2017, the representatives of the AGSA said that
they did not yet have a final outcome on the matter, but it
seemed
that the Department was not treating the payments correctly. Mr
Huysamer of the Department says that it was by then too
late to deal
with this matter in the 2016/2017 financial statements.
[10]
[26]
At
a meeting of the Western Cape Economic Cluster Audit Committee on
26 July 2017, the following occurred:
[11]
[26.1]
The
AGSA indicated that
“
the
new standard set by the MSC”
requires
the Department to classify the transfer payments made to Casidra as
goods and services;
[26.2]
Mr
Hardien of the Provincial Accountant General (“PAG”)
stated that whichever way the consultation on the classification
of
transfer payments went, the Department would still receive a clean
audit – even if the Department was required to make
adjustments, it would be deemed a
“
first
time technical issue”
.
[26.3]
In
response to a question from the Audit Committee, the Department
stated that it would no longer be possible to adjust the number
of
accounts which were affected.
[26.4]
The
PAG stated that there were inconsistencies within the accounting
standards. The matter would be addressed at the National PAG
Forum.
Part of the resolution was based on the uncertainty specified by the
Accountant General. A collective decision was made
to retain the
status quo until the audit is finalised. Therefore, until the
standard has been clarified, the audit opinion will
be an unqualified
audit opinion. The PAG Forum would submit the matter to the National
Accountant General as well as have a face
to face discussion with the
National AGSA. The PAG indicated that the matter required
clarity.
[26.5]
The
Audit Committee congratulated the Department on a good set of annual
financial statements, aside from the technical issues.
[27]
National
Treasury was consulted on the matter. It issued a Position Paper,
prepared by the Office of the Accountant-General on 20
April 2018
(after the end of the 2017/2018 financial year).
[12]
[28]
The
AGSA issued his Final 2016/2017 Management Report on 18 May
2018.
[13]
That
report contained a section dealing with “
emerging
risks
”
.
It stated:
“
The
National Treasury is currently drafting an Accounting Manual to,
amongst others, distinguish between ‘Goods and services’
and ‘Transfer payments’. This
can
potentially
affect the
future
classification of these transactions.
”
(emphasis added)
[29]
By
the time this
“
forewarning”
(the
AGSA’s description of it)
[14]
was
given:
[29.1]
The
2016/2017 financial year was over, and it was no longer possible to
amend the recording and accounting of those transactions;
[29.2]
The
2017/2018 financial year was also over, and the Department’s
financial statements for that year had already been submitted.
[15]
[30]
I
think that the aforegoing demonstrates the procedural unfairness of
the conduct of the AGSA. He had for years accepted the method
used in
the Department’s annual financial statements. He then engaged
in extensive discussion and numerous meetings with
the Department and
other role-players about how to resolve what was a difficult
technical question in the mind of the AGSA.
[31]
In
the presence of the AGSA, assurances were given about how the matter
would be dealt with in the interim. A collective decision
was made to
retain the status quo until the audit was finalised, and until the
standard had been clarified, the audit opinion will
be an unqualified
audit opinion
.
The
advice of National Treasury was sought, and was obtained on 20 April
2018.
[32]
On
18 May 2018, the AGSA stated that the forthcoming Accounting Manual
would deal with this issue, and that this
“
can
potentially affect the future classification of these transactions”.
The
AGSA then issued the impugned audit findings in respect of the two
years which had passed while this process was taking place.
[33]
The
applicant argues that the AGSA took a decision with retrospective
effect, and on this ground alone, the qualified audit opinion
must be
set aside. The applicant claims that a decision with retrospective
effect is irrational and illegal. These submissions
should be
considered against the backdrop of relevant legal principles.
[34]
The starting
point is section 1 of the Constitution. It provides in
section 1(c), that the Republic of South Africa is
a sovereign,
democratic state founded on values which include
“
the
rule of law
”.
[35]
In
Pharmaceutical
Manufacturers Association of South Africa and Another: In re Ex Parte
President of the Republic of South Africa
and Others
[16]
Chaskalson P cited with
approval De Smith, Woolf and Jowell, as follows at para [39]:
“
[39]
The rule of law embraces some internal qualities of all public law:
that it should be certain, that it is
ascertainable in advance so as
to be predictable and not retrospective in its operation …”
.
[17]
[36]
This does not apply
only to statutes. In
Minister
of Safety and Security v Van der Merwe
,
[18]
Mogoeng J (as he then was)
held as follows on behalf of the Constitutional Court:
“
Some
of the essential attributes of the rule of law are comprehensibility,
accountability and
predictability
in the exercise of
all power
,
including the power to issue warrants”
.
[emphasis added]
[37]
The Constitutional
Court has also applied this principle to changes of policy.
Thus, in
Van
Vuren v Minister for Correctional Services,
[19]
the Court held:
“
In
the context of correctional law, deprivation [of liberty] may occur
in the retroactive application of a change in parole policy,
as is
the case in the instant matter. Deprivation of a person’s
liberty in that manner does not conform to the principles
of the rule
of law. The construction contended for by the respondents
effectively renders the new mandatory non-parole period
of 20 years
retrospective in operation. This would offend the foundational values
of constitutional supremacy and the rule of law,
which this Court
should not countenance”
.
[38]
Of course, this case
does not involve the deprivation of liberty. But as the
Constitutional Court has explicitly stated, this requirement
of
predictability, as an element of the rule of law, applies to the
exercise of all power. The rule of law requires that the exercise
of
public power must be predictable and not retrospective in its
operation. It applies to the exercise of all public power.
[39]
Where public power
is exercised in a manner inconsistent with these principles, the
exercise of the power is in breach of the rule
of law, inconsistent
with the Constitution, and therefore unlawful. It therefore falls to
be set aside by a court.
[40]
In
KwaZulu-Natal
Joint Liaison Committee v MEC for Education, KwaZulu-Natal and
Others
,
[20]
the question was whether a
previous promise which the State had made, bound current State
successors. The Constitutional Court held
that State conduct is
“
legally
and constitutionally unconscionable
”
and invalid when it is in breach of the constitutional principles of
reliance, accountability and rationality.
[21]
[41]
The Court explained
this principle in the context of the facts of that case:
“
[63] The
reasons lie in reliance, accountability and rationality. First,
reliance. The schools budgeted for the whole
year in reliance on
the 2008 notice. The reduction in subsidy announced in
the letter of May 2009 would severely disappoint
them. But they could
adjust their future outlays. They could not do so in regard to the
tranche that had already fallen due. Their
entitlement should
therefore be taken to have crystallised.
…
.
[65] Last,
rationality. Government officials must, in dealing with those who act
in reliance on their undertakings,
act rationally. A budget cut
announced in relation to payments promised but not yet made would be
regrettable. But it may be rational.
Behaviour and expectations can
be tailored to it. But it is impossible to tailor behaviour and
expectations to a promise made in
relation to a period that has
already passed. Revoking a promise when the time for its fulfilment
has already expired does not
constitute rational treatment of those
affected by it.”
