Corporate sustainability
strategy, resilience
and competitiveness

Lloyd Macfarlane

For many companies, the word ‘sustainability’ conjures up negative connotations. It’s all about compliance, box-ticking, advisers with hairy socks and sandals, and a glossy annual report which, once written, is filed away and forgotten about. Lloyd Macfarlane, of management consultancy PSP-Icon, believes that view is wrong. In fact, Macfarlane argues that approached strategically, corporate sustainability can deliver both resilience and competitive advantage, leading to increased long-term profitability.

Macfarlane says that many people still regard sustainability to be about environmental, or ‘green’ issues. “It is still about resource efficiency, cleaner production, energy, water, waste materials and green building.” Which is fine and important, he says, but it’s also about strategy and innovation – sustainability can be used to position companies for both resilience and competitiveness.

“It’s seldom that you find a company that is not looking to address one of those two things. Resilience can mean future-proofing the business by viewing the business model, the strategy and other fundamentals through certain lenses, and then closing gaps and aligning everything with the management approach. Strategic objectives must reflect the material issues of the business and be relevant for key stakeholder groups. This creates a much more integrated and sustainable operation,” explains Macfarlane.

Investors are looking for long-term value creation…

Tools

One method used by Macfarlane is the examination of the company’s business model using the Six Capitals, which is one of the tools promoted by the Integrated Reporting movement. The Six Capitals are categorised as financial, intellectual, human, natural, manufactured and social and relationship, which together represent stores of value that are the basis of an organisation’s value creation.

“We look at what inputs go into the business, what outputs emerge and what the outcomes are. Then we can look at how well, within that framework, the business is positioned for risk and opportunity,” says Macfarlane.

Another strategic tool he employs is to view the business through the extended value chain.

“Here, depending on what sector the business is in, we examine products, services and activities from raw material extraction, right through to ‘end of life’. We map the profile of that organisation and the impacts that occur along the way. This allows us to see areas in which mitigation needs to take place or value needs to be created across the entire value chain, even beyond the boundaries of direct control. In this way, corporate sustainability is far more than a box-ticking exercise or just applying a framework. It is the integration of environmental, social and governance strategies, and management of those strategies across the organisation’s value chain. This approach exposes companies to their own business case, which drives innovation and competitiveness,” notes Macfarlane.

Drivers

Several factors are helping to drive this process in South Africa at the moment, according to Macfarlane.

“Carbon reporting and carbon tax are a big focus now, with the imminent introduction of a carbon tax. There is also global pressure on nations to reduce industrial emissions. South Africa has already promulgated the National Greenhouse Gas Reporting Regulation, which obliges certain companies to report on their emissions and, subject to what those emissions are, pay a carbon tax priced at R120 per ton of CO2e. My estimation is that less than 2 000 companies will pay that tax, but at least another 10 000 might be well advised to understand the minimum thresholds and to position themselves so that they’re not at risk if the thresholds change. This can be done by conducting a carbon footprint audit that helps to identify emissions sources, tax liabilities and opportunities for efficiency.

Another important driver is the investor agenda. Investors are looking for long-term value creation and an increasing number of stock exchanges, including the JSE, require an Integrated or Sustainability Report as a listing requirement. State-owned enterprises in South Africa are now also required to produce an Integrated Report. Key here, says Macfarlane is the alignment or integration of the reporting processes into the strategy of the business. Reporting poorly can sometimes be worse than not reporting at all.

“This is where meaningful business case benefits and advantages can emerge. Certain companies listed on the JSE, outside of the Top 40, or on the AltX, are engaging us around our Resilience Package, which uses an Integrated Reporting approach to close gaps and integrate the strategy, giving the company a more relevant performance lens and a more credible long-term value creation narrative for investors.

“We’ve had some high-profile examples of ‘short-termism’ in South Africa over the last few years and savvy investors, who understand the meaning of long-term value creation and responsible investing, are using reports to establish if companies are strategically integrated or just checking boxes.”

Belgotex

One client of PSP-Icon that has adopted a long-term value approach with considerable success is Pietermaritzburg-based flooring manufacturer, Belgotex.

“Belgotex is a market leader. They have looked down the value chain and done as much as possible to mitigate impacts. They’re deriving huge advantages in terms of innovation, differentiation and reputation and this has positioned them for market dominance,” says Macfarlane.

Digging a little deeper into Belgotex’s success story, he explains that the company has an initiative to recycle both at a production and consumer waste level. Instead of waste being destined for landfills, they bring it back into production, reprocess it and restore value to it as a raw material. Recycled materials help to reduce the impacts of raw material extraction and the carbon emissions associated with production.

A second example is the solar array on Belgotex’s rooftop: “They were looking to reduce emissions and electricity consumption, so they installed solar panels on top of the factory roof. This has resulted in meaningful savings and the carbon emissions avoided over a two-year period have been linked to the company’s greenest carpet range which has resulted in more than 200 000 square metres of flooring that is now effectively carbon neutral. In a highly competitive sector this provides a valuable point of differentiation for the company, as it targets customers that are themselves looking to make responsible purchasing decisions.

“Imagine the competitive advantage this gives Belgotex when approaching a large corporate trying to install nine stories of flooring. Your competitor comes in at the same price, but your product is carbon-neutral – and you can pass that value on to the client! This kind of innovation and competitiveness epitomises the benefits associated with long-term value creation,” says Macfarlane.

…sustainability can be used to position companies for both resilience and competitiveness.

RPC Astrapak

Another example he cites is packaging giant RPC Astrapak.

“They operate in a sensitive industry – plastic has very high carbon emissions when processed in virgin state, and there are some serious waste impacts that the industry is managing. RPC Astrapak has a zero-waste-to-landfill objective, and 100% of production waste is currently being recycled. In addition, the company’s carbon footprint has been reduced significantly since 2015, through Resource Efficiency and Cleaner Production practices, but also by using recycled materials. There is a focus on the life cycle of plastic, including large investments and collaboration with industry organisations to build the recycling industry and increase consumer awareness around pollution.” says Macfarlane, stressing this began not as a compliance issue, but as a voluntary decision by a long-term investor intent on creating shared value.

“PSP-Icon’s expertise lies in taking tools like carbon foot-printing, sustainability and integrated reporting, helping companies like Belgotex and RPC Astrapak interpret and apply the results, and in so doing, creating both resilience and competitiveness. We are working with our shareholder audit, accounting and consulting firm, Nexia SAB&T to drive these principles into the public sector too – consulting with state-owned enterprises and local government. It certainly feels as if there is a new appetite for sustainable change,” Macfarlane concludes.

Liquidations and Insolvencies Explained

When a business or a person is unable to pay their debts when they become due, they are considered to be insolvent. The business model is quite simple; when the money going out is more than money coming in, debts are accrued and the liabilities exceed the assets.

Sequestration

A debtor may apply for their personal estate to be sequestrated by way of voluntary sequestration or it can be sequestrated by a creditor by way of compulsory sequestration. The two most important components of applying for sequestration is that a liquidated claim should exist and an act of insolvency should be proved to have been committed.

The applicant must prove that the sequestration will be to the advantage of the general body of creditors who will ultimately receive a dividend from the proceeds of the estate. This would all form part of the Notice of Motion brought before a judge of the High Court who holds jurisdiction.

Once the final sequestration order has been granted by the High Court, the case is referred to the Master of the High Court who holds jurisdiction. The Master will then appoint an Insolvency Practitioner listed on their National Panel either by way of nomination or make a discretionary appointment. Sufficient security needs to be provided to the Master of the High Court to defray all sequestration costs until such time that a Practitioner is appointed.  All estates vest under the care of the Master of the High Court.

Insolvency Practitioners

The appointed practitioner will attend to all the administration to wind up the estate as quickly and efficiently as possible. A great deal of communication exists between the Practitioner and the creditors throughout the administration of the estate. The practitioner will collect claims, sell the assets and maintain the finances of the estate throughout the process. The Practitioner is then obligated to frame and lodge a Liquidation Account with the Master of the High Court setting out the financial situation of the estate. Should all creditors as well as the Master be satisfied with the contents of the Account, the Master will confirm the account and dividends, if any, will be paid out. In the event of a contribution being levied, the Practitioner will enforce the necessary steps to collect same. They will then proceed to finalise the winding up of the estate.

Application for Rehabilitation

The ordinary time when an application for rehabilitation by court can be made is four years after sequestration. The period in a particular case would depend on:

• When the first account was confirmed
• Whether the Insolvent Estate was previously sequestrated
• Whether the Insolvent has been convicted of certain offences
• Whether the Master recommends rehabilitation

In certain cases the insolvent may apply much earlier if:

• After giving six weeks’ notice no claims were proved against the estate within six months from the sequestration date, the insolvent has not committed certain offences, and the estate has not been sequestrated previously
• After the confirmation of the account providing for the payment in full of all claims of creditors with interest thereon.

Liquidation of Companies, Close Corporations and Incorporations

This is the process which precedes the dissolution of an entity. The affairs of the company are administered by tracing and taking control of assets for the payment of creditors according to their ranking of preference and the distribution of the residue amongst the shareholders according to their rights.

Types of Liquidation

Voluntary winding up may be of a solvent company or an insolvent company. Both types of voluntary winding up require the signed resolutions by members / directors which needs to comply with the following; It must be clear from the resolution that:

• It was a special resolution,
• Adopted by the members or directors,
• Which provides for a creditors’ winding up of an insolvent company, or
• Which provides for the voluntary winding up on a solvent company.

The Company, a creditor, a shareholder or a certain official may apply for the compulsory winding up of a company. The circumstances under which the company may be wound up includes:

• Inability to pay debts, or
• It appears to the courts that it is just and equitable that the company should be wound up.

Winding -Up

A provisional winding-up order is usually issued in the form of a rule nisi. Interested parties are invited to appear on the return date and advance reasons for the final order not to be issued. If no such reasons can be given, the court will proceed to issue the Final Liquidation Order.

Security for costs must be lodged until the appointment of a provisional liquidator. The application needs to be accompanied with a certificate from the Master of the High Court confirming that security has been lodged. A copy of the application must be served on the following:

• The Master of the High Court
• Registered unions
• Employees
• South African Revenue Service

The company will no longer be under the control of its members or directors but rather first in the Master of the High Court and then in the appointed liquidators.

Important consequences of Liquidation include:

• Transfer of shares after liquidation are void
• Change of status of Company or the members without approval of liquidator is void
• Disposition of property, including claims after commencement of liquidation is void
• All legal processes are suspended

Realisation of Assets

The appointed liquidator will proceed to realise all assets vesting in the Company and liquidate same in order to generate sufficient funds for the payment of the administration costs as well as payment of dividends to proven creditors. All creditors need to prove their claims at the official Creditors’ Meetings convened by the Master of the High Court and the appointed Liquidator.

All funds arising from the liquidation of a company need to be paid to an estate bank account which will be managed by the appointed Liquidator under the care of the Master of the High Court.

Nexia SAB&T’s Insolvency Services

Nexia SAB&T offers administration of deceased estates, both testate and intestate as well as the administration of Insolvent Estates and Liquidated Companies and Close Corporations.

Nexia SAB&T received various appointments within the Liquidation and Insolvency Industry over the years including complex and high profile estates.  Our Liquidation and Insolvency department currently has eleven liquidators on the Master of the High Court’s National Panel of which five are Senior Practicing Liquidators.

Nexia SAB&T received its very first appointment in early 2003 and has developed a fully equipped Insolvency division since then.

We have a qualified and experienced Insolvency and Deceased Estate Practitioners and Insolvency Administrators, acting as assistants and consultants to all our liquidators.

Nexia SAB&T has offices in all nine South African Provinces and take appointments nationally.

Contact Us
www.nexia-sabt.co.za
Contact: +27 21 596 5400

Disclaimer
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in future, and, to the extent permitted by law. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Nexia SAB&T does not accept liability for any loss arising from any action taken, or omission, on the basis of the content in this article or any documentation and external links provided.

Nexia SAB&T is a member firm of the “Nexia International” network. Nexia International Limited does not deliver services in its own name or otherwise. Nexia International Limited and the member firms of the Nexia International network (including those members which trade under a name which includes the word NEXIA) are not part of a worldwide partnership. Member firms of the Nexia International network are independently owned and operated.

Nexia International Limited does not accept liability for any loss arising from any action taken, or omission, on the basis of the content in this publication or article or any documentation and external links provided.

The trade marks NEXIA INTERNATIONAL, NEXIA and the NEXIA logo are owned by Nexia International Limited and used under licence.

References to Nexia or Nexia International are to Nexia International Limited or to the “Nexia International” network of firms, as the context may dictate.

For more information, visit www.nexia.com.

Contextualising Performance Audit

It is important that prior to introducing the subject of performance auditing that it be correctly contextualised in relation to its integration with other audits. The various types of auditing may inter alia be categorised as follows:

Financial Auditing

The assessment of whether the financial statements of an entity fairly present its financial position at a given point in time. To achieve this opinion, the entity’s accounting and financial management systems are interrogated and assessed against predetermined standards.

Compliance Auditing

The process of determining whether a process or transaction executed by an entity has met the applicable legislative and/or regulatory guidelines that are applicable to the entity.

Audit of Predetermined Objectives

The process of determining whether reliance in all material aspects when measured against a set of predetermined criteria can be placed on the reported performance against predetermined objectives in the annual performance report of an entity.

Information Systems Auditing

The assessment of whether information technology investments made by an entity have contributed to the reduction of costs, enhanced service delivery and the quality of information being produced.

Forensic Auditing

An examination and evaluation of an entity’s financial information and accounting procedures to collect evidence for the prosecution or investigation of financial crimes such as theft and fraud. Forensic audits may be conducted to determine if wrongdoing occurred, or to gather evidence for the case against an alleged criminal.

Now that we have been able to contextualise performance auditing within the audit matrix, we will attempt to provide more context to performance auditing, defining it in more detail, introducing the standards against which performance auditing is conducted and a brief chronology on how the performance auditing process is applied.

Definition of Performance Auditing

Performance auditing may thus be defined as an independent auditing process to evaluate the measures instituted by management to ensure that resources have been procured economically and are used efficiently and effectively.

The objective of performance auditing includes the following three assertions:

The main objective of performance auditing is to promote constructive economical, effective and efficient governance. It also contributes to accountability and transparency and promotes accountability by assisting those charged with governance and oversight responsibilities to improve performance. It promotes transparency by affording identified stakeholders an insight into the management and outcomes of different activities. It thus serves as a basis for learning and identifying potential improvements for the entity being audited.

Performance Audit Standards

Performance audits are benchmarked against the International Standards and Guidelines of Supreme Audit Institutions (ISSAI), which are issued by the International Organisation of Supreme Audit Institutions (INTOSAI). The following standards and guidance are normally complied with in conducting a performance audit:

• ISSAI 300 – Fundamental Principles of Performance Auditing
• ISSAI 3000 – Standards for Performance Auditing
• ISSAI 3100 – Central Concepts for Performance Auditing

ISSAI 300

Provides the framework, the general principles and an overview of the nature and the elements for performance audits. It is used as the basis from which to develop performance audit standards.

ISSAI 3000

Provides the features and principles of performance auditing and a basis for good performance audit practices; 1.2 states that “performance auditing is not overly subject to specific requirements and expectations. While financial auditing tends to apply relatively fixed standards, performance auditing is more flexible in its choice of subjects, audit objects, methods, and opinions. Performance auditing is not a regular audit with formalised opinions. It is an independent examination made on a non-recurring basis. It is by nature wide ranging and open to interpretations. It must have at its disposal a wide selection of investigative and evaluative methods and operate from a quite different knowledge base to that of traditional auditing. It is not a checklist-based form of auditing.”

ISSAI 3100

Provides the guidelines which outline a common understanding of what defines high quality work in performance auditing.

The Performance Audit Process

When preparing to conduct a performance audit, the following broad processes are generally applied to ensure that the standards as mentioned above are achieved.

