A qualified audit report for the Companies and Intellectual Properties Commission's (CIPC's) forerunner has raised fears that the newly-created office may suffer the same fate.
The commission's predecessor, the Companies and Intellectual Property Registration Office (Cipro) received a qualified audit report for the year to March after accounting for the same revenue twice.
The Auditor-General's (AG's) report found that Cipro did not have “adequate systems for the identification, measurement and recording of revenues for annual returns”. Cipro was self-funded from levies and fees it charged its clients, which includes income earned through providing information and the rates its charged firms to lodge annual returns.
However, Cipro says it had to use Excel to account for income from annual returns because it did not have enough time to put a proper system in place, because of the pressure of getting ready for the new Companies Act.
The commission was created through the merger of Cipro and the Office of Companies and Intellectual Property Enforcement. It came into existence on 1 May as a result of the new law.
CIPC has come under fire after companies complained they could not use its systems to file annual returns, which led to firms being deregistered, rendering them unable to trade. Under the Companies Act, every corporation must file a report each year, or be deregistered.
There have also been complaints that it takes too long for firms to register company names, which leads to entities being unable to trade. About three million companies are registered on its database.
The CIPC has admitted to challenges in clearing backlogs. In July, it had a queue of more than 30 000 applications from companies wanting to register or reserve names. Its call centre was also battling to deal with the more than 50 000 incoming queries it receives on a monthly basis.
Trade and Industry minister Rob Davies has said the backlog would be cleared by the end of last month. However, doubt has been cast on the commission's ability to cope, after Cipro's annual report for the year to March was presented in Parliament last week.
Double counting
According to the audit report, “significant deficiencies” were found, as the office included revenue of R32.6 million from annual returns that should have been accounted for in the previous year. The office listed a total of R284.8 million in income from annual returns.
“This resulted in the material understatement of the comparative amount for revenue,” states the report. The AG could not “quantify the full extent of the error due to there being inadequate systems in place”, the report says.
The AG says this double impairment was because Cipro did not have “adequate” systems to correctly account for impairments against “individual debtors”.
The AG says: “I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my qualified audit opinion.”
As a result of the double accounting, the AG reversed its opinion on the 2010 financial statements, which have gone from being unqualified to qualified. The AG says this is “because of the possible effect” of revenue being accounted for in 2010 and 2011.
Under pressure
CIPC acting COO Lungile Dukwana, who was Cipro's acting CEO before it became the commission, says “there is no maladministration” as the office could account for all the revenue it received.
The “qualification relates to the quality of data as well as the system challenges experienced”, says Dukwana. He explains the office's debtor management system was not finalised during the year because of “pressure to enhance the business systems to comply with the new Companies Act”.
Cipro's qualified report is because the company had to calculate annual return income using Microsoft Excel, because it did not have a proper system, says Dukwana. “The use of Excel creates a risk for calculation errors, and due to the high number of companies on the Cipro database, complex calculations were required.”
Dukwana says the office verified the data, and the “AG's concern relates to the fact that an automated system was not in place at the time of the audit”.
The office cannot “legally” make companies pay annual return fees and had to predict “human behaviour” around the timing of the payments, which impacted impairments, says Dukwana.
All the information required for the audit was provided to the AG, says Dukwana. “However, there was a concern that the impairment provision of the previous financial year and the actual impairment list do not reconcile. This is the result of non-alignment between the accounting rules and business rules,” he says.
The commission is not aware that the AG changed the opinion for the previous financial year, says Dukwana. He says Cipro used the same methodology for both years.
Cipro was heavily criticised after its database was abused last year, which led to the South African Revenue Service paying out fraudulent tax refunds worth at least R51 million, after companies' details were illicitly changed on Cipro's database.
In addition, at least 11 firms were reportedly hijacked in 2010, as fraudsters removed legitimate directors and replaced them with others on the agency's database.
Cipro also failed to install a new enterprise content management system, after a R153 million contract, awarded to Valor IT, was canned when irregularities were picked up in the tender process.
The new system would have resulted in tighter controls and reduced fraud. Cipro hired Waymark to upgrade its systems, at a cost of R11 million, to get it ready for when the new law came into effect.
Commissioner Astrid Ludin has said the new office's biggest challenge is a legacy system that dates back to 1997. The CIPC is set to overhaul its legacy IT systems, a process that will largely be completed by next October.
Worrying signs
The Democratic Alliance's shadow deputy minister of trade and industry Jacques Smalle argues that the problems highlighted by the AG “will simply carry over into the commission”.
Smalle says the qualified audit “illuminates the administrative anarchy that is ongoing at that entity” and Davies should “intervene”.
“This is proof of the fact that Cipro continues to suffer from maladministration - causing severe problems in the company registration process that have been well-documented before. The time has come for the minister to take action and hold those responsible to account,” says Smalle.
Cipro received a qualified audit in 2008/9 because it did not account for annual return income on an accrual basis, says Dukwana. He says this was the only other qualified audit received by the entity.
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