[42]
The Constitutional
Court followed the same approach in
Pretorius
and Another v Transvaal Pension Fund and Others
.
[22]
[43]
The constitutional
principles of reliance and rationality do not permit government to
create a situation in which the subject (including
another organ of
state) reasonably expects that government will deal with a matter in
a particular way, and acts on that expectation
– and then
changes its position at a time when it is too late for the subject to
tailor its conduct accordingly. This is
what occurred in this matter.
The AGSA took a decision which operated retrospectively. That is
wrong. The audit findings cannot
stand.
[44]
For the above
reasons, I am of the view that the conduct of the AGSA was
inconsistent with the Constitution and invalid.
[45]
The consequence of
this is prescribed by section 172(1)(a) of the Constitution:
“
When deciding a
constitutional matter within its power, a court –
must declare that any law or
conduct that is inconsistent with the Constitution is invalid to the
extent of its inconsistency.”
[46]
The normal
consequence, when a decision is declared invalid, is that the
decision is set aside. The court has the power under section
172(1)(b) of the Constitution, to deviate from that default position
where justice and equity require that the retrospective effect
of the
declaration of invalidity be limited, or that the declaration of
invalidity be suspended. There is no basis in this case
for deviating
from the normal consequence of a declaration of invalidity.
The
statutory regulatory framework
[47]
I
proceed to consider the statutory framework within which the AGSA
conducted the audits and expressed the qualified opinions.
[48]
Section
216(1) of the Constitution provides that:
“
National
legislation must establish a national treasury and prescribe measures
to ensure both transparency and expenditure control
in each sphere of
government, by introducing –
(a)
generally
recognised accounting practice;
(b)
uniform
expenditure classifications; and
(c)
uniform
treasury norms and standards.
”
[49]
That
national legislation is the Public Finance Management Act
[23]
(“PFMA”).
[50]
Chapter
11 of the PFMA provides for the establishment of the Accounting
Standards Board (“the ASB”). Section 89(1)(a)
provides
that the ASB must “
set
standards of generally recognised accounting practice as required by
section 216(1)(a) of the Constitution”
for
the financial statements of departments. Section 89(1)(b) provides
that the ASB must prepare and publish directives and guidelines
concerning those standards. Section 89(4) provides that the standards
must promote transparency in and effective management of
revenue,
expenditure, assets and liabilities of the institutions to which they
apply.
[51]
Section
91(1)(b) provides that the Minister may, after consulting with the
AGSA, make regulations prescribing the standards set
by the ASB in
terms of section 89.
[52]
The
ASB has not set standards of generally recognised accounting practice
which contain a definition of
“
goods
and services
”
or “
transfer
payments
”
which departments are required to apply in their annual financial
statements.
[53]
Section
76 of the PFMA requires the National Treasury to make regulations or
issue instructions applicable to departments concerning
specific
matters.
[54]
The
word “
prescribed
”
in the
PFMA, means prescribed by regulation or instruction in terms of
section 76.
[24]
[55]
The
power of National Treasury to issue regulations and instructions does
not include the powers conferred upon the ASB to set standards
of
generally recognised accounting practice for the annual financial
statements of departments, and upon the Minister to prescribe
those
standards by regulation.
Is the Modified Cash Standard legally binding?
[56]
Section
5(2) of the PFMA provides that
“
the
Minister (
of
Finance
),
as the head of the National Treasury, takes the policy and other
decisions of the Treasury, except those decisions taken as a
result
of a delegation or instruction in terms of section 10
”.
[57]
Section
6(2)(a) provides that the National Treasury must prescribe
“
uniform
treasury norms and standards
”.
To “
prescribe
”
means, in terms of section 1, to prescribe by means of a regulation
or instruction in terms of section 76.
[25]
Section 76(2) authorises National Treasury to make regulations or
issue instructions concerning certain matters. One of those matters,
in terms of section 76(2)(a), is “
any
matter that may be prescribed for departments in terms of the Act”
.
Section 76(2)(g) provides that another of those matters is “
the
treatment of any specific expenditure
”.
[58]
There
are two Treasury regulations which are relevant:
[58.1]
Treasury
regulation 6.7.1 (b) states that “
Transfer
referred to in the Act
(the
PFMA)
is
the same as transfers in the new Economic Reporting Format for
entities of government …
”
.
[58.2]
Treasury
regulation 18.2 provides as follows:
“
In
the absence of any implementation dates for the standards of
generally recognised accounting practice issued by the Accounting
Standards Board, the following reporting standards comprise generally
accepted accounting practice and must be adhered to for the
preparation of annual financial statements, unless otherwise approved
by the National Treasury ….
Departments:
…..The statements must be prepared on a modified cash basis in
accordance with the formats prescribed by the
National Treasury and
must be accompanied by the audit opinion of the Auditor-General.
”
[59]
I
deal later with regulation 6.7.1 (b). I first address
regulation 18.2.
[60]
Regulation
18.2 places three binding obligations on the Department:
[60.1]
To
prepare its statements on a modified cash basis; and
[60.2]
To
do so in accordance with the formats prescribed by National Treasury;
and
[60.3]
To
accompany its statements with the audit opinion of the AGSA. (It is
that audit opinion which is in issue in the present matter.)
The
first obligation: statements to be prepared on a modified cash
basis
[61]
The
financial statements of the Department are presented on a modified
cash basis. Mr Segooa, who deposed to the answering affidavit
on
behalf of the AGSA, does not assert otherwise, and the AGSA has never
suggested otherwise. The Department accepts that it is
legally bound
to prepare its statements on a modified cash basis.
[26]
[62]
The
Department explains, in the light of the reliance in the answering
affidavit on this requirement, that there are three relevant
methods
of presenting financial statements. They are the “
accrual
basis
”
,
the “
cash
basis
”
,
and the “
modified
cash basis
”
.
[27]
[63]
Accrual,
is the most generally applied basis of accounting. Local government,
public entities and the private sector apply the accrual
basis of
accounting. In accrual accounting, a transaction is recorded when it
takes place. This normally happens before the
actual cash flow
takes place.
[64]
In
the cash basis of accounting, the transaction is accounted / recorded
when the cash actually flows into, or from the entity’s
bank
account. The result of using this system is that the annual financial
statements of a department will only reflect the use
of the budget
received for a particular year. In practice this means that a
department “starts” its business on 1 April
of every year
and “closes” its business on 31 March, the end of the
financial year. On 31 March, funds remaining from
the funds allocated
for the past year are “given back” to Treasury. On 1
April, a department receives the new appropriated
amount which is
allocated for the coming year. If a department still has a need
for the funds it had to return to the revenue
fund, it must follow
the adjusted estimate (“roll-over”) process prescribed by
Treasury. If the request for a “roll-over”
is approved by
Treasury, these funds usually become available from November
following the year that ended on 31 March. The
result is that
these funds will become available more than six months after the need
was expressed. In very exceptional circumstances
this can be
expedited, on condition a department can fit this into its cash flow
until the funds become available through the “roll-over”
process.
