Report and Opinion of the Auditor General on the Financial Statements of Uganda Air Cargo Corporation for the Year Ended 30Th June 2014

THE REPUBLIC OF UGANDA

REPORT AND OPINION OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA AIR CARGO CORPORATION FOR THE YEAR ENDED 30TH JUNE 2014

OFFICE OF THE AUDITOR GENERAL KAMPALA, UGANDA

TABLE OF CONTENTS LIST OF ACRONYMS ...... iii REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA AIR CARGO CORPORATION FOR THE YEAR ENDED 30TH JUNE, 2014 ...... iv 1.0 INTRODUCTION ...... 1 2.0 BACKGROUND INFORMATION ...... 1 3.0 ENTITY FINANCING ...... 1 4.0 OBJECTIVES ...... 2 5.0 AUDIT SCOPE ...... 2 6.0 AUDIT PROCEDURES PERFORMED ...... 2 7.0 FINDINGS...... 3 7.1 Lack of assets revaluation ...... 3 7.2 Management of trade debtors ...... 4 7.3 Un recovered WHT deductions ...... 5 7.4 Un remitted proceeds from sale of boarded off vehicles ...... 6 7.5 Budget Performance ...... 6 7.6 Lack of business plan ...... 6 7.7 Inadequate office space ...... 7 7.8 Expiry of term of Board of Directors...... 7 7.9 Withdrawal of international Air Operator Certificate (AOC) ...... 3

LIST OF ACRONYMS

Acronym Meaning

CAA Civil Aviation Authority

PFAA Public Finance and Accountability Act, 2003 PPDA Public Procurement and Disposal of Public Assets Authority UPDF Uganda People’s Defense Forces PS Permanent Secretary UGX Uganda Shillings URA Uganda Revenue Authority UACC Uganda Air Cargo Corporation ULC Uganda Land Commission PERD Public Enterprises Review and Divestiture IFRS International Financial Reporting Standard IAS International Accounting Standard AOC Air Operators Certificate OPSpecs Operations specifications CAA Civil Aviation Authority

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REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA AIR CARGO CORPORATION FOR THE YEAR ENDED 30TH JUNE, 2014

THE RT. HON. SPEAKER OF PARLIAMENT I have audited the financial statements of Uganda Air Cargo Corporation for the year ended 30th June 2014, as set out on pages 5 to 27. These financial statements comprise of the Statement of Financial Position as at 30th June 2014, Statement of Financial Performance, Statement of Changes in Equity and Cash Flow Statement together with other accompanying schedules, notes and accounting policies.

Management Responsibility for the financial statements The Directors are responsible for the preparation and fair presentation of the financial statements of Uganda Air Cargo Corporation in accordance with International Financial Reporting Standards and the requirements of the Corporation’s Act (Cap 322) and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error.

Auditor’s Responsibility My responsibility as required by Article 163 of the Constitution of the Republic of Uganda 1995 (as amended), Section 16(2) of Uganda Air Cargo Corporation Act, and Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an opinion on these statements based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that I comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing audit procedures to obtain evidence about the amounts and disclosures in the financial statements as well as evidence supporting compliance with relevant laws and regulations. The procedures selected depend on the Auditor’s judgment including the assessment of risks of material misstatement of financial statements whether due to fraud or error. In making those risk assessments, the Auditor considers internal control relevant to the entity’s preparation and fair presentation of financial statements in order to design audit procedures that are appropriate in the circumstances but not for purposes of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management as well as evaluating the

iv overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my qualified opinion.

PART A Basis for Qualified Opinion  Lack of assets revaluation It was noted that the Corporation reported assets worth Shs.60,125,330,451 but the assets were not re-valued in line with IAS 16. As such, I was unable to confirm the amounts reflected in this respect.

Qualified Opinion In my opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the Financial Statements present fairly in all material respects, the financial position of Uganda Air Cargo Corporation as at 30th June, 2014 and its financial performance and cash flows for the year then ended in accordance with the International Financial Reporting Standards and comply with the requirements of the Uganda Air Cargo Corporation Act.

