Office of the Auditor General

THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL

ON THE FINANCIAL STATEMENTS OF THE MANDELA NATIONAL STADIUM LIMITED FOR THE YEAR ENDED 31ST DECEMBER 2014

OFFICE OF THE AUDITOR GENERAL

UGANDA

TABLE OF CONTENTS PAGE LIST OF ACRONYMS ...... ii

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE MANDELA NATIONAL STADIUM LIMITED FOR THE YEAR ENDED 31ST DECEMBER 2014 ...... 1

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE MANDELA NATIONAL STADIUM LIMITED FOR THE FINANCIAL YEAR ENDED 31ST DECEMBER 2014 ...... 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 ...... 7

7.0 AUDIT FINDINGS ...... 7

7.1 Categorization of Audit Findings ...... 7

7.2 Summary of audit finding ...... 8

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 THE MANDELA NATIONAL STADIUM LIMITED FOR THE YEAR ENDED 31ST DECEMBER 2014

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 2014. These financial statements comprise of the Statement of Financial Position as at 31st December 2014, 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) and Section 45 of the Public Finance Management Act, 2015, the Accounting Officer is accountable to Parliament for the funds and resources of the Council. The Accounting Officer is also responsible for the preparation of financial statements in accordance with the requirements of the Public Finance Management Act 2015. The Accounting Officer is also responsible for the preparation of financial statements in accordance with the requirements of the Financial Reporting Guide, 2008, and for such internal controls as management determines 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 qualified 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

 Treatment and disclosure of the Chinese Grant An opening 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. The reduction was not well explained and therefore a misrepresentation.

 Unconfirmed Debtors Under Paragraph 7.2 of the financial statements, management disclosed Hotel debts for accommodating the Chinese technical team (UGX.815,000,000) and UMEME Ltd for the Kireka Sub-station hosted on the land of MNSL (UGX.384,000,000). However the said debts lacked supporting documentation.

Qualified Opinion In my opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements of Mandela National Stadium Limited for the year ended 31st December 2014 are prepared, in all material respects in accordance with the International Financial Reporting Standards and section 31(6) of the Public Finance and Accountability Act, 2003.

Emphasis of Matter Without qualifying my opinion further, I draw your attention to the Balance sheet as at 31st December 2014.

 Long outstanding debtors A review of the Debtors balances revealed an increase by UGX.6,383,515 from UGX.1,001,519,619 of the previous year to UGX 1,007,903,134 in the current year. It was also noted that the Stadium does not have a debt management policy and this affected enforcement of recovery measures.

 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.

 Accumulation of Payables Review of the financial statements indicated that the stadium has high creditors’ obligations amounting to UGX.2,839,694,548.

Domestic arrears may attract litigation from long outstanding creditors. The NSSF and URA obligations could attract further fines and penalties.

Other Matters

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.

 Going concern status of the Stadium I noted that there are conditions indicating the Stadium’s inability to sustain itself as a going concern and yet the accounts are presented in a contrary manner.

 Absence of a fire detection and fighting system/Equipment Inspection of the stadium facilities confirmed that the fire fighting equipment is obsolete and that the stadium does not have any fire extinguishers in place. It was also noted that although the Stadium has water hydrants, they are all non-functional.

 Land management The Stadium land comprises of; block 234 (1.660 hectares) and block 234 (48.54 hectares). However, the land titles were not availed for verification and there is observable encroachment.

John F. S. Muwanga AUDITOR GENERAL

9th December 2015

PART “B”

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE MANDELA NATIONAL STADIUM LIMITED FOR THE FINANCIAL YEAR ENDED 31ST DECEMBER 2014

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 2014 was UGX.1,506,336,890 against a budget of UGX.1,658,623,000. 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 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:-

a) Whether 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) Whether all funds were utilized with due attention to economy and efficiency and only for the purposes for which the funds were provided.

c) Whether goods and services financed have been procured in accordance with the Government of Uganda Procurement regulations.

d) Whether the stadium had a sufficient internal control structure and the internal controls were working as intended.

e) Whether the management complied with the Government of Uganda financial regulations in their operations.

f) Whether all necessary supporting documents, records and accounts have been kept in respect of all activities, and are in agreement with the financial statements presented.

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 Categorization of Audit Findings The following system of profiling of the audit findings has been adopted to better prioritise the implementation of audit recommendations.