[65]
In
the modified cash system, only certain elements are recognised in the
statement of financial position (balance sheet) and statement
of
financial performance, while others are recorded for presentation as
notes. Transactions are primarily recognised when they
arise from
cash inflows and outflows. Because the cash basis does not recognise
transactions when they occur (as opposed to when
cash or its
equivalent is received or paid), and so as to ensure transparency and
a more complete view of financial performance
and position, the
“modified” cash system requires detailed disclosure of
accrual-basis financial information. This
is required even if items
do not qualify for recognition under the cash system.
[66]
Because
of the practical difficulties in the use of the accrual or cash basis
of accounting, National Treasury has prescribed (in
Regulation 18.2)
that departments must use the modified cash basis. That is what the
Department does. The AGSA has not contended
that the Department
does not prepare its accounts on a modified cash basis, or that it
uses a different basis.
[67]
The
Modified Cash Standard is a guide to the preparation of accounts on a
modified cash basis. For example, it defines the meaning
of
“
transfers
and subsidies
”
.
That meaning does not derive from the use of a modified cash system
of accounting. The same issue would arise under “accrua
l
”
or
“cash” accounting. The Modified Cash Standard has
not been “
prescribed
”
,
because it is not contained in a Regulation or a Treasury
Instruction. It is therefore not legally binding on the Department.
What has been “
prescribed
”
,
is the modified cash basis of accounting. The use of that
method of accounting is therefore legally binding.
[68]
The
AGSA conflates these two concepts (“modified cash basis”
and “Modified Cash Standard”), asserting that
regulation
18.2 prescribes the Modified Cash Standard. Regulation 18.2 does not
do that. What it prescribes is that accounts must
be prepared on a
modified cash basis. That is what the Department has done.
[69]
The
AGSA’s fundamental error of law in this regard is demonstrated
by the following:
[69.1]
He
asserts that the Modified Cash Standard is legally binding.
[28]
This is not correct.
[69.2]
He
asserts that Treasury Regulation 18.2 “
provides
that the Modified Cash Basis is the reporting standard that must be
adhered to for the preparation of annual financial
statements
”
,
in the absence of Generally Recognised Accounting Practice (“GRAP”)
standards issued by the ASB.
[29]
This is incorrect.
[69.3]
He
asserts that Regulation 18.2 “
provides
that the Standard (
the
Modified Cash Standard)
comprises
generally recognised accounting practice
”
.
[30]
This is incorrect.
[69.4]
He
asserts that the Modified Cash Standard “
sets
out the principles for the recognition, recording, measurement,
preparation and disclosure of information as contemplated in
Treasury
Regulation 18.2
.”
[31]
This is incorrect.
[69.5]
He
states that the Modified Cash Standard restates what is already
stated in Regulation 18.2, i.e. that the Modified Cash Standard
“
comprises
generally recognised accounting practice
”
.
[32]
This is incorrect.
[69.6]
He
asserts that Regulation 18 stipulates that the Modified Cash Standard
“
is
the reporting standard that is applicable to departments
”
until an
implementation date is set by the ASB.
[33]
This is incorrect.
Second
requirement: In accordance with formats prescribed by National
Treasury
[70]
It
should be borne in mind that “
prescribed
”
,
means by way of a section 76 regulation or instruction.
[71]
The
Modified Cash Standard is not a “format”. It has
also not been made by way of a section 76 regulation or instruction
issued by National Treasury. It is a document prepared by the
Accountant General. It could therefore not be a “
format
prescribed by National Treasury
”
.
[72]
National
Treasury does send Provincial Departments a
“
format”
for the preparation of their accounts. However, that format does not
prescribe what payments or receipts fall into
each of the categories
set out in the format.
[73]
The
AGSA does not contend that the Department’s statements are not
in accordance with those formats.
The Department’s practice
[74]
The
Department contends that it has at all material times applied the
Modified Cash Standard, as properly interpreted. It maintains
that
position. It contends however, that if it is found to have been
incorrect in this regard, that does not provide a basis for
the
impugned findings, as the Modified Cash Standard is not legally
binding.
[34]
In my view, the Modified Cash Standard is not converted into a
legally binding prescript simply by virtue of the fact that the
Department has previously complied with it, and contends that it has
continued to comply with it.
[35]
[75]
I
conclude by finding that the Modified Cash Standard is not legally
binding on the Department.
The New Economic Reporting Format
[76]
The
New Economic Reporting Format was published by National Treasury in
September 2009.
[36]
It is a reference guide for Departments.
[77]
The
New Economic Reporting Format has not been made by regulation or
instruction in terms of section 76. Mr Segooa does not
suggest
that it has been. He however asserts that the New Economic
Reporting Format was issued “
in
compliance with section 6(2)(b) of the PFMA
”
.
[37]
[78]
That
cannot be the case:
[78.1]
Section
6(2(b) of the PFMA provides that National Treasury must “
enforce
this Act and any prescribed norms and standards, including any
prescribed standards of generally recognised accounting practice
and
uniform classification systems, in national departments
”
;
[78.2]
The
Modified Cash Standard is not a “
prescribed
standard of generally recognised accounting practice and uniform
classification system
”
:
it is not issued in terms of a section 76 regulation or instruction.
Section 6(2)(b) therefore does not create a duty (or, for
that
matter, a power) to enforce the Modified Cash Standard.
[78.3]
In
any event, the duties of National Treasury in terms of section
6(2)(b) apply only in respect of national departments. The Department
is not a national department.
[79]
Section
6(2)(b) is therefore not applicable.
[80]
However,
Treasury regulation 6.7.1 (b) states that
“
Transfer
referred to in the Act (
the
PFMA
)
is the same as transfer in the New Economic Reporting Format for
entities of government …
”.
[81]
The
meaning of this is not entirely clear. To the extent that it
prescribes what transactions are to be dealt with in departmental
financial statements as “transfers”, it strongly supports
the Department’s approach.
[82]
This
is illustrated by the partial manner in which Mr Segooa deals with
the New Economic Reporting Format.
[83]
Mr
Segooa attaches selected pages of the New Economic Reporting Format
to his answering affidavit, and then sets out how “
requited
”
payments
are to be dealt with.
[38]
However, he omits to say how the term “
unrequited
”
(and
therefore “
requited
”
)
is defined in the New Economic Reporting Format; and he does not
address the question of what, according to the New Economic Reporting
Format, constitutes a transfer or subsidy.
[84]
The
New Economic Reporting Format says the following with regard to these
concepts:
[39]
“
Transfers
and subsidies include
all
unrequited
payments made by the government unit. A payment is unrequited
provided that the government unit does
not
receive
anything of similar value directly in return for the transfer to the
other party
”
.