Report on other legal requirements As required by the Uganda Air Cargo Corporation Act and the National Audit Act, I report to you, based on my audit, that: i. I have obtained all the information and explanations, which to the best of my knowledge and belief were necessary for the purpose of my audit. ii. In my opinion, proper books of account have been kept by the company, so far as appears from my examination of those books; and iii. The statement of financial position and statement of financial performance are in agreement with the books of account.

Other Matters Without qualifying my opinion, I consider it necessary to communicate the following matter other than those presented or disclosed in the financial statements.

 Withdrawal of international Air Operator Certificate (AOC) The Corporation had short comings regarding the Aircraft Operator and Aviation Maintenance Organisation Industry. In order to avoid harming the entire civil aviation system of Uganda, the approved AOC and Operations specifications (OPSpecs) of all commercial and air operators was withdrawn. Management of UACC was asked to surrender the AOC and OPSpecs to the Authority and was advised to reapply for recertification.

Revenue collections were grossly affected as five (5) of its air-crafts were grounded because of disallowed flights across Uganda borders.

John F.S. Muwanga AUDITOR GENERAL KAMPALA 19th March, 2015

REPORT OF THE AUDITOR GENERAL AND SUPPLEMENTARY INFORMATION

PART "B" DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA AIR CARGO CORPORATION FOR THE YEAR ENDED 30TH JUNE, 2014 This Section outlines the detailed introduction, background information, entity financing, audit findings, management responses, and my recommendations in respect thereof.

1.0 INTRODUCTION In accordance with Article 163(3) of the Constitution of the Republic of Uganda (as amended) and Section 16(2) of Uganda Air Cargo Corporation Act, I am required to audit and report on the public accounts of Uganda that is to say, all public offices including the courts, the central and the local government administrations, universities and public institutions of the like nature and any public corporation or other bodies or organizations established by an Act of Parliament. Section 16(2) of Uganda Air Cargo Corporation Act further mandates me to specifically carry out audits the Corporation. Accordingly, I carried out the audit of the above Corporation to enable me report to the Minister, the Board and Parliament.

2.0 BACKGROUND INFORMATION Uganda Air Cargo Corporation (UACC) was created by the UACC Act (Cap 322) in 1994 with the mandate to establish and operate air transport services within and outside Uganda. UACC is expected to operate commercially and be sustainable. UACC is a Government of Uganda statutory corporation, registered as a limited liability company under the Companies Act. UACC is classified under category (ii) of the PERD Statute, which means that the Government of Uganda intends to maintain majority ownership of the Corporation. The Corporation’s main offices are at Entebbe International Airport, Terminal Building. It also has a ticketing office at Colline House in Kampala. The Corporation’s vision is “The preferred Airline”, and its mission is “To provide safe, reliable, efficient cargo freight, passenger freight and travel services at competitive rates”.

3.0 ENTITY FINANCING UACC offers air cargo freight, air passenger charters, medical evacuations, VIP charters, fun flights, businesss charters and humanitarian/relief flights. During the year, UACC generated a total income of Shs.27,498,084,482 from the services rendered and spent Shs.24,764,832,803.

4.0 OBJECTIVES The main objective of the corporation is to establish, provide, develop and operate safe, efficient, adequate economical and properly coordinated air transport services.

5.0 AUDIT SCOPE The audit was carried out in accordance with International Standards on Auditing and accordingly included a review of the accounting records and agreed procedures as was considered necessary. In conducting my reviews, special attention was paid to establish whether:-

a. The financial statements have been prepared in accordance with consistently applied Accounting Policies and fairly present the revenues and expenditures for the period and of the financial position as at the end of the period. b. All Corporation funds were utilized with due attention to economy and efficiency and only for the purposes for which the funds were provided. c. Goods and services financed have been procured in accordance with the Government of Uganda procurement regulations. d. To evaluate and obtain a sufficient understanding of the internal control structure of the Corporation, access control risk and identify reportable conditions, including material internal control weaknesses. e. The UACC management was in compliance with the Government of Uganda financial regulations. f. All necessary supporting documents, records and accounts have been kept in respect of all Corporation activities, and are in agreement with the financial statements presented.

