JSE suspends CoJ bonds over failure to publish audited financial statements

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JIMMY MOYAHA: Almost a year after the City of Johannesburg’s previous financial year has ended, the audited financials of the city have still not been presented, and that has led to the Johannesburg Stock Exchange [JSE] on Friday announcing that the City of Johannesburg’s bonds would be suspended from trading.

We’re going to be taking a look at this in a bit more detail with chartered accountant and founder at Corusca Consulting, Khaya Sithole, who joins us on the line now to see what we make of these developments.

Khaya, lovely having you on the show, as always. Thanks so much for taking the time. Let’s start with an idea of the audit process here. From a JSE perspective, when are financials due at the Johannesburg Stock Exchange after the year-ends of the respective companies?

KHAYA SITHOLE: Good evening, and good evening to listeners. Ideally financial statements should be published as soon as practicably possible.

The reason you want them to be published as soon as practicably possible is that you don’t want to have a lengthy time lag between the reporting date and the publication date, because obviously information may have been superseded by circumstances. So in principle you want it to be as fast as possible.

But naturally there are particular guidelines about what time frames need to be then. And in instances where it is a listed entity, the time frames are quite short for obvious reasons; and once those time frames are not honoured you do have a problem of people not knowing exactly what the state of affairs of the organisation that we’ve invested in is. So you want this to be as fast as possible.

JIMMY MOYAHA: Khaya, from the city’s perspective, they’ve confirmed that the Auditor-General’s Office of South Africa is still finalising the audit – and that includes resolving some technical accounting matters and some disputes through the standard dispute process.

From their perspective they’re saying the AG’s office hasn’t finished what it needs to do. The AG’s office is saying that this is an ongoing problem with not only one municipality.

Who is at fault here? Is it the fault of the auditor for not preparing the numbers? Is it the fault of some of the findings that they find weren’t in order? How do we navigate this part of the process?

KHAYA SITHOLE: What tends to happen with institutions audited by the Auditor-General is that if there is a material difference of opinion between the Auditor-General’s interpretation of a series of transactions versus the auditee’s – in this case the city’s interpretation of events – there is an internal dispute resolution process where technical minds get together and try to find a resolution and reach a meeting of the minds.

Now the fact that we are talking about financial statements that were due last year and still haven’t been published simply means that there hasn’t been that meeting of the minds.

The issue here is that, as far as we understand, the Auditor-General gets given a set of guidelines, a set of accounting principles that it must audit. It is given a set of auditing rules that it must apply. And when the Auditor-General says ‘Look, we can’t reach a meeting of the minds on this one’, it is more likely an issue with the entity that prepared the financial statements that cannot find concurrence with the Auditor-General.

But again, until we see the actual details and the merits of what the dispute is all about, we do not know for sure. Clearly the fact that so many of these audited entities haven’t been able to reach that meeting of the minds with the AG means that the issue is pervasive; it would be important to understand exactly what the issue is, and why it’s being replicated across different municipalities.

JIMMY MOYAHA: Khaya, what does this mean for the suspension of the bonds themselves and those who are invested in the bonds, as many investors locally and internationally come in and buy these sorts of bonds at a government level, at a municipal level. What does this mean now that these bonds would be suspended from trade?

KHAYA SITHOLE: Once one buys these particular bonds one obviously needs to be able to get sight into the ability of that institution to repay those bonds.

That’s why financial statements are quite important, because in the financial statements you’d get an indication that, look, we know that these bonds are maturing over that particular time frame, we know what the interest is meant to be, and here we are showing that we’ve got the ability to service those bonds in the foreseeable future. That’s why the bond investors need to be able to see the financial statements.

Now, in instances when they cannot see the financial statements there is a particular risk – that they’re working on the basis of incomplete information – and it is that information black hole that the JSE frowns upon.

So in this instance they said, look, until we know what the state of the entity is and the ability of the entity to service these bonds, we probably do need to put a pause because the JSE doesn’t want to be held liable for having vouched, in essence, for a particular entity’s bonds without actually getting insight into the ability of those bonds to be serviced.

So at this stage the idea is that once they get a resolution to these issues with the Auditor-General and the financial statements are published, at least there isn’t that information gap.

Then the JSE will say, well, at least now you know on what basis you are engaging with this entity, you know its state of financial affairs. And if you then insist on buying the bonds, at least we’ve given you access to the information that is necessary in that investment decision.

That is why this is an important document that has to be published by all of these entities.

JIMMY MOYAHA: Khaya, should we be looking at municipalities differently from a treatment perspective? The City of Joburg, for example, has a little over R70 billion in unpaid bills, R32 billion or so in collections in December 2025. We can debate the sustainability of those figures as a separate conversation, but should we be treating municipalities differently in terms of how much time they are afforded, or should we treat them and hold them to the same standards that we hold other listed entities – because other listed entities have controls in place and perhaps municipalities should have those too?

KHAYA SITHOLE: Well, the issue here is that you don’t want to create these departure points where you reduce the sense of vigilance simply because it’s a government or a municipal entity.

The point here is that people who participate in the bond market have multiple options to invest in. Nothing compels anyone to buy these municipal bonds.

And so if these particular entities, these public entities, want to access capital markets, the rules are that you need to be able to give people sufficient information for them to make an investment decision.

So anything that then sounds like it’s a departure would actually create an information vacuum that would be detrimental to investors who might not know on what basis they’re investing, but also even more detrimental for the cities themselves because very few people will be willing to take a gamble on an entity whose state of affairs they are not able to regularly see and interrogate.

So it would actually be disastrous for these particular entities if we had to take our eye off the ball and in this instance it’s why the JSE has to push and say: ‘We need this information, otherwise we might actually end up with no one investing in these bonds – in the long run anyway’.

JIMMY MOYAHA: I suppose this is why [we have] the International Financial Reporting Standards that are to be applied, regardless of which entity we are looking at, and this uniformity is the reason we have such reliable information in the public domain.

We’ll have to leave this conversation on that note. Thanks so much to Khaya Sithole, chartered accountant, founder and director at Corusca Consulting, for joining us to unpack the accounting challenges plaguing municipalities which have led to suspensions from the Johannesburg Stock Exchange.