(First emphasis added, second
emphasis in original)
[85]
In
my view, the Department did not receive anything of similar value (or
anything at all) directly in return for the payments to
Casidra and
Hortgro. That money was used to provide benefits to the
beneficiaries. It follows that in terms of the New Economic
Reporting
Format, the payments to Casidra and Hortgro were unrequited payments.
They were therefore transfer payments in terms
of the New Economic
Reporting Format. The payments were not for goods and services, as
the AGSA asserts.
Accounting Manual for Departments: Expenditure
[86]
In
October 2017, the National Treasury re-issued an updated document
entitled “
Accounting
Manual for Departments: Expenditure
”
(“the
Accounting Manual”). The Accounting Manual has since been
further updated, but that is not relevant to the present
application.
The Accounting Manual notes under the heading “
Overview
”
that the purpose of the chapter is to provide an explanation of the
different types of expenditure incurred by departments,
along with
the accounting entries required to capture expenditure transactions
in the Basic Accounting System. It records that
the office of the
Accountant General has compiled a Modified Cash Standard and that the
Accounting Manual serves as an application
guide to the Modified Cash
Standard.
[40]
[87]
The
Accounting Manual, like the Modified Cash Standard, is not a legally
binding prescript. It is a helpful guide and constitutes
advice
provided by the National Treasury.
[88]
On
Mr Segooa’s own version, the Accounting Manuel serves as “
an
application guide
”
to the
Modified Cash Standard.
[41]
He does not provide any basis for a suggestion that it is a
legally binding prescript.
Is the relationship between the Department and
Casidra and Hortgro one of principal and agent
?
[89]
The
AGSA contends that the Department has acted as a principal, while
Casidra and Hortgro have represented it as its agents. Therefore,
the
funding should have been described in the Department’s
financial statements as “
goods
and services
”
.
[90]
The
Department applies three main sources of funds for the relevant
beneficiaries. They are:
[42]
[90.1]
Transfer
funds made available by the National Department of Agriculture,
Forestry and Fisheries (“DAFF”) through various
programmes: the Comprehensive Agricultural Support Programme
(“CASP”), the Ilima Letsema Programme for Food Production
and Security and the LandCare Programme;
[90.2]
Transfer
funds made available through the national Department of Public Works
Extended Works Programme (“EPWP”); and
[90.3]
Funds
from the provincial government’s “
equitable
share
”
of
national revenue in terms of section 214
[43]
of the Constitution.
[91]
The Department has
provided funding to Casidra for the purpose of settlement of black
farmers’ food gardens, and related matters,
in the two years in
question.
[92]
In
2016/17 the Department transferred to Casidra CASP funding in the
amount of R39 million, and Ilima Letsema funding in the amount
of
R39.480
million, for 73 projects to assist the settlement of black farmers.
In 2017/18 the amounts were R41.884 million (from CASP), R45.424
million (from Ilima Letsema), and R5.513 million (equitable share)
for 82 projects.
[93]
In 2016/17 the
Department provided Casidra with funding for community food gardens
(93) and household gardens (1 092) in the
amount of
R11.083
million, at a maximum of R150 000 per garden. In 2017/18 the total
amount was R9.925 million (CASP) and R2 million (equitable share)
for
a total of 1
117 gardens.
[94]
In 2016/17 the
Department also provided Casidra with R3.851 million (CASP) and
R500 000 (equitable share) to assist 21 new
export farmers to
obtain market access. In 2017/18 the total amount was R4 million
(CASP) and R500 000 (equitable share) for 21
export farmers.
[95]
Further, in 2016/17 the
Department granted and transferred R9.672 million to Casidra, which
enabled it to undertake 5 663 training
days for farmers. In
2017/18 the amount granted was R9.385 million.
[96]
Further, in 2016/17 the
Department granted and transferred R5.611 million to Casidra for its
Unit of Technical Assistance, which
needed to obtain external
professional input in order for Casidra to carry out its activities.
In 2017/18 the amount granted for
this purpose was R4 million. The
technical support ranged from simple provision of goods, services and
assets to the comprehensive
implementation of an approved business
plan. The activities included drilling for water, provision of a
mentor and, if a fruit
project is involved, up to five years for
implementation and support. The projects ranged between R50 000
and R10
million.
[97]
The Department also
transfers funds to Hortgro for the purposes of settlement of black
farmers.
[98]
In 2016/17 the
Department transferred CASP grant funding to Hortgro in the amount of
R 31.1 million for 20 projects for this purpose.
Hortgro also
received R
10.4
million from the Jobs Fund towards these projects. In 2017/18
the Department transferred R 28.5 million to Hortgro for nine
projects,
and Hortgro received an additional R 11.3 million from the
Jobs Fund for these projects.
[99]
During 2016/17 the
Department transferred LandCare grant funding in the amount of R
4.106 million to Casidra for 23 projects involving
the clearing of
alien plants, fencing, and other initiatives to protect the natural
resources such as land and water. In
2017/18 the amount was R
4.38 million for 23 projects.
[100]
Projects are
recommended by a District Assessment Panel (“DAP”). The
DAP consists of Departmental officials, relevant
stakeholders (e.g.
other government departments, municipalities, and environmental
NGO’s), and members of the Sustainable
Resource Management
Committee (“SRM”). The SRM Committees are appointed by
the MEC in terms of the
Conservation of Agricultural Resources Act 43
of 1983
. It is the responsibility of the Accounting Officer to ensure
that the funds are spent in accordance with the approved business
plan.
[44]
[101]
The business plan
refers to the National Assessment Panel. This is a DAFF created
committee of which the Department is not a part.
[45]
The Department presents a consolidated business plan to it for
approval by DAFF. The Department is in effect the go-between between
DAFF and the communities whose members are the beneficiaries of the
business plan. The Accounting Officer must ensure that the
business
plan is complied with.
[102]
To
the extent that it might be argued that the LandCare officials were
overzealous in carrying out their oversight responsibilities,
this
does not change the fundamental nature of the relationship between
the Department and Casidra/Hortgro.
[103]
The recommended
projects are presented to the Provincial Assessment Panel (“PAP”)
for approval. The PAP includes Departmental
officials,
representatives of the DAP, DAFF officials, and representatives of
the SRM Committee.
[104]
One of the conditions
of the provision of funds for these projects is that local unemployed
persons are trained, equipped with tools
and employed on a temporary
basis in order to give them skills (such as fencing) with which they
can market their services.
[105]
During 2016/17 the
Department transferred the amount of R2.2 million from “
equitable
share
”
funds
to Casidra for 18 projects which involved the clearing of alien
plants, fencing and other initiatives to protect the natural
resources (land and water). In 2017/18 the total amount was
R2.4 million for 22 projects.
[106]
The only difference
between these projects and the LandCare projects is the source of
funds. The projects were identified
and approved in the same
manner as the LandCare projects. Local unemployed persons are
supported, as I have described above.
