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We have audited the consolidated financial statements of EOH Holdings Limited (“the Group”) set out in the Consolidated Segment Results to the Notes to the consolidated Annual Financial Statements, which comprise the consolidated statement of financial position as at 31 July 2019, and the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, except for the effects of the respective matters described in the Basis for Qualified Opinion section of our report, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 July 2019, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa.
The Group’s consolidated financial statements reflect a restatement of prior period balances, details of which are disclosed in note 3 to the consolidated financial statements. Our evidence indicates that certain of the prior period restatements listed in the note should have been accounted for in the current year as they result mainly from the change in management and their revised considerations that were made in the current year and applying hindsight, we were not provided with sufficient audit evidence to indicate otherwise. According to paragraph 53 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8), hindsight should not be used in determining adjustments to amounts for a prior period.
The following explains our disagreement with the treatment of the adjustments:
This provision and the related tax expense cannot be raised in prior periods without applying hindsight and our audit evidence indicates that this provision should only be raised in the current period.
In our opinion taxation is overstated, as a result of the above, in the statement of profit and loss and other comprehensive income by R20.400 million for the year ended 31 July 2018 and are understated by this amount for the year ended 31 July 2019. The tax payable balance in the statement of financial position at 1 August 2017 is, in our opinion, understated by R16.791 million and at 31 July 2018 by the R20.400 million. The equity-accounted investments balance and the trade and other receivables balance in the statement of financial position are, in our opinion understated by R291.343 million and R254.559 million respectively at 31 July 2018. The trade and other payables balance is, in our opinion overstated in the statement of financial position at 1 August 2017 by R83.952 million and at 31 July 2018 by R316.491 million.
Consequently, in our opinion, operating expenses are overstated in the statement of profit and loss and other comprehensive income by R54.108 million for the year ended 31 July 2018 and are understated by the same amount for the year ended 31 July 2019. The inventory balance in the statement of financial position at 31 July 2018 is, in our opinion understated by the above amount.
In our opinion revenues are understated in the statement of profit and loss and other comprehensive income by R159.723 million for the year ended 31 July 2018 and are overstated by this amount for the year ended 31 July 2019. The trade and other receivables balance in the statement of financial position at 31 July 2018 is, in our opinion understated by the above amount.
In our opinion, operating expenses are overstated in the statement of profit and loss and other comprehensive income by R365.863 million and cost of sales by R18.964 million for the year ended 31 July 2018 and are understated for the year ended 31 July 2019 by these same amounts. Furthermore, in our opinion the intangible assets balance in the statement of financial position at 31 July 2018 is understated by R384.828 million.
In our opinion, net financial impairment losses are overstated in the statement of profit and loss and other comprehensive income by R375.485 million for the year ended 31 July 2018 and are understated for the year ended 31 July 2019 by the same amount. Furthermore, in our opinion the trade and other receivables balance in the statement of financial position as at 31 July 2018 is overstated by R208.379 million and the other financial assets balance by R167.106 million.
The result of the matters above is that the loss for the year ended 31 July 2019 is understated by R1,856.937 million, the loss for the year ended 31 July 2018 is overstated by R1,756.195 million. The retained earnings balance is therefore understated by R1,856.937 million at 31 July 2018 and the opening retained earnings balance as at 1 August 2017 is understated by R100.743 million. The evidence provided by management was insufficient, in our opinion, to support the full restatement of the balances for the prior period and their resultant effect on the financial results. The consolidated statement of financial position as at 31 July 2018 is misstated as detailed in the paragraphs above and there is no material impact on the consolidated statement of financial position at 31 July 2019.
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the group in accordance with the sections 290 and 291 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised November 2018) (together the IRBA Codes) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities, as applicable, in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) respectively. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Basis for Qualified Opinion section above, we have determined the matters described below to be the key audit matters to be communicated in our report on the consolidated financial statements.
|Valuation of goodwill (Note 6)|
Goodwill has been recognised in the consolidated statement of financial position as a result of multiple acquisitions over a number of years. Goodwill comprises approximately 19% of the total assets of the group. During the current financial year approximately 44% of the goodwill balance as at the end of the prior period has been impaired.
As required by the International Financial Reporting Standards (IFRS), the directors conduct annual impairment tests to assess the recoverability of the carrying value of goodwill and indeterminate useful life of intangible assets. This is performed using discounted cash flow models.
There are a number of key areas of estimation and judgement made in determining inputs into these models which include among others:
The impairment test performed on goodwill is subjective, includes judgement & estimations made by management. Furthermore, the recent financial results, media articles and allegations of suspected fraud has negatively impacted market share and the operations of the business and increased the risk of goodwill impairment.