6.0 AUDIT PROCEDURES PERFORMED The following audit procedures were undertaken:- a. Revenue Obtained all schedules of all revenues collected and reconciled the amounts to the UACC’s cashbooks and bank statements. b. Expenditure The Corporation payments vouchers were examined for proper authorization, eligibility and budgetary provision, accountability and support documentation. It was established that all UACC funds were utilized for the intended purposes.

c. Internal Control System Reviewed the internal control system and its operations to establish whether sound controls were applied throughout the period audited. d. Procurement Reviewed the procurement of goods and services under the UACC during the period under review and reconciled with the approved procurement plan. e. Fixed Assets Management Reviewed the use and management of the UACC assets during the period audited. f. Uganda Air Cargo Corporation’s Financial Statements Examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by management; as well as evaluating the overall financial statement presentation.

7.0 FINDINGS 7.1 Lack of assets revaluation IAS 16 (revaluation model) requires that revaluations should be carried out regularly so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. Uganda Air Cargo prepares financial statements applying IFRSs and therefore should have complied with the revaluation model. It was noted that the Corporation reported assets worth Shs.60,125,330,451 but the assets were not re-valued contrary to IAS 16.

Management explained that they have contacted experts in South Africa who are specialists in valuation of aircraft. The valuation exercise will be completed during the financial year 2014/2015.

I advised management to follow up the matter and have the assets re-valued in line with IAS 16.

7.2 Withdrawal of international Air Operator Certificate (AOC) According to one of the communication from Civil Aviation Authority dated 17th June 2014, it was noted that the Corporation had short comings regarding the Aircraft Operator and Aviation Maintenance Organisation Industry. It was noted that in order to avoid harming the entire civil aviation system of Uganda, the approved AOC and Operations specifications (OPSpecs) of all commercial and air operators was

withdrawn. Management of UACC was asked to surrender the AOC and OPSpecs to the Authority and was advised to reapply for recertification. Revenue collections were grossly affected as the five (5) of its air-crafts were grounded because of disallowed flights across Uganda borders.

Management explained that they have submitted its manuals to CAA for evaluation. The entity was placed at Stage 4 of the 5 phase process of the AOC recertification exercise.

I urged management to continue pursuing the recertification exercise up to its conclusion to enable them perform their mandate.

7.3 Management of trade debtors It was observed that a sum of Shs.7,942,811,910 and Shs.9,278,342,911 remained outstanding as trade debtors at the end of the financial years 2014 and 2013 respectively. The following were observed:

i) Non- performing debtors Non performing debtors worth Shs.2,834,018,304 were noted. There was no movement of the debtors’ balances from the previous period (2013) indicating that no funds were collected from the Companies and Institutions, as shown in the table below. Failure to collect the outstanding debts deprives the entity of the resources required for proper running of the entity and its investment. Trade debtors USD Ushs. LC Aviation 1,000,000 2,496,000,000 RJM Aviation 23,100 57,657,600 Civil Aviation Authority 5,000 12,480,000 Foot Prints Travel Consultants Ltd 52,300 130,540800 Air Charter Services 11,982 29,907,072 Office Of The Prime Minister 22,630 56,484,480 Asante Aviation 2,212 5,521,152 Coco Travel 18,200 45,427,200 Total 2,834,018,304

Management explained that they have authorised debt collectors to recover LC Aviation outstanding debt which constitute the biggest percentage of the outstanding debt and hoped that the debt will be recovered before the end of the financial year

2014/2015. Demand notes have been written and in case the companies do not respond, management will engage the courts of law.

The outcomes of the promised actions are awaited.

ii) Lack of a credit policy The Corporation is a profit making organization offering both cargo and passenger flight services to the public. Inherently, the business is risky in terms of non-credit worthy customers that may fail to make good their obligations. Accordingly, to mitigate such a risk of non-payment by the customers, the Corporation ought to have in place a documented credit policy. However, it was noted that there are no guidelines in place to determine credit rating and allowed credit limits. Lack of such guidelines may result in extending credit to customers who have not been evaluated and therefore not credit worthy.