N Category Description o

1 High significance Has a significant / material impact, has a high likelihood of reoccurrence, and in the opinion of the Auditor General, it requires urgent remedial action. It is a matter of high risk or high stakeholder interest.

2 Moderate significance Has a moderate impact, has a likelihood of reoccurrence, and in the opinion of the Auditor General, it requires remedial action. It is a matter of medium risk or moderate stakeholder interest.

3 Low significance Has a low impact, has a remote likelihood of reoccurrence, and in the opinion of the Auditor General, may not require much attention, though its remediation may add value to the entity. It is a matter of low risk or low stakeholder interest.

7.2 Summary of audit finding

No Finding Significance

1. Treatment and Disclosure of the Chinese Grant High

2. Unremitted PAYE Deductions High

3. Unconfirmed Debtors High

4. Long Outstanding Debtors High

5. Failure to make provisions for bad and Doubtful debts High

6. Accumulation of Payables High

7. Going Concern status of the Stadium High

8. Absence of a fire detection and fighting system/Equipment High

9. Land Management High

10. Irregular appointment of board members Moderate

11 Failure to deduct and Remit Withholding Tax Moderate

7.3 Unconfirmed debtors

IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.

Under Paragraph 7.2 of the financial statements , management observed that due to the complexity and un collectability of the debts from the government for accommodating the Chinese technical team (UGX.815,000,000) and UMEME Ltd for the Kireka Sub-station hosted on the land of MNSL (UGX.384,000,000), the said debtors have not been included in the year’s accounts. However, management did not provide any documentation or analysis such as contract references and period covered by the items attached to support the existence or occurrence of the respective amounts. There was also no evidence that efforts had been made to recover the said debts and failed.

In absence of supporting evidence I was not able to ascertain that the debts did exist and that the write-offs were properly made and in the circumstances the presentation is misleading.

I advised management to always make provisions in accordance with the financial reporting framework in presentation of financial information to avoid giving insufficient information to the users of accounts.

7.4 Treatment and disclosure of Chinese grant

In my prior audit report to Parliament, I reported that Management asserted in the Accounting Policies under 1(a) that the Financial Statements were prepared in accordance with international Financial Reporting Standards (IFRs). However, review of the current financial statements with regard to the treatment of the Chinese grant revealed that management has continually not complied with standards in respect of treatment of the grant as illustrated below;

a) 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: Either 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.

b) The standard requires that the grant should be recognized as income over the periods necessary to match them with related costs, for which they are intended to compensate, on a systematic basis. However it was noted that no portion of the grant was recognized through the statement thus misrepresenting the grant in the income statement.

c) 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 and reserves” implies that the treatment appears to be contrary to the requirements of the standard and misleading.

d) 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. The reduction was not explained and appears to be a misrepresentation.

Management indicated that in their opinion, the provisions of IAS 20 do not apply but rather the Memorandum and Articles of Association may need to be amended to take care of all Government equity in the Stadium that existed before incorporation.

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 and Government Assistance or expedite the process of converting the grant into capital.

7.5 Long outstanding debtors

A review of the Debtors balances revealed an increase from UGX.1,001,519,619 to UGX.1,007,903,134 indicating an increase of UGX.6,383,515. Included in the debtors were FUFA (UGX.194, 863,217), National Resistance Movement (UGX.128,000,000), GTV (UGX.47,932,556), Equity Debtors-MOESTS and MoFPED (UGX.99,980,000), and Pioneer Easy Bus Limited (UGX.221,673,367). It was also noted that the Stadium

does not have a debt management policy and this affected enforcement of recovery measures.

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

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

7.6 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 the recommendation will be presented to the Board for approval. I advised management to make provisions for bad debts in conformity with International Financial Reporting standards.

7.7 Accumulation of Payables

Review of the financial statements noted that the stadium has high creditors’ obligations amounting to UGX.2, 839,694,548. The major creditors include URA for tax arrears of UGX.580, 566,673, NSSF, for arrears and penalties worth UGX.1, 752,846,860; staff Terminal benefits worth UGX.97, 544,711; Trans cargo Freighters Ltd worth UGX.103,947,985 and Meridian Sales services Limited worth UGX.88,692,792.