The valuation of goodwill and the impairment test performed in goodwill is considered to be a key audit matter due to the extent of judgment and estimation involved.
We focused our assessment of the impairment test of goodwill on the key assumptions and judgements made by the directors.
Our audit procedures included:
|Impairment allowance on trade receivables (Note 2.1 and Note 13)|
The group adopted International Financial Reporting Standard (IFRS) 9, Financial Instruments during the current financial year. The standard introduces new requirements around two main aspects of how financial instruments are treated, namely measurement and classification as well as impairment. IFRS 9 introduces new impairment rules which prescribe a new, forward looking, expected credit loss (“ECL”) impairment model which takes into account reasonable and supportable forward-looking information, which will generally result in the earlier recognition of impairment allowances.
The group trade receivables represents approximately 23% of the total assets of the group as at 31 July 2019. The increasing economic challenges experienced in South Africa and the long outstanding government debt increases the risks of default by these customers and therefore the risk of impairment in terms of the ECL impairment model.
The group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the trade receivables. The group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the trade receivables and the economic environment.
Management performed an assessment of the trade receivable balances at year end based on an expected credit loss (ECL) impairment model.
The ECL impairment allowance of trade receivables under IFRS 9 is considered to be a key audit matter due to the extent of subjectivity and judgement involved in applying the ECL impairment model.
Our audit approach included obtaining an understanding of the group’s policy in relation to the ECL impairment allowance of trade receivables and testing the application of this policy.
We have performed the following procedures:
We furthermore considered the adequacy of the group’s disclosure of trade receivables and the related ECL impairment allowance
|Suspected prior period fraud investigations|
The EOH board identified certain transactions that indicated possible fraud related to certain government contracts as well as certain suppliers that were entered into by the group and mandated ENS Africa (ENS) to perform an investigation as to the validity of these contracts.
ENS discovered evidence of possible tender irregularities. Instances included EOH employees conspiring with preferred suppliers to inflate software licence sales and inappropriate sponsorships and donations.
Payments made over the past 5 years of R1.2 billion to 78 suppliers were investigated by ENS to determine whether the appropriate work for services rendered was performed or delivered.
We identified the possible fraud as a key audit matter due to the nature of the fraud and the significant impact the findings might have on the financial statements and resultant effect thereof on the audit report.
Our procedures to address this key audit matter include:
|Going concern assessment (Note 45)|
The financial statements of the group are prepared on the going concern basis.
The group is highly geared and thus reliant on the availability of their credit facilities to continue operating.
For the current year under assessment the group has made significant losses during the current year and have sold a number of subsidiaries to accommodate the significant loan repayments to the bank.
These factors could indicate that the going concern basis used in the preparation of the financial statements is not appropriate, or that a material uncertainty over the appropriateness of the assumption could exist.
Management’s assessment of going concern is based on their judgement and their view relating to the next financial year.
As a result of the judgement involved in management’s going concern assessment, the group’s highly geared position and their performance during the current year, the going concern assessment is considered to be a key audit matter.
Management prepared a detailed assessment of the ability of the group to continue as a going concern.
We obtained and discussed the detailed assessment from management in order to obtain an understanding of their assessment.
Key features of our audit approach to obtain assurance over the assessment included.
We have also assessed the adequacy of the group’s disclosures in respect of management’s assessment of going concern.
The directors are responsible for the other information. The other information comprises the information included in the document titled “EOH Holdings Limited Consolidated Financial Statements for the year ended 31 July 2019”, and the document titled “EOH Holdings Limited 2019 Integrated Report”, which includes the Directors’ Report, the Audit Committee Report and the Company Secretary’s Certificate as required by the Companies Act of South Africa as well as the other reports included in the referred to documents. The other information does not include the consolidated financial statements and our auditor’s report thereon.
Our opinion on the consolidated financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We conclude that there is a material misstatement of the other information in the “Audit Committee Report” and the “Chief Financial Officer’s review” due to our qualification of the consolidated financial statements as disclosed in our Basis for Qualified Opinion.
The directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that Mazars has been the auditor of EOH Holdings Limited for 9 years (2 years as PKF Gauteng Inc.).
In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act, we report that we have identified reportable irregularities in terms of the Auditing Professions Act. We have reported such matters to the Independent Regulatory Board for Auditors. The matters pertaining to the reportable irregularities have been described in the directors’ report.
Partner: Miles Fisher
Date: 01 November 2019