[107]
The Extended Public
Works Programme (“EPWP”) is a programme of the national
Department of Public Works, which provides
the Department with
funding for this purpose.
[108]
In 2016/17 the
Department transferred EPWP grant funding to Casidra in the amount of
R2.068 million for five projects for the clearing
of alien plants,
fencing and other initiatives to protect the natural resources.
In 2017/18 the total amount was R2.062 million
for five projects.
[109]
These projects are
identified and selected in the same manner as the LandCare projects,
and operate in the same manner. Only
the source of funding is
different.
[110]
In
2016/17 the Department transferred
CASP
grant funding in the amount of R40.8 million to Casidra for four
projects for flood damage reparation. In 2017/18 the total amount
was
R17.2 million for five projects.
[111]
When
a flood disaster is declared, DAFF asks the Provincial Government to
assess what the damage is. The Department consults farmers’
associations, undertakes its own assessments, and then assesses the
extent of the damage in financial terms. The appointment of
service
providers is in collaboration with (and not on the instruction of)
the Department. The Department has very experienced
engineers. It is
only sensible to exercise knowledge-sharing. The quotations are
submitted to Casidra, and the decision to appoint,
is that of
Casidra. The Department assists in this regard, because of its
in-house knowledge.
[46]
[112]
The
Department sends its overall assessment (a globular amount) to DAFF.
DAFF informs the Department of the amount which it will
make
available to the Department for flood relief through CASP. The
Department then formulates a business plan for the expenditure
of
that amount, and submits the business plan to DAFF, which either
accepts or rejects it. If DAFF accepts the business plan, it
provides
the money to the Department.
[113]
The
Department then provides the money and the business plan to Casidra.
These projects are almost exclusively engineering works,
such as
riverbank protection.
[114]
Casidra
implements the business plan by using its own staff, and hiring
additional assistance (for example engineers and contractors).
It
administers the projects, manages the money, and makes day-to-day
decisions on how the money is to be spent in accordance with
the
business plan approved by DAFF.
[115]
Casidra
has a discretion how the funds are applied within the framework of
the business plan prepared by the Department, and approved
by DAFF.
[116]
The
Department does not specify precisely what work must be done in
respect of each area where there is flood damage which requires
repair work, or how much must be spent on each particular place where
damage has taken place. It also does not prescribe who the
service
provider must be.
[47]
The Department’s in-house experts simply consult on project
delivery to assure that it is indeed done in accordance with
the
specifications. If the Department did not provide this assistance,
Casidra would have to appoint experts to do quality control.
The
Department does not sign off on the project delivery, but provides
opinion and guidance.
[48]
[117]
Mr
Segooa says the following about the Basic Accounting System (“BAS”)
used by the Department in order to demonstrate
that the relationship
between Casidra and the Department is that of principal and
agent:
[49]
“
(The)
business
plan provides that quotations for specialist projects and select
payments are received by the Department and then provided
to Casidra
for the appointment of the service provider. Payment of the service
provider will only be made after approval of invoices
(signing of BAS
Creditor Payments) by an employee of the Department i.e. the Project
Manager: Sustainable Resource Management.
”
[118]
The
Department provides administrative support to Casidra. The facts are
that the BAS template is used as a convenient tool to confirm
the
correctness of what has been done, and that Casidra may proceed to
pay through its own
systems.
[50]
[119]
Casidra
carries out its activities in collaboration with, not under the
instruction of the Department. The Department does not decide
who the
beneficiaries are. The supplier will send a list of people who made a
claim, and the Department is able to check that each
such person has
been so selected. This lightens the administrative burden on
Casidra.
[51]
[120]
The
AGSA says the following about the relationship between the Department
and Casidra in his answering affidavit:
[52]
“
In
line with the terms of the implementation plan and the agreement
between the parties, the Department considered and approved
payments
to service providers before Casidra could effect such payments.
(Copies
of the payments and supporting documentation
)
indicate that the Department authorised payments R4 938 947.22
to Kaap Agri and R5 417 810.19 to Koup Produsente
Koop Bpk
respectively before Casidra could settle the service provider’s
invoices.
In accounting for its
relationship with Casidra in its Financial Statements for the period
ending 31 March 2017, the Department
stated at note 32 that:
‘
Principal
Agent Arrangements
Department acting as the
principal
Casidra SOC
Limited assists the Department with project implementation in terms
of memoranda of agreement between the two parties.
These projects
include extension and advisory services to farmers and to facilitate,
coordinate and provide support to black smallholder
and commercial
farmers in line with the Department’s mandate for sustainable
agriculture development with the Province, as
well as implementation
of the integrated food security strategy of South Africa. Casidra
also assists with the implementation of
the disaster schemes in the
province on behalf of the Department. An annual implementation fee is
payable to Casidra in terms of
the memorandum of agreement.
”
[121]
I
turn to consider the facts. Payments are made by Casidra through its
system. Kaap Agri is the creditor of Casidra, not the Department.
A
BAS form is completed for process purposes. It refers to ABSA Bank.
ABSA is Casidra’s bank, not the Department’s.
[122]
The
Department sought permission to change its 2016/17 Financial
Statements so as to remove the incorrect label attached to the
relationship in the note 32 referred to above. The AGSA refused to
agree to this.
[53]
The Department did make the correction in its 2017/18 Financial
Statements.
[123]
I
refer to these facts in order to underline the principle that,
whether there is a relationship of principal and agent between
parties, is to be determined by the facts of the matter, and not by a
label which has been applied to the relationship outside
of those
circumstances. It is of course true that the Department and Casidra
have a common mandate. That does not make Casidra
the Department’s
agent.
[124]
During 2016/17 the
Department
transferred R36.493 million from the Province’s “
equitable
share
”
to
Casidra, so that Casidra could pay it to producers as drought relief.
In 2017/18 the amounts transferred were R20.367 million
from the
Province’s “
equitable
share
”
, and
R40 million grant funding from the Department of Cooperative
Governance and Traditional Affairs (“CoGTA”). In
addition, during that year the department transferred R5 million to
Casidra for the provision of boreholes in the Matzikama area,
and R5
million for clearing of alien
plants
in the Berg River.
[125]
Most drought relief
funding is done in terms of a long-standing framework developed by
DAFF, which focuses on the provision of fodder
for core livestock
animals. The
purpose
is to
assist
the producer
to
maintain his/her
core
live
stock
until
the drought is
over and the veld has recovered.
The
trigger for this
funding
is the declaration of a local, provincial or national disaster.
[126]
The Department has a
database which enables it to identify the farms in the drought
declared area.
T
he
Department assesses who qualifies for support, and how many livestock
units
should
be supported in the declared area.
[127]
The
Department
allocates
a globular sum for the purpose of drought relief, drawing on funds
from CoGTA, DAFF, and the Provincial Government.
