The State Capture Inquiry report has slammed South African Airways's (SAA's) former auditors PWC for failing in its duty as a watchdog institution when it audited the books of the flag carrier between 2012 and 2016. 

PWC and its joint audit partner, Nkonki Incorporated, gave the State-owned airline unqualified audits for each of the five years they provided external audit services. This meant that, in their view, SAA's financial statements were free from material misstatements caused by fraud or error. Nkonki Inc was voluntarily liquidated in April 2018.

The first section of the State Capture Inquiry report, released on Tuesday, found that during these five years, the airline's board was in a state of "precipitous governance decline" and was engaging in numerous acts of corruption and fraud.

The report found that PWC failed to devise audit procedures to detect corruption or irregular tenders.

"It was evident that PWC was either not equipped to assess, or was just not particularly concerned about, the peculiar requirements and obligations attendant on a public entity, and ensuring that irregularities that contravened the PFMA (Public Finance Management Act) and other procurement legislation were carefully investigated and reported on," it found.

In 2016/2017 financial year, the airline's audit was taken over by the office of the Auditor General. The AG changed the airline's audit outcome from a clean audit to a qualified audit with findings.

According to the report, the AG found that "vital documents" required under international standards for aircraft, as well as other "critical source documents", were missing from the audit files. 

"PWC and Nkonki failed in their duties as a watchdog institution. Had they performed their functions properly, the shambolic state of financial and risk management in SAA would have been picked up earlier, and could have been addressed. 

"It took the intervention of the Auditor General to finally expose these deep deficiencies," the report found. 

'Unfortunate oversights' 

In a statement on Thursday, PWC said that it was "disappointed that the work fell below the professional standards expected of us and that we demand of ourselves".

The group said that while it had identified non-compliance with procurement legislation and fruitless and wasteful expenditure at SAA, it failed to include these in its audit reports between 2014-2016 as required by law.

"The accountable audit partner accepts responsibility for this regrettable and unfortunate oversight and has accepted a monetary sanction from the IRBA (The Independent Regulatory Board for Auditors) for this unfortunate oversight."

The inquiry also found that PWC bid to do joint work with an auditing firm owned by one of SAA's directors during the period it was auditing the national airline. 

In late 2014 and early 2015, PWC bid for three tenders with Kwinana & Associates, a firm owned by then-SAA board member Yakhe Kwinana. 

The report was scathing in its assessment of Kwinana's suitability to be a chartered accountant, saying she appeared to have "no clue" about the obligations of the profession. Her auditing firm has been placed into liquidation, and she is being investigated by the South African Institute of Chartered Accountants.

One of the joint bids was successful, resulting in PWC paying Kwinana & Associates R6.18-million in 2016. 

Kwinana, who stepped down from SAA's board in 2016, was at the time head of the airline's Audit and Risk Committee, meaning she helped chose its external auditors. 

In oral evidence, she refused to accept there was any conflict of interest.

"Ms Kwinana refused to accept that there was any problem with this at all," the report stated.