The office of Auditor-General Shauket Fakie has found a host of financial irregularities, including alleged VAT fraud, at the SA Diamond Board, the parastatal body that regulates the diamond industry.

A R45 000 backdated salary increase for former CEO Victor Sibiya, for which no board approval could be found; an unauthorised offshore advertising campaign costing R495 340, which produced no value; and a lack of internal controls, were some of the matters highlighted in the report for the year to end-March 2002, tabled in Parliament yesterday.

Fruitless expenditure of R650 000 on legal costs was also incurred.

So significant were the matters raised that no audit opinion could be expressed on the financial statements.

A board official, who asked not to be named, insisted yesterday that the board had returned to financial health and would be assisted in this by the increase in the levy on the value of exported rough diamonds from 0,155% to 0,17%, due to be gazetted within the next few weeks.

The industry had approved the increase, he said. The existing levy generates an annual income of about R13m for the board, which has not been sufficient to fund its expenses of about R15m.

The auditor-general's report questioned the status of the board as a going concern.

"Because of the significance of the increase in liabilities and the significant losses reported in the financial statements, as well as the uncertainty surrounding the contingent obligations and the cash-flow problem encountered by the board, the going concern is of concern," the report said.

The board was found to have understated its VAT liability in its return for the two-month period to end-March by R382 021, declaring only R50 229 instead of the actual R432 250.

"This could lead to significant penalties and interest due to the noncompliance with the VAT Act," the report noted.

The board official said the board had been inundated with demands by the sheriff to pay legal costs, and had no money to pay VAT. Legal costs of about R650 000 were incurred for action taken against the board, mainly by diamond dealers, which the board did not defend. The report said this could be regarded as fruitless expenditure.

The report also noted that no supporting documentation or required authorisation could be obtained for credit notes amounting to R1,5m. It was also not possible to confirm the "completeness, validity and accuracy" of the fixed assets disclosed in the statements.

No tax was deducted on the R45 000 backdated salary increase paid to Sibiya.

The report noted that the board's systems of internal controls were not sufficient to provide the necessary accuracy and validity for the purpose of the audit. Also, the internal audit committee had not been in operation for the year.

Democratic Alliance minerals and energy spokesman Ian Davidson called on Minerals and Energy Minister Phumzile Mlambo-Ngcuka to be held to account for "the mess" at the board, and to detail the corrective measures put in place to deal with it.

He said she had failed to respond adequately to his questions in Parliament on the board's financial status.

With acknowledgements to Linda Ensor and Business Day.