Management explained that the UACC Finance Manual provides some guidance on how credit should be extended and for what period. However, the manual is under review and hopefully this will properly cater for any eventual risks that come with credit extension.

I urged management to ensure that the process of reviewing the manual is expedited.

7.4 Un recovered WHT deductions It was noted that withholding tax worth Shs.395,598,528 was deducted by Ministry of Defence from invoices submitted for payment by Uganda Air Cargo since 1997/98 financial year. Management explained that since the Ministry of Defence did not remit the withheld taxes to URA then the taxes were supposed to have been refunded to UACC. The funds continue to be reflected in the financial statements as receivables.

Management explained that they have communicated to Ministry of Defence to avail the certificates in the Corporations favour but this has not been forthcoming for a while now. Management indicated that they will continue to demand the certificates.

I urged management to continue pursuing the matter and have the funds recovered.

7.5 Un remitted proceeds from sale of boarded off vehicles Uganda Air Cargo Corporation had three vehicles, all of which were disposed off by Ministry of Defence by public auction, but the proceeds from the sale have never been received by management of the Corporation. This is likely to affect UACC cash- flows and eventual performance.

Management explained that a letter was written to the Permanent Secretary, Ministry of Defence requesting for the proceeds of disposal but no payment has been received to date

I advised management to continue engaging the Ministry Accounting Officer, over the proceeds.

7.6 Budget Performance At the beginning of the year, Uganda Air Cargo Corporation had budgeted to collect USD.11,434,156 but only USD.11,016,861 was realized leading to a gap of USD.417,295. The shortage in revenue collections meant that some of the planned activities of the Corporation could not be undertaken. For example construction of office block and a hanger could not kick off. In addition, the Corporation failed to pay outstanding gratuity of Shs.479,673,673 owed to its employees.

Management attributed the gap to increased competition from other players, and grounding of five of its aircraft by Civil Aviation Authority.

I urged management to adjust their market strategies and also ensure that the conditions required for the issuance of the operators certificate are fulfilled.

7.7 Lack of business plan The Corporation has a fifteen year strategic plan for the period 2009-2024 within which there is a five year business plan (2009-2014). It was noted that the five year business plan from which annual activities undertaken by the corporation should be derived expired. The entity therefore did not prepare performance reports to indicate the planned activities, actual activities undertaken and the outputs derived. The absence of a business plan may adversely impact on the entity in the achievement of its objectives.

Management explained that the business plan was in draft form awaiting the appointment of a Board of Directors before it is finally approved.

I urged management to ensure that a follow up is made to have a Board in place.

7.8 Inadequate office space The corporation secured some office space from CAA to accommodate engineering department, procurement department, sales and marketing plus internal audit and other offices at a monthly rent of USD.5,773 (an annual rent of USD.69,278).

However, it was noted that the offices appeared to be very small in size; the partitioned offices lacked proper ventilation and air conditioning and the lights had to be switched on throughout the day. It was also noted that there were no stores as items were being stored in a container in the compound. It was very clear that staff were working under unhealthy conditions which may affect their productivity.

Management explained that the Corporation is planning to set up its own headquarters.

I urged management to secure a proper working environment. This will improve service delivery. 7.9 Expiry of term of Board of Directors. At the time of writing this report, it was established that the term of office of the Board had expired. Lack of Board is contrary to the Act establishing the Corporation and affects good corporate governance practices, which may negatively impact on the performance of management. It was also noted that the term for Board is only one (1) year and as such new members are to be appointed annually. This may pose a challenge to have new board members appointed in time.

Management explained that it had made several reminders to the Ministry of Defence to have a new Board appointed.

I urged management to continue pursuing the Ministry until a new Board is in place. Further, an amendment to the Act should be considered to have board terms extended.

APPENDIX 1

FINANCIAL STATEMENTS