[128]
Casidra
enters
into an agreement with a supplier for the purchasing of fodder. The
Department identifies the farmers who will receive the drought
relief, and provides each farmer with a voucher for a particular
number of head of cattle. The effect of the voucher is that
the
Department vouches for Casidra’s ability to pay for the
stipulated amount of fodder.
[129]
The
beneficiary takes the voucher to the supplier with which Casidra
entered into an agreement. The supplier provides the farmer
with the
fodder in question, and submits an account to Casidra, which makes
payment. Casidra is required to repay to the Department
any balance
remaining after it has made payment to the supplier(s) in accordance
with the vouchers.
[130]
The
Department has, since about 2006, accounted for its expenditure of
drought relief funds in this manner, and has classified and
accounted
for all of the expenditure I have described above, as “
transfer
payments and subsidies
”
.
[131]
In
support of his contention, that they should be classified as payments
for “
goods
and services
”
,
the AGSA relies on the chapter of the Modified Cash Standard dealing
with
“
Accounting
by principals and agents
”.
It refers to the following terms and meanings derived from the
Modified Cash Standard:
“
A
principal-agent arrangement results from a binding agreement in which
one entity (an agent), undertakes transactions with third
parties on
behalf of, and for the benefit of, another entity (the principal).
An agent is an entity that has
been directed by another entity (a principal), through a binding
arrangement, to undertake transactions
with third parties on behalf
of the principal and for the benefit of the principal.
A principal
is an entity that directs another entity (an agent), through a
binding agreement, to undertake transactions with third
parties on
its behalf and for its own benefit.
”
[132]
On
the basis of his interpretation and application of these definitions
to the payments in question, the AGSA concludes that:
[132.1]
The
accounting for drought relief (other than drought relief vouchers)
should be dealt with as goods and services for the Department
of
Agriculture;
[132.2]
The
accounting for flood relief should be dealt with as goods and
services for the Department of Agriculture; and
[132.3]
The
accounting for farmer settlement should be dealt with as goods and
services for the Department of Agriculture.
[133]
These
conclusions were reached after the AGSA had referred to the criteria
in the Modified Cash Standard as to the meaning of the
phrase “
on
its behalf and for its own benefit
”
in the
definition of “
principal
”
.
[134]
In
my view, essential elements of the relationship between principal and
agent include the following:
[54]
[134.1]
“
Agency
”
is the performance of a juristic act on behalf of or in the name of
one person (the principal) by another (the agent), who
is authorised
by the principal to act, that creates, alters or discharges legal
relations between the principal and a third person
(the third party).
[134.2]
“
It
is the agent’s position as the principal’s authorised
representative in affecting the principal’s legal relations
with third parties that is the essence of agency
”
.
[55]
[135]
This
flows from judgments cited by the author. They include the judgment
of the Appellate Division in
Joel
Melamed and Hurwitz v Cleveland Estates (Pty) Ltd
:
[56]
“
[The]
current tendency is to reserve the term ‘agent’ to denote
a representative who is bound by contract with a principal
to carry
out a mandate and also authorised to create, alter or discharge legal
relations for the principal.
”
[136]
The
terms “
principal
”
and
“
agent
”
have a
well-established meaning. The Modified Cash Standard definition must
be understood in that light.
[137]
In
my view, the Department has no legal relationship with the
third-party beneficiaries. There is no contractual
nexus
between
them. The beneficiaries have no rights against the Department if, for
example, they do not receive the benefits which they
wish to receive,
or which they have been promised.
[138]
Casidra
and Hortgro are not authorised by the Department to create, alter or
discharge legal relations between the Department and
the beneficiary.
[139]
Casidra
and Hortgro do not act on behalf of, or in the name of the
Department. They act in their own name.
[140]
Casidra
and Hortgro do not bind the Department in their transactions with
third parties.
[141]
The
AGSA argues that the Department exercises effective control over the
manner in which the funds are utilised, and therefore it
proves that
there is a principal and agent relationship. In my view, the
Department has legal obligations with regard to Casidra’s
and
Hortgro’s use of the funds transferred to them by the
Department. Treasury Regulation 8.4 (which is legally binding)
provides as follows with regard to
“
Transfers
and subsidies
”:
“
8.4.1 An accounting officer
must
maintain appropriate measures to
ensure
that transfers and subsidies to entities are applied for their
intended purposes. Such measures may include –
(a)
regular reporting procedures;
(b)
internal and external audit requirements
and, where appropriate, submission of audited statements;
(c)
regular monitoring procedures;
(d)
scheduled or unscheduled inspection visits
or reviews of performance; and
(e)
any other control measures deemed
necessary
”
.
“
8.4.2 An accounting officer may withhold
transfers and subsidies to an entity if he or she is satisfied that –
(a)
conditions attached to the transfer and
subsidy have not been complied with;
(b)
financial assistance is no longer
required;
(c)
the agreed objectives have not been
attained; and
(d)
the transfer and subsidy does not provide
value for money in relation to its purpose or objectives
.”
(emphasis added)
[142]
The
Department is therefore legally obliged to exercise sufficient
control to ensure that the funds are properly used for their
intended
purpose. The Department may take a number of specified measures in
that regard, and
“
any
other control measures deemed necessary
”.
[143]
The
need for such control and discipline is self-evident and requires no
explanation. It may be that the AGSA considers that the
control
measures which the Department has taken, go beyond those which are
necessary. However, that cannot change the nature of
the legal
relationship between the three parties - the Department,
Casidra/Hortgro, and the beneficiaries.
[144]
It
is therefore incorrect as a matter of law to characterise the
relationship between the Department on the one hand, and Casidra
or
Hortgro on the other hand, as a relationship of principal and agent.
Casidra, or Hortgro, is the entity that has a legal relationship
with
the beneficiary, not with the Department.
[145]
I
find that the essential elements of agency are lacking in the
relationship between the Department, Casidra or Hortgro and the
third-party beneficiaries of the funds. The AGSA was therefore
incorrect in producing a qualified audit opinion to the effect that
the transfer of funds was for goods and services.
Expert Opinion: Professor G.K. Everingham and Mr
George Ducharme
[146]
The
Department requested two independent accounting experts to provide
expert opinion on the correct accounting description of the
payment
of the funds in question to Casidra and Hortgro.
[57]
Both have extensive expert knowledge and practical experience with
regard to the matters in issue.
[147]
Professor
G.K. Everingham is Professor Emeritus and the former Head of the
Department of Accounting at the University of Cape Town.
He is
the author of two leading and authoritative texts on accounting in
South Africa. He has served on the governing
boards of the
bodies responsible for the training, accreditation and regulation of
accountants and auditors in South Africa. He
has served on the boards
and audit committees of major entities in both the private and public
sector, including a major state-owned
corporation and the City of
Cape Town.
[148]
Professor
Everingham states that he was asked to express an independent expert
opinion on the correct manner in which to account
for payments made
by the Department to Casidra.
[58]
For this purpose, he reviewed the financial statements of the
Department and Casidra for the financial year ended 31 March
2017.
