Report of the Auditor General on the Financial Statements of Mandela National Stadium Limited for the Year Ended 31St December 2013

OFFICE OF THE AUDITOR GENERAL

THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL

ON THE FINANCIAL STATEMENTS OF MANDELA NATIONAL STADIUM LIMITED FOR THE YEAR ENDED 31ST DECEMBER 2013

OFFICE OF THE AUDITOR GENERAL

UGANDA

TABLE OF CONTENTS PAGE List of Acronyms ...... ii

Report of the Auditor General on the Financial Statements of Mandela National Stadium Limited for the Year ended 31st December 2013 ...... 1

Detailed Report of the Auditor General on the Financial Statements of Mandela National Stadium Limited for the Financial Year ended 31st December 2013 ...... 5

1.0 Introduction ...... 5

2.0 Background Information ...... 5

3.0 Objectives of the Stadium ...... 5

4.0 Financing of the Stadium ...... 6

5.0 Audit Objectives ...... 6

6.0 Audit Procedures Performed ...... 6

7.0 Audit Findings ...... 7

LIST OF ACRONYMS

CHoGM Common Wealth Heads of Government Meeting

FUFA Federation of Uganda Football Association

GoU Government of Uganda

IAS International Auditing Standards

MNSL Mandela National Stadium Limited

MoES Ministry of Education and Sports

MoFPED Ministry of Finance, Planning and Economic Development

NSSF National Social Security Fund

PAYE Pay as You Earn

PFAA Public Finance and Accountability Act

PPDA Public Procurement and Disposal of Public Assets

PSST Permanent Secretary/Secretary to Treasury

UGX Uganda Shillings

URA Uganda Revenue Authority

WHT Withholding Tax

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF MANDELA NATIONAL STADIUM LIMITED FOR THE YEAR ENDED 31ST DECEMBER 2013

THE RT. HON. SPEAKER OF PARLIAMENT I have audited the accompanying financial statements of the Mandela National Stadium Limited for the year ended 31st December 2013. These financial statements comprise of the Statement of Financial Position as at 31st December 2013, Statement of Financial Performance, Statement of Changes in Equity, Cash flow Statement together with other accompanying statements, notes and accounting policies.

Management Responsibility for the Financial Statements Under Article 164 of the Constitution of the Republic of Uganda, 1995 (as amended), the Accounting Officer is accountable to Parliament for the funds and resources of the Stadium. The Accounting Officer is also responsible for the preparation of financial statements in accordance with the requirements of the Section 18 of the Public Enterprises Reform and Divestiture Act Cap 98 of the Laws of Uganda, 2000 and the Mandela National Sports Limited Financial Reporting Manual, and for such internal controls as management determines are necessary to enable the preparation of financial statements that are free from material misstatements, 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) and Sections 13 and 19 of the National Audit Act, 2008 is to express an opinion on the financial statements based on my audit. I conducted my audit in accordance with the International Standards on Auditing. These standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing audit procedures to obtain audit 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 the financial statements whether due to fraud or error. In making those risk assessments, the Auditor considers

internal controls 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 purpose of expressing an opinion on the effectiveness of the entity’s internal controls. 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 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 audit opinion.

Part “A” of my report sets out my opinion on the financial statements. Part “B” which forms an integral part of this report presents in detail all the significant audit findings made during the audit which have been brought to the attention of management.

PART "A"

Basis for Qualified Opinion

 Non-Disclosure of Share Capital The Articles and Memorandum of Association for Mandela National Sports Limited shows that the company had authorized share capital of UGX.100,000,000 divided into 10,000 ordinary shares of UGX.10,000 each. Only 2 Ordinary shares worth UGX.20,000 were subscribed to by the Government of Uganda represented by the Minister for Finance, Planning and Economic Development and the Minister for Education and Sports with 1 Ordinary share each. However, this position was not reflected in the Statement of Financial Position, and as such the financial statements are misrepresented in this regard.

 Treatment and Disclosure of the Chinese Grant A balance of UGX.26,851,323,480 was reported in the Statement of Financial Position as a Chinese Grant under Capital & Reserves after deducting the current year’s operating deficit of UGX. 375,474,615. However, this was not done in accordance with the requirements of the International Accounting Standards.

Qualified Opinion In my opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements present fairly in all material respect, the financial position of Mandela National Stadium Limited for the year ended 31st December 2013 and its operating results and cash flows for the year then ended and comply with the international Financial standards and section 18 of the Public Enterprises Reform and Divestiture Act, Cap 98 of the Laws of Uganda, 2000.

Emphasis of Matter Without qualifying my opinion further, I draw your attention to notes 2 and 4 to the Financial statements where debtors and liabilities have been described in detail:  Long Outstanding Debtors A review of the Debtors balances revealed an increase from UGX.920,377,202 to UGX.1,001,519,619. Included in the debtors were Uganda Police (UGX.390,166,796) and FUFA (UGX.121,020,025). Also noted was that the Stadium does not have a debt management policy and this affected enforcement of recovery measures.

 Accumulation of Liabilities A review of the financial statements revealed that creditors increased from UGX.2,567,614,723 to UGX.2,909,850,158 indicating an increment of UGX. UGX.342,235,435 during the financial year. Domestic arrears may attract litigation from long outstanding creditors. The NSSF and URA obligations could attract further fines and penalties.

Other Matter

In addition to the matters raised above, I consider it necessary to communicate the following matters other than those presented or disclosed in the financial statements:

 Land Management The Stadium land is comprised of block 234 (1.660 hectares) and block 234 (48.54 hectares). However, the land titles for the two pieces were not available for verification. Also noted was that there were a number of squatters who had encroached on the land and this could result into loss of land and/or huge compensations in future. No action had been taken by management to remove these squatters from the Stadium land.

 Revenue Shortfall Out of the budgeted revenue of UGX.1,967,997,000 the Stadium realized only UGX.1,030,107,963 resulting into a shortfall of UGX.937,889,037. Failure to collect budgeted revenue undermines the implementation of planned activities.

John F. S. Muwanga AUDITOR GENERAL

23rd March, 2015

PART “B”

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF MANDELA NATIONAL STADIUM LIMITED FOR THE YEAR ENDED 31ST DECEMBER ,2013

This section outlines in detail the audit scope, audit findings, my recommendations and management responses in respect thereof.

1.0 INTRODUCTION Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended) requires me to audit and report on the public accounts of Uganda and all public offices including the courts, the central and 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. Accordingly, I carried out the audit of the Stadium to enable me report to Parliament.

2.0 BACKGROUND INFORMATION Mandela National Stadium Ltd (MNSL) is a wholly government owned company listed under class II of the Public Enterprises Reform Divesture Act (PERD) where Government of Uganda (GoU) is to retain a majority shareholding upon its divestiture. The Authorised share capital is 1,000 shares with per value of shs.10,000. The issued and fully paid shares are 2. The Company is incorporated in Uganda under the Companies Act and is domiciled in Uganda and located at Namboole, Bweyogerere Wakiso District.

3.0 OBJECTIVES OF THE STADIUM The following are the objectives of the Stadium:  Promotion of the current facilities in order to increase usage;  Use of strategic alliances as a strategy to attract sports and non-sports products and services. These are linkages between the sports and sports Associations, Federations and sports regulators, such as National Council of Sports, FUFA, Cranes Committee, Uganda Amateur Athletics Federation, Uganda Basketball Association, and Football Clubs;

 Introduction of new business lines - Management should continue appraising various initiatives in the leisure, hospitality and Stadium areas to improve the Stadium’s sustainability; and  Exploring ways in which to involve the private sector in the activities of the Stadium e.g. operating catering facilities, gym and courts.

4.0 FINANCING OF THE STADIUM The Stadium’s internally generated revenue for the year 2013 was UGX.1,030,107,963 against a budget of UGX.1,967,997,000. The main sources of revenue for the Stadium include Mandela Stadium Hotel, the main Stadium arena, office space, gardens and conference hall.

5.0 AUDIT OBJECTIVES The audit was carried out in accordance with the 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 for the Stadium have been prepared in accordance with Section 18 of the Public Enterprises Reform and Divestiture Act, Cap 98 and the International Financial Reporting Standards; b. Sufficient internal controls have been applied consistently throughout the year to safeguard the assets of the Stadium and mitigate the risk of misstatement of the financial statements; c. All necessary supporting documents and records have been maintained and are in agreement with the financial statements presented; d. Goods and services have been procured in accordance with the Government of Uganda (GoU) procurement regulations; and e. The Stadium’s assets were well managed in the period under review.

6.0 AUDIT PROCEDURES PERFORMED a) Revenue/Receipts Obtained schedules of receipts and reconciled the amounts to the Stadium’s cashbooks and bank statements.

b) Expenditure Vouched transactions to establish whether documentation in support of the expenditure agreed with the amounts and descriptions on the vouchers; reviewed and reconciled the bank statement transactions to test for occurrence and whether they were properly controlled and accounted for.

c) Internal Control System Reviewed the internal control system and its operations to establish whether the controls were sound and were applied throughout the period under review.

d) Procurement Reviewed the procurement of goods and services during the period under review and reconciled with the procurement plan.

e) Fixed Asset Management Reviewed the use and the management of the Stadium’s assets during the period under review.

f) 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 statements presentation.

7.0 AUDIT FINDINGS

7.1 Non-Disclosure of Share Capital In my prior year audit report, I reported that the Articles and Memorandum of Association for Mandela National Stadium Limited shows that the company had authorized share capital of UGX.100,000,000 divided into 10,000 ordinary shares of UGX.10,000 each. Only 2 Ordinary shares worth UGX.20,000 were subscribed to by the Government of Uganda represented by the Minister for Finance, Planning and Economic Development and the Minister for Education and Sports with 1 Ordinary share each.

However, this position was still not being reflected in the Statement of Financial Position. Also noted was that there was no evidence of shareholders' payments for the shares they subscribed for. The financial statements were misrepresented in this regard.

Management explained that the matter was presented at the Shareholders’ meeting which was held on 4th December, 2014 and hoped that the Shareholders would subscribe for the shares as the law requires.

I advised Management to disclose the shareholders’ funds in the financial statements.

7.2 Treatment and Disclosure of Chinese Grant In my prior year audit report, I reported that Management asserted in the Accounting Policies under 1 (a) that the financial statements were prepared in accordance with the International Financial Reporting Standards (IFRSs). However, review of the financial statements with regard to the treatment of the Chinese Grant revealed that there was noncompliance with the standards in respect of this Grant as illustrated below;  IAS 20 (24), Accounting for Government Grants and Disclosure of Government Assistance, requires that a grant relating to assets may be presented in one of two ways: as deferred income, or by deducting the grant from the asset's carrying amount. However, management did not state which of the two ways had been adopted with regard to the Chinese Grant through GoU for the construction of the Stadium.  The Standard requires that the grant should be recognized as income over the periods necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. However, audit noted that no portion of the grant has been recognized through the statement thus misrepresenting the grant in the Income statement.  The standard further requires that such grants should not be credited directly to shareholders' interests. The current treatment of the grant in the Balance Sheet under “capital & Reserves” implies that the treatment appears to be contrary to the requirements of the standard and misleading.

 A balance of UGX.26,379,809,188 was reported in the Statement of Financial Position as a Chinese Grant under Capital & Reserves after deducting the accumulated deficit of UGX.4,082,009,812. However, the reduction was not explained and appeared to be a misrepresentation.

At the time of audit no evidence was available to confirm that adjustments were made to comply with the reporting standards. In the circumstances, the reported balance may not be fairly stated and Management’s assertion that the financial statements were prepared in accordance with IFRSs may not be correct.

I advised Management to comply with the requirements of IAS 20 which prescribes treatment of Grants.

7.3 Long Outstanding Debtors A review of the Debtors balances revealed an in increase from UGX.920,377,202 to UGX.1,001,519,619 indicating an increment of UGX.81,142,417. Included in the debtors were Uganda Police (UGX.390,166,796) and FUFA (UGX.121,020,025). Besides, the debtors were not aged to determine their recoverability. It was also noted that the Stadium does not have a debt management policy that would guide management in enforcing debt collection measures.

Management indicated that reminders to debtors to settle their obligations had been made.

I advised Management to a institute debt management policy and efficient collection of debts.

7.4 Accumulation of Liabilities A review of the financial statements revealed that creditors increased from UGX.2,567,614,723 to UGX.2,909,850,158 indicating an increment of UGX. UGX.342,235,435 during the financial year. The bulk of the arrears (77%) include statutory deductions that were not remitted by the Stadium to the respective Authorities (URA tax arrears, UGX.401,671,721, NSSF Contribution arrears of UGX.332,579,063 and the related penalty UGX.1,493,189,209). The NSSF and URA obligations could attract fines and penalties and other domestic long outstanding payables may attract litigation.

In response, Management explained that the Board and Management were exploring possible ways such as increasing revenue collections to address the problem.

I advised the Accounting Officer to ensure that the outstanding obligations are settled without further delay.

7.5 Land Management The Stadium land is comprised of block 234 (1.660 hectares) and block 234 (48.54 hectares). However, the following matters were noted in relation to this land;  The land titles for the two pieces were not availed for verification.  There were a number of squatters who have encroached on the land. This may lead to loss of land and/or huge compensations in future. No action has been taken by management to remove these squatters from the Stadium land. List of encroachers and the size of land under their occupancy

No. Squatter Area occupied 1. Isaac motor garage 48X34 ft 2. Baga building small scale 105 x183x32 ft 3. Mamerito container village/ hardware 22 x15 4. Mamerito washing bay & parking 57 x 86ft 5. Kasumba ware house 52x33x30 6. Bweyogere market 113 x 33ft 7. Bweyogere police station 149x82 ft 8. Veterans washing bay 149 x 82ft 9. Sports view hotel 103x39,102x20ft 10. Prayer palace church 149x33,39 11. Bulemeezi maize milling factory 19x12

Management explained that the stadium owns land comprising of Block 234, Plot 234, plot 1334 and Block 234, LRV 419, Plot 3391, Folio 25. The land titles are in the names of Uganda Land Commission and efforts to transfer the titles into Mandela National Sports Limited had not been successful. It was further explained that the Ministry of Finance, Planning and Economic Development (MoFPED) through the

Privatization Unit have decided to assist in the process of transferring the title into Mandela National Sports Limited.

I advised Management to ensure that the Stadium’s land is secured by removing all the squatters and fencing off the unutilised land.

7.6 Revenue Shortfall Out of the budgeted revenue of UGX.1,967,997,000, the Stadium realized only UGX.1,030,107,963 resulting into a shortfall of UGX.937,889,037. I explained to management that failure to collect budgeted revenue undermines the implementation of planned activities.

In response, Management explained that several strategies such as; attracting new businesses through establishment of partnerships and streamlining the business operations, were being put in place, to improve on the Stadium’s revenue performance. Management, also stated that the Stadium needs to be re-capitalized and rehabilitated by the Shareholders/Government, so that the facilities may be in good saleable state.

I advised Management to devise a comprehensive system for revenue collection and management to enable full implementation of the planned activities.

7.7 Unremitted PAYE Deductions

Section 123(1) of the Income Tax Act cap 340 requires a Withholding agent to pay to Uganda Revenue Authority (URA) any tax that has been withheld or that should have been withheld within fifteen days of the next month. However, UGX. 84,729,899 deductions in respect of PAYE from staff salaries were not remitted to the tax body.

