Audit reveals how inflated tenders cost CMC Sh1.1 bn

Motor dealer CMC Holdings lost more than Sh1.1 billion in inflated charges paid over five years to a transport and logistics firm owned by CMC board member and former chairman Peter Muthoka, a forensic audit by PricewaterhouseCoopers (PwC) has found.

The report — which was commissioned by the management of the NSE listed company — potentially opens the door for CMC to claim the money from Mr Muthoka and other senior executives who are alleged to have colluded to defraud the motor dealer.

CMC’s chief executive, Bill Lay, accused Mr Muthoka’s transport and logistics services firm, Andy Forwarders, of overbilling shortly after his appointment as CEO last year, sparking a vicious boardroom war that nearly paralysed operations at the company.

That claim led to the replacement of Mr Muthoka as chairman by Mr Joel Kibe on September 8, last year, further driving a wedge between directors that saw the capital markets regulator suspend CMC’s shares from trading at the Nairobi Securities Exchange (NSE).

“It is our view that as a result of the dealings between Andy and CMC, the company has suffered a substantial loss of around Sh1.1 billion,” read part of the forensic report seen by Business Daily.
“In broad terms Andy charged CMC around double what it would have paid on an open tender basis,” it concluded.
Another Capital Markets Authority (CMA) commissioned forensