1

NAC & Downtown Studios

Presentation to Portfolio Committee29 August 2012

2

Presentation Overview• Summary of Progress Made since last appearance• NAC Council position on Downtown Studios• Institutional Framework

– MOU– Funding

• NAC Council position• Matters impacting on the transfer & progress made in

resolving these– Financial viability– Corporate governance– Other matters

• Resolving the Audit Issues

3

Summary of Progress • Chairperson and Deputy Chairperson hosted by

Chairperson of Downtown Music Hub and the CEO for a site visit.

• There is a good understanding of the challenges and the way forward between the parties.

• Condonation received for the purchase from the Minister.

• Audits have been conducted for 2009/10, 2010/2011 and 2011/2012 based on compete annual financial statements for Downtown Studios and Fox Street properties. Unqualified audit reports received.

• The audited financials have been integrated into the NAC Annual Financial Statements for 2012/2013.

4

For the Committee’s Information

• The NAC did invite Fana Mokoena to make a presentation to the NAC Council meeting on 27 and 28 July 2012

• Unfortunately Mr Mokoena did not respond to the invitation

5

The Institutional Framework: RoleDepartment of Arts

& Culture

National Arts Council (NAC)

Downtown Music Hub

AVUSA (Gallo)

Fox Street Properties

Downtown Studios

Building @ 62 Goud Street

Business & Assets

Instructs NAC to purchase from AVUSA

Establishes the SPV

Initiates discussions with AVUSA

Transfer

6

Institutional Framework: MOU• MOU signed between DAC & NAC in 2008– NAC to act on behalf of the DAC in the purchase of the

property and the business– Property & the business to be transferred to a Special

Purpose Vehicle (SPV) which would be established in 2009– Funds were transferred to the NAC as follows:

Item Budget

Purchase of property R4,600,000

Purchase of business R 143,160

Operations R1,500,000

Development of a business plan R 400,000

Transfer costs R 200,000

VAT R 666,400

TOTAL R7,509,560

7

• Addendum to MOU signed in 2010– Expands the role of the NAC to include the

appointment of the staff members as independent contractors and payment of staff and creditors

8

Funding through NAC to date utilising DAC Funds held for transfer

Date Item Budget

2008/2009 Purchase, operations & business planning R7,509,560

2009/2010 Operations and further business planning R3,000,000

2012/2013 Auditing, operations & settling of debts R1,823,441

2012/2013 Operations & additional audit costs R2,000,000

TOTAL TOTAL R14,333,001

DAC provided R3 million directly to the Downtown Music Hub in 2010/2011 and 2011/2012 for operations and programmes

9

NAC Council Position

• Downtown Studios led to:– A qualified audit for the NAC in 2009/10 – An adverse audit opinion in 2010/2012

• The new Council of the NAC took office in March 2011• Recognising the implications of the ongoing challenges

presented by Downtown Studios for the NAC, a task team was established to investigate matters and prepare comprehensive recommendations for Council

• On the basis of this report, Council resolved that Downtown Studios should be transferred to the Downtown Music Hub as a matter of urgency

10

• A meeting was held with the DAC to agree on a joint approach, supported by the Downtown Music Hub, to the management of the issue.

• It was agreed to:– Engage with the short and medium term financial

viability of the organisation – Deal with corporate governance matters impacting

on the NAC regularity audit– Finalise all matters pertaining to the transfer of

Downtown Studios

11

Matters impacting on TransferIssue Intervention Further Actions Status

Financial viability •Funds secured settle outstanding debts•Funds secured for 2012/2013

•DAC and Downtown Music Hub to determine further short to medium term funding arrangements•Workshop between DAC, NAC and Downtown Music planned

Progress as

planned

Financial Reporting •3 year management accounts prepared

•PFMA principles and NAC policies to be applied to all transactions relating to Downtown Studios and Fox Street Properties

Progress as

planned

12

Issue Intervention Further Actions StatusPreparations for 2011/2012 audit

•Establishment of appropriate treatment with regard to NAC AFS in consultation with Treasury & AG

•Application of treatment in 2012/2013

Progress as planned

•Unqualified audit outcomes for 2009/10, 2010/211 and 2011/2012

•Fox Street Properties and Downtown Studios to be included in NAC regularity audit conducted by the AG for 2012/2013 financial year

Progress, however

audit delayed

Other matters •Signing over of provident funds and finalisation of outstanding taxation matters

•None required

13

Issue Intervention Further Actions StatusEmployee taxation •Payment of

outstanding funds owing to SARS

•Not applicable Progress as

planned

Settling of debts •All outstanding rates and taxes and other accounts settled

•NAC to transfer rates and taxes accounts to Downtown Music Hub on transfer

Progress as

planned

Approval from Minister

•Condonation of purchase received

•Condonation required from Minister for transfer

Progress as planned

14

Resolving the Audit FindingsYear Category Actions Status

2009/10 Irregular expenditure•Approval not obtained for the purchase of Downtown Studios from the relevant Executing Authority

•Condonation received from Minister

Resolved

2009/10 Rental revenue•Rental revenue not recognised in NAC AFS

•Downtown Studios & Fox Street Properties integrated into NAC AFS in 2011/2012 based on audited financials•Rental revenue recognised

Resolved

15

Year Category Actions Status2010/11 Non-Current Asset held for

Transfer•Assets not measured in accordance with GRAP 17

•Treatment of assets agreed to with Treasury and AG•Treatment applied in NAC AFS for 2011/2012

Resolved

2010/11 Revenue from Non-Exchange Transaction

•Non-exchange revenue not recognised contrary to GRAP 23

•Appropriate GRAP standard agreed to with Treasury and the AG•Non-exchange revenue recognised in NAC AFS for 2011/2012

Resolved

2010/11 Expenditure Management•Irregular expenditure as condonation for purchase of the asset not received from the Executing Authority

•Condonation received•Irregular expenditure reported in 2011/2012 as expenditure at Downtown Studios not in terms of PFMA

Partially Resolved

16

Year Category Actions Status2010/11 Business Combination &

Consolidated Financial Statements

•Purchase not correctly accounted for in terms of International Financial Reporting Standards and GRAP 6

•AFS prepared for Downtown Studios and Fox Street Properties for 2009/10, 2010/11 and 2011/2012•Integration of trial balances into NAC AFS in accordance with agreed approach between NAC and AG

Resolved

2010/11 Material Misstatements in AFS

•Material Misstatements identified during the audit.

•Integration of trial balances into NAC AFS in accordance with agreed approach between NAC and AG•Led to material misstatements and prior year errors in the 2011/2012 AFS

Partially Resolved

17

NAC Audit Outcome for 2011/2012• The NAC received a qualified audit for 2011/2012 due

to:– Material misstatements in the AFS due to the

incorporation of the Downtown Studios and Fox Street Property trial balances which impacted on accumulated surplus and expenses

• While disappointing this is an improvement on the adverse audit finding of 2010/2011

• The work reported on in this presentation has also laid the foundation for the transfer of Downtown Studios and Fox Street Properties to the Downtown Music Hub in 2012/2013 and also laid the foundation for an improved audit outcome for 2012/2013

18

Thank you