I explained to Management that failure to remit taxes may attract fines and penalties from Uganda Revenue Authority (URA), leading to loss of funds by the Stadium.

In response, Management explained that statutory obligations have accrued over the years due to the Stadium’s historical leadership challenges such as; Frequent unplanned change of Stadium Boards of Directors, Leadership and Management

teams, Vandalizing and misuse of the Stadium assets and facilities and Lack of Government funding to the Stadium.

Management indicated that reminders to debtors to settle their obligations had been made.

I advised Management to ensure that statutory deductions are remitted timely in compliance with the Income Tax Act.

7.8 Failure to Make Provisions for Bad and Doubtful Debts

Note 1 (c) of the Notes to the Financial statements provides that specific provision shall be made for all known bad debts. However, there were no such provisions made by management. This implies that debts which appear to be irrecoverable due to failure to trace the debtors continue to be reported in the financial statements at full amounts.

Management stated that there was need to keep all debts on record for further assessment by new management before write off.

I advised Management to make provisions for bad debts in conformity with International Financial Reporting standards.

7.9 Going Concern Status of the Stadium Sub section 25 of IAS 1 (presentation of financial statements) requires that when preparing financial statements, management should make an assessment of an entity’s ability to continue as a going concern. When an entity does not prepare financial statements on a going concern basis, it shall disclose the fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

I noted that there are conditions affecting the going concern status of the Stadium, for example;

 Current ratio reduced from 0.38:1 in 2012 to 0.35:1 in 2013,  The loss increased from UGX.375.5 million in 2012 to UGX.813.3 million in 2013. This trend continues to wipe away the capital base of the Stadium.

 The long outstanding debts are an indication of the Stadium’s inability to settle its obligations from its own sources of funds.  The deteriorating state of the Stadium’s assets without provisions in the budget to finance their maintenance is an indicator that the assets are not able to generate the required income to finance planned activities and pay service providers. The above factors are an indication of the Stadiums inability to sustain itself in the foreseeable future.

Management attributed the state of affairs to frequent management and board changes. It was further stated that stability of staff and board had now been addressed.

I advised Management and the board to put in place proper governance structures such as strategic plan, Board charter, Debt management policy, Human resource functions, staff recruitment and appraisal systems, Internal Audit and marketing strategies.

7.10 Lack of Internal Audit Function Regulation 27(2) of the PFAA, 2003 requires the accounting officer to establish an effective Internal Audit Function. However, it was noted that the stadium does not have an Internal Audit function. Absence of the Internal Audit function renders the implementation of internal controls difficult. I explained to management that identification of weaknesses in the controls to enable appropriate corrective measures may not be possible in the absence of an Internal Audit function.

In response, Management explained that the advert for the position of Internal Auditor was placed in the newspapers but the Stadium was financially constrained to recruit.

I advised the Accounting Officer to liaise with the board and establish an Internal audit function for the stadium.

7.11 Dilapidated Infrastructure Inspection of the stadium revealed that the stadium structures are in a dilapidated state with roofs in stadium centres leaking and cracks on some of the walls and

terraces. There was visible lack of maintenance for the stadium assets. I explained to management that failure to maintain the stadium at an international level presents a negative picture to international visitors, besides the facilities will deteriorate further.

In response, the Accounting Officer explained that in 2012, the Construction Unit- Ministry of Education and Sports assessed works necessary for the refurbishment of the stadium and on 9th November, 2014 H.E the President of the Republic of Uganda had directed the responsible Ministry to undertake the rehabilitation. The Board and Management have further continued to remind the Shareholders (Ministry of Finance, Planning and Economic Development and Ministry of Education and Sports) of the bad state in which the Stadium is.

I advised Management to liaise with MoES, MoFPED and all key stakeholders to ensure funds are set aside to rehabilitate the Stadium.

FINANCIAL STATEMENTS