Most audit types, including performance auditing, comprise of three main phases:

• Planning
• Execution
• Reporting

Planning Phase

The starting point in the performance audit strategic planning process is deciding what to audit from a myriad of possible activities occurring within an entity. Performance auditing should be directed toward areas where an independent audit may support the oversight function in promoting accountability, economy, efficiency and effectiveness in the use of resources at its disposal.

In determining possible areas for audit, general criterion can be used to provide guidance for areas to be focussed on in selecting an area to be audited. This criterion may be inter alia broadly described as follows:

• Added value – where the subject has not been covered previously or in earlier audits, the greater the chance of the audit subject adding value to the entity;
• Important problems or known problem areas – the greater the risk of consequences in terms of economy, efficiency and effectiveness the more important the problems tend to be;
• Risk or uncertainty – the financial or budgetary amounts involved are substantial, areas which are traditionally prone to risk such as for example procurement, new or urgent activities, management structures are complex, no reliable and updated information, etc.

Once the strategic planning process has been completed, it is important that an annual plan be compiled for performance audit activities to be carried out during a financial year.

Audit Considerations for the Planning of a Performance Audit

• Identification of important aspects of the environment in which the entity operates
• Developing an understanding of the accountability relationships
• Specifying the audit objectives and the tests necessary to meet them
• Identifying key management systems and controls and carrying out a preliminary assessment to identify both strengths and weaknesses
• Determining the materiality (both quantitative and qualitative) of matters to be considered
• Assessing the extent of reliance that might be placed on other auditors, for example internal auditors
• Determining the most efficient and effective audit approach

Planning Steps Included in the Audit

• Collect information about entity and its organisation
• Define the objectives and scope of the audit
• Undertake a preliminary analysis to determine the approach to be adopted and the nature and extent of enquiries to be undertaken at a later stage
• Highlight special problems anticipated during the planning of the audit
• Familiarise the entity with the scope, objectives and assessment criteria of the audit and where necessary discuss it with them
• Assess compliance with applicable laws and regulations when necessary to satisfy the audit objectives

Planning Procedures

• Obtain sound understanding and knowledge of the business;
• Identify symptoms
• Select a potential focus area
• Motivate the potential focus area
• Prepare an audit planning memorandum
• Prepare audit questions
• Prepare audit criteria

The planning phase of a performance audit is critical to its success and at least 40 to 45% of the audit time should be spent on this phase.

Execution Phase

During the execution phase, the auditor designs tests and procedures to obtain evidence in the most cost-effective manner. Information is gathered, evaluated for its appropriateness and it is then determined whether it is sufficient to support observations about the entity’s performance.

Execution Phase Activities

• Design audit procedures and tests
• Carry out audit procedures and tests (audit evidence)
• Analyse the evidence and draw conclusions – evaluate actual performance against the audit criteria that were developed
• Evaluate the existence of sufficient and appropriate evidence
• Develop audit findings, causes and effects

The execution phase of a performance audit should not exceed 30% of the total audit time spent on the audit.

Reporting Phase

A written report should be prepared at the end of each audit; its content should be easy to understand and free from vagueness and ambiguity and include information which is supported by competent and relevant evidence. Regarding performance audits, the report should include all significant instances of non-compliance that are pertinent to the audit objectives.

In order to recognise reasonable user needs, the report may need to have regard to expanded reporting periods or cycles.

In a performance audit, the auditor reports on economy and efficiency with which resources are acquired and used, and the effectiveness with which objectives are met. The report should not concentrate solely on criticism of the past but should be constructive.

The reporting phase of a performance audit should not exceed 25% of the total audit time spent on the audit.

In the next publication, we will provide a real-life example of a performance audit that was conducted by Nexia SAB&T, which will demonstrate how these concepts were applied

Nexia SAB&T’s Performance Audit Offering

Nexia SAB&T looks forward to assisting you with your performance audit needs. For more information please do not hesitate to contact us.

Contact Us

Naeem Hassim
naeem.hassim@nexia-sabt.co.za
www.nexia-sabt.co.za
Contact: +27 12 682 8800

Ndumi Medupe
ndumi@ nexia-sabt.co.za
www.nexia-sabt.co.za
Contact: +27 12 682 8800