CBK, Deloitte on the spot over change of Chase Bank results

The Central Bank of Kenya (CBK) allowed audit firm Deloitte to alter and publish Chase Bank’s 2014 financial results as part of Deloitte’s cover-up of the reporting mess it created in the classification of the lender’s controversial Islamic assets, it has emerged.

Documents that Chase Bank directors submitted to Parliament last week show that Deloitte – with the backing of the CBK – not only moved the controversial assets in the bank’s balance sheet from the Other Assets line to Loans and Advances for 2015, but also restated the previous year’s report a year after they were published with the regulator’s approval.

Chase Bank directors told the National Assembly’s finance committee that Deloitte made the changes with the aim of covering up its sudden U-turn on classification of the bank’s Islamic assets that kicked up a storm and caused the lender’s collapse two months ago. 

Deloitte, who were Chase Bank’s external auditors for more than 20 years, in March made a surprise about-turn to classify disputed Islamic banking assets as insider borrowing and slapped the mid-sized lender with a qualified audit opinion that caused panic among depositors, leading to its closure.

READ: Directors blame audit firm Deloitte for Chase Bank’s fall

ALSO READ: Ousted Chase Bank chairman was architect of Sh11bn loot

The changes and restatement of the results were even more intriguing because they were made barely a week after the CBK director of bank supervision, Gerald Nyaoma, wrote to Chase Bank confirming that the lender’s financial statement had conformed to the regulatory rules and authorised their publication on March 30 as required by law.

“We note that the annual returns on the audited financial statements and disclosures for the period ended December 31, 2015 as presented by Chase Bank Kenya conform to the format prescribed by CBK prudential guideline,” said Mr Nyaoma in a letter dated March 30, 2016.

Chase Bank directors, however, submitted to Parliament documents showing that Mr Nyaoma five days later fired another letter to the lender, insisting that it had not made full financial disclosures.

“The errors noted were that there was no mention of the bank’s auditors and whether the auditors issued a qualified or unqualified opinion on the financials,” said Mr Nyaoma in another letter dated April 4, 2016.

Chase Bank’s restated figures showed it had under-reported insider loans by a whopping Sh7.9 billion and ultimately ended up with a surprise Sh743 million full-year loss as opposed to the Sh849 million loss it had declared earlier.

The bank had reported a net profit of Sh2.3 billion for the year ended December 2014.

The documents submitted to Parliament also show that Deloitte’s covert meddling with the 2014 financial statements saw Chase Bank’s loan book for the period to December 2014 rise to Sh64.4 billion from the Sh53.8 billion in statements published a week earlier – a difference of Sh10.6 billion.

The increase was made possible by the movement of what had been classified in the balance sheet as “other assets” worth Sh11.9 billion but was later restated as Sh3.4 billion – the rest of the cash having been moved to directors’ loans and advances.

Accounting professionals said it is illegal for auditors to change the contents of financial statements that had been approved by regulatory authorities and published one year earlier without offering an explanation.

Why the CBK allowed Deloitte to push through such an accounting move and authorise its publication is the question Chase Bank directors are now asking Parliament to investigate. 

The Chase Bank directors argue the disputed assets were joint ventures financed under Musharakah – a Sharia-compliant financing used by Islamic banks where partners are entitled to a share of profits in a ratio mutually agreed upon.

The lender’s Islamic banking window, Chase Iman, was established in May 2009 and offers a bouquet of Islamic banking products. This was the first time Deloitte was raising concerns regarding Chase Bank’s so-called Islamic joint ventures.

The Business Daily has analysed Chase Bank’s financial reports dating back to 2009 and established that Deloitte had since 2012 included Sharia-compliant assets in the balance sheet as “other assets,”.

Deloitte is yet to disclose the reason for the sudden change in asset classification which torpedoed the bank into sudden collapse.

Kenya’s banking sector regulator is yet to outline how other commercial banks with Sharia-compliant windows treat loans and deposits from the Islamic facility.

Kenya has two fully-fledged Islamic banks, Gulf African Bank and First Community Bank, with more than a dozen lenders operating Shariah-compliant windows, including Barclays’ La-Riba, National Bank Amanah, KCB Sahl, and Standard Chartered Saadiq.

The documents submitted to Parliament also show that Chase Bank had in a letter dated July 26 2012, and written by its finance manager Makarios Agumbi, sought CBK approval to revise its financials to accommodate Islamic products.

“We formally request you to consider… a separate off balance sheet line item for Islamic banking,” said Mr Agumbi in the letter addressed to Daniel Muguima, the CBK manager in charge of bank supervision.

“With the growth of Islamic banking business, the amounts have become material to us, hence the materiality principle of accounting necessitate that we present or disclose it separately as attached.”

The Chase Iman window, valued at Sh6 billion, accounted for 11 per cent of the bank’s balance sheet as at December 2012, according to suspended group managing director Duncan Kabui.

Deloitte in May told the team of lawmakers that ousted chairman Zafrullah Khan and Mr Kabui connived to use Chase Bank’s Islamic window to conceal their plan to siphon cash from the lender to entities they co-owned.

“These companies are owned by the chairman, over 90 per cent of the ownership of those companies was the chairman and 10 per cent was the group MD,” said Fredrick Aloo, a partner at Deloitte & Touche in charge of auditing Chase Bank’s accounts.

The CBK forcefully seized the Sh7.9 billion so-called Islamic joint ventures – primarily real estate – from Mr Khan and Mr Kabui and charged them to the bank, which allowed the re-opening of Chase Bank on April 27, 2016 after a three-week closure.

The prime assets confiscated include the Watermark Business Park in Karen, Nairobi a car park at Chase Bank’s headquarters located at Riverside Drive, 240 acres of land on Mombasa Road, a three-acre plot next to the German Embassy on Riverside Drive, and a number of high-end properties in Dubai.