In response, management explained that the obligations have accrued over the years due to the Stadium’s historical leadership challenges but the Board and management were exploring possible ways such as engaging the shareholders for financial support to address the problem.

I explained to management that domestic arrears may attract litigation from long outstanding creditors. The NSSF and URA obligations could attract further fines and penalties.

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

7.8 Going concern status of the Stadium

Sub section 25 of IAS 1 (presentation of financial statements) requires management to make an assessment of an entity's ability to continue as a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures.

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

 Current ratio stood at 0.38:1 while the acid test ration stood at 0.03:1 in 2014.  The stadium reported losses of UGX.336,825,521 for 2014. This trend continues to wipe away the capital base of the Stadium.  The long outstanding creditors is 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 may not be 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 and that management is working on strategies that can boost revenue generation to match the investment in the facility.

I advised management and the board to put in place proper governance structures to ensure stability in stadium liquidity.

7.9 Absence of a fire detection and fighting system/Equipment

Inspection of the stadium facilities revealed that the fire fighting equipment is obsolete and the stadium does not have any fire extinguishers in place while the water hydrants at the Stadium are all not functional. I also noted that the Stadium does not have CCTV cameras.

This implies that the Stadium does not have any capacity to fight fire outbreaks in case of any fire incidents. The current situation also puts the users of the Stadium at a greater risk of loss of lives and loss of property.

Management explained that the current fire detection system broke down but had secured a replacement donated by the Chinese government. However, the donated cargo has stalled in the bond for over two years due to lack of funds to clear the taxes and requests to the Ministry for financial assistance have not been fruitful and storage charges continue to accumulate.

I advised management to ensure that modern fire fighting systems are installed in the Stadium. Measures should also be put in place to solicit for funding to clear the fire fighting equipment lying idle in the bond.

7.10 Land management

The Stadium land is comprised of block 234 (1.660 hectares) and block 234 (48.54 hectares). However, the following facts were noted in relation to this land;

1. A review of the land status file indicated that the Stadium got a stamp duty waiver of UGX.1.6 billion for the transfer of this land from Uganda land commission into the Stadium’s names. By the time of audit, the land titles for the two pieces were not available for verification.

2. Through the review of the security reports from the Stadium security officer and inspection of the land boundaries, it was observed that the number of land encroachers have increased and if not stopped could claim most of the stadium land thus curtailing its future expansion and development programs.

The increase in land encroachment could also result into huge compensations in future. No action had been taken by management to remove these squatters from the Stadium land.

Management explained that they engaged surveyors who have opened the land boundaries and the next step is to plant permanent mark stones and devise means of evicting the encroachers.

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

7.11 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, PAYE deductions amounting to UGX. 63,865,019 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. The challenges have continued to hinder management to discharge the recurrent expenses as they arise.

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

7.12 Failure to deduct and Remit Withholding Tax

Section 119 (1) of the Income Tax Act states; where the government of Uganda, a government institution, a local authority, any company controlled by the government of Uganda, or any person designated in a notice issued by the minister as a “Payer”, pays an amount or amounts in aggregate exceeding one million shillings to a person in Uganda for a supply of goods or materials of any kind or for supply of services, the payer shall withhold tax on the gross amount of the payment.

I noted that the stadium made taxable payments of UGX.150, 703,264 to various suppliers without deducting withholding tax from the payments worth UGX.9,042,196.

This puts the Stadium at the risk of paying for the amount which was not withheld, a condition which puts further strain on the small funds for the Stadium.

I advised management to always ensure that suppliers that provide no evidence of tax exemption are taxed accordingly to avoid penalties from tax authorities.

7.13 Irregular appointment of board members

Section 37 (ii) of the Articles of Association of MNSL states that the number of directors including the chairman shall not be more than seven; 3 of whom shall be representatives of government (one of the said 3 being a representative from Ministry of Education and the other being the Permanent Secretary/Secretary to the Treasury).

I noted that contrary to the Articles of Association, the MNSL Board consists of two (2) members over and above the maximum number.

I observed that the board expenses consume 5.4% of the budget, making it the third highest expenditure line for the stadium.

Management explained that board members are appointed by the Ministry and this could have been an oversight on the part of the appointing authority.

I advised management to liaise with the Minister to ensure that the number of directors is reduced to comply with the Articles of Association.

FINANCIAL STATEMENTS