[59]
He says that he is qualified to express the opinions which he has
arrived at after his examination of those financial statements.
[60]
The financial statements of the Department were prepared in
accordance with the Modified Cash Standard, whereas those of Casidra
were prepared in accordance with Generally Recognised Accounting
Practice.
[149]
He
has also referred to the Treasury document explaining the Modified
Cash Standard, effective from 1 April 2013. He noted that
at page 10
and paragraph 4 of the Modified Cash Standard, the purpose of the
financial statements is stated as:
“…
to
present a true and fair view of a department’s financial
performance, financial position, changes in net assets and cash
flows
and other disclosures that is useful to a wide range of users, and to
provide additional information that would be useful
in
decision-making. Financial statements also reflect the results of the
stewardship of management, and the accountability of management
for
the resources entrusted to it
.”
[150]
This
principle is also embodied in the global standard-setting
environment, though generally the term “
fairly
present
”
is
used rather than “
true
and fair view
”
.
[151]
A
further fundamental accounting principle is that economic substance
should override legal form. This is embodied in the conceptual
framework which serves as the basis for accounting standards,
including those of GRAP. It is also incorporated in the Modified
Cash
Standard, albeit indirectly, via the qualitative characteristic of
reliability, which states “
Reliable
information will ... reflect the substance rather than the legal form
of the transactions or events
”
.
[61]
[152]
Given
that the Department’s financial statements were prepared in
accordance with Modified Cash Standard, and that the Modified
Cash
Standard incorporates the notions of “
true
and fair
”
presentation,
as well as substance over form, it is reasonable to consider the
acceptability of the financial statements in the
context of the
Modified Cash Standard. To his mind this emphasises that due regard
must be had to fair presentation and substance
over form in
considering the acceptability of the financial statements. He does
not enter upon the question whether the Modified
Cash Standard is
legally binding.
[153]
In
determining whether the amounts transferred by the Department to
Casidra should be accounted for as transfers, or they should
be
treated as goods and services and/or capital items on the basis that
Casidra is in effect no more than a paymaster for the Department
and
thus its agent, he had regard to the nature of Casidra’s
activities.
[154]
In
essence these comprise
[62]
its own operational activities, i.e. those forming part of its
day-to-day administration. This would include Programme 1, covering
corporate services, the management of government farms and provision
of assistance to private farms as well as the creation of
employment
opportunities in rural areas and support for local agricultural
development (Programmes 2 and 4, and part of Programme
3). It also
involves the provision of flood and drought disaster relief (part of
Programme 3).
[155]
These
activities must be evaluated against the definitions of agent and
principal provided in the Modified Cash Standard document,
viz:
[63]
“
An agent is an entity that
has been directed by another entity (a principal), through a binding
arrangement, to undertake transactions
with third parties on behalf
of the principal and for the benefit of the principal.
A principal is an entity that directs another entity
(an agent), through a binding arrangement, to undertake transactions
with third
parties on its behalf and for its own benefit.
A principal-agent arrangement
results from a binding arrangement in which one entity (an agent),
undertakes transactions with third
parties on behalf, and for the
benefit of, another entity (the principal
).”
[156]
In
view of the requirement that the transactions should be for the
benefit of the principal if the entity is to be classified as
an
agent, in his opinion in all cases it is difficult to see how these
are for the benefit of the Department. The beneficiaries
are the
farmers and communities benefiting from Casidra’s various
programmes.
[157]
He
also noted that the Modified Cash Standard sets out three criteria
for classification as an agent, all of which must be met.
The first
of these is that:
“
It does not have the power
to determine the significant terms and conditions of the transaction
”
[158]
His
understanding of the activities of Casidra is that it does have the
power to determine significant terms and conditions of transactions,
though the provision of drought aid may, arguably, be an exception in
that Casidra acts on the recommendations of CASP.
[64]
[159]
Consequently,
given that Casidra has a limited role as agent, if at all, it is
logical and appropriate that the Department should
view it as an
autonomous entity, and treat the payments made to Casidra as transfer
payments. This presents fairly the relationship
between the
Department and Casidra, and reflects the substance of the
transactions.
[160]
He
noted that the Department has accounted for the transfer payments in
this fashion in the past, and that this was accepted by
the AGSA. He
was at a loss to identify any new accounting rule or any change in
circumstances which may have caused the AGSA
to change his view on
this.
[161]
It
may be argued that in disclosing transfer payments as a single line
item (‘Transfers and subsidies’ in the Statement
of
Financial Performance of the Department), there is a loss of
information which could be useful to users of the Department’s
financial statements. The remedy for this (apart from referring users
to the annual report of Casidra) would be to provide details
of the
allocation of the transfers by way of a note.
[65]
[162]
Mr
George Ducharme was previously Professor of Accounting at the
University of the Western Cape. He is now the managing director
of a
consultancy concern which provides advice and training to financial
managers working in the public sector.
[163]
Mr
Ducharme concluded as follows:
[66]
“
I am
of the opinion that the funds transferred to Casidra and to Hortgro
for drought relief, flood relief, LandCare projects, vegetable
industry projects and fruit industry projects were correctly
accounted for and budgeted for by the DOAWC in the 2017 financial
statements and budget as transfers and subsidies.
”
[164]
The
AGSA has not produced the evidence of similar expert witnesses to
gainsay the expert opinions of Prof Everingham and Mr Ducharme.
The
witness on behalf of the AGSA is Mr Segooa. Mr Segooa describes
himself as a “
corporate
executive
”
.
It is unclear what his qualifications are, and one does not know
whether he is an expert in the field of accounting. I find that
the
evidence of Prof Everingham and Mr Ducharme is factual, rational,
detailed and convincing.
Closing
remarks
[165]
It
follows in my view that the impugned findings fall to be reviewed and
set aside in terms of PAJA if they are administrative action,
and in
terms of the constitutional principle of legality if they are not
administrative action.
[166]
The
decisions were procedurally unfair, for the reasons mentioned above.
The findings of the AGSA, that the expenditure in question
was
incorrectly classified as transfer and subsidies, and should have
been classified as goods and services, were materially influenced
by
multiple errors of law:
[67]
[166.1]
The
Modified Cash Standard is not legally binding, contrary to what the
AGSA contends;
[166.2]
The
AGSA has misinterpreted the key statutory instrument, Treasury
regulation 18.2;
[166.3]
The
approach adopted by the AGSA is inconsistent with the meaning in law
of the terms
“
principal
”
and “
agent
”;
and
[166.4]
The
AGSA misdirected himself as to the legal status of the various
reporting standards to which I have referred.
[167]
The
incorrect approach of the AGSA as to the meaning of “
principal
”
and
“
agent
”
resulted
in the impugned findings being made because irrelevant considerations
(an incorrect meaning) were taken into account, or
relevant
considerations (the correct meaning) were not taken into account.
[168]
The
AGSA failed to have regard to relevant considerations, and had regard
to irrelevant considerations, in reaching his conclusion
that in
terms of the Modified Cash Standard and the other reporting
standards, and in terms of the law, the relationship between
the
Department and Casidra and Hortgro was one of principal and agent,
and the Department did not account for the payments in question
in
accordance with the requirements of the Modified Cash Standard.
[169]
Now
that the full reasoning of the AGSA appears from the answering
affidavit, it is clear that the AGSA’s conclusion as to
the
nature of that relationship was based on an incorrect understanding
of the true facts in that regard.
[68]
[170]
For
all these reasons, the impugned findings of the AGSA fall to be
reviewed and set aside in terms of section 6(2) of PAJA or section
1(c) of the Constitution.
Order
[171]
In
the result I make the following order:
[171.1]
The following findings of the first respondent in
his audit report on the financial statements of the Western Cape
Department of
Agriculture (“the Department”) for the year
ending 31 March 2017 are reviewed and set aside:
[171.1.1] The qualification of his
opinion that the financial statements present fairly, in all material
respects,
the financial position of the Department as at 31 March
2017 and its financial performance and cashflows for the year so
ended;
[171.1.2] The finding that the
Department did not account for payments made to implementing agents
in accordance
with the requirements of the Modified Cash Standard;
[171.1.3] The finding that the
Department incorrectly budgeted and accounted for these payments as
transfers and
subsidies instead of either expenditure for capital
assets or goods and services;
[171.1.4] The finding that the
Department irregularly entered into contracts with implementing
agents without
applying Treasury Regulations.
[171.2]
The following findings of the first respondent in
his audit report on the financial statements of the Department for
the year ended
31 March 2018 are reviewed and set aside:
[171.2.1] The qualification of his
opinion that the financial statements present fairly, in all material
respects,
the financial position of the Department as at 31 March
2018 and its financial performance and cashflows for the year so
ended;
[171.2.2] The finding that the
Department did not account for payments made to implementing agents
in accordance
with the requirements of the Modified Cash Standard;
[171.2.3] The finding that the
Department incorrectly budgeted and accounted for these payments as
transfers and
subsidies instead of either expenditure for capital
assets or goods and services;
[171.2.4] The finding that
principal-agent relationships were not disclosed;
[171.2.5] The finding that the
Department irregularly entered into contracts with implementing
agents without
applying Treasury Regulations.
[171.3]
The
applicant shall pay the wasted costs of 6 February 2020, which shall
include the costs of senior counsel.
[171.4]
Save for
the aforegoing, the first respondent is directed to pay the costs of
this application which shall include the costs of
senior counsel.
W. VOS, AJ
[1]
It does not appear that the Auditor General personally took any of
the actions or decisions in issue. Rather, they were
taken by
persons in the office of the Auditor General, acting on his behalf.
[2]
Record: p 48, para 135.
[3]
Minister of Home Affairs and another v Public Protector
2018
(3) SA 380 (SCA).
[4]
No.
3 of 2000.
[5]
At paragraph [37].
[6]
Footnote 25, para 38.
[7]
Record: p 402, para 229.
[8]
This is part of the principle of legality:
Pepcor
Retirement Fund and another v Financial Services Board and another
2003 (6) SA 38
(SCA) para 47.
[9]
Record: p 344, para 15; p 407, para 244.
[10]
Record: p 832, para 67.3.
[11]
Record: 783-791.
[12]
Record: p 685.
[13]
Record: p 614.
[14]
Record: p 69, para 248.
[15]
Record: p 934, para 71.
[16]
[2000] ZACC 1
;
2000 (2) SA 674
(CC).
[17]
This passage was again recently cited by the Constitutional Court,
in dealing with retrospectivity, in
Phaahla v Minister of Justice
and Correctional Services
[2019] ZACC 18
para 56.
[18]
2001 (5) SA 61
(CC) para [52].
[19]
2010 (12) BCLR 1233
(CC) para [60].
[20]
2013 (4) SA 262 (CC).
[21]
Para [57].
[22]
2019 (2) SA 37
(CC) para [30] and [39].
[23]
No.
1 of 1999.
[24]
Section 1.
[25]
Section 76 of the PFMA deals with Treasury regulations and
instructions. It provides for instances in which National Treasury
must make regulations or issue instructions applicable to
departments.
[26]
Record: p 806, para 19; p 807, para 20.1; p 838, para
88.
[27]
Record: p 808-812, para 22-37.
[28]
Record: p 396 (heading of section of affidavit).
[29]
Record: p 397, para 205.
[30]
Record: p 397, para 205.
[31]
Record: p 398, para 209.
[32]
Record: p 399, para 210.
[33]
Record: p 399, para 212.
[34]
Record: p 829, para 57.
[35]
Record: p 829, para 58.
[36]
Record: p 248.
[37]
Record: p 383, para 148.
[38]
Record: p 356, para 50.5.
[39]
Record: p 858.
[40]
Record: p 17, paras 32 – 34.
[41]
Record: p 354, para 46.
[42]
Record: pp 19 – 27, para 41 – 74.
[43]
Section 214 of the Constitution provides for the equitable share and
allocation of revenue.
[44]
Record: p 817. para 46.4.
[45]
Record: p 818, para 46.6.
[46]
Record: p 818, para 46.9.
[47]
Record: p 369, para 97; p 819, para 46.10.
[48]
Record: p 369, para 97; p 819, para 46.10.
[49]
Record: p 369, para 97; p 819, para 46.10.
[50]
Record: p 370, para 103; p 819, para 46.10.
[51]
Record: p 819, para 46.13.
[52]
Record: p 371, paras 105 – 106.
[53]
Record: p 820, para 46.17.
[54]
Bradfield “
Agency
” in Du Bois (General Editor)
Wille’s Principles of South African Law (9
th
ed,
2007) p 983
et seq
.
[55]
Page 984.
[56]
Joel Melamed and Hurwitz v Cleveland Estates (Pty) Ltd
1984
(3) 155 (A) 164G – 165G.
[57]
Record: p 34, para 96.
[58]
Record: Prof G K Everingham p 328, para 2.
[59]
Record: Prof G K Everingham p 328, para 3.
[60]
Record: Prof G K Everingham p 328, para 4.
[61]
Record: Prof G K Everingham p 329, para 9; p 79, para 28.
[62]
Record: Prof G K Everingham p 330, paras 11 – 11.3.
[63]
Record: p 199, para 6; Prof G K Everingham pp 330 – 331, para
12.
[64]
Record: Prof G K Everingham p 332, para 15.
[65]
Record: Prof G K Everingham p 333, para 18.
[66]
Record: p 326.
[67]
Record: p 48, paras 137.1 – 137. 6; and see
Johannesburg Metropolitan Municipality v Gauteng Development
Tribunal
2010 (6) SA 182
(CC) para 91.
[68]
Pepcor Retirement Fund and another v Financial Services Board and
another
2003 (6) SA 38
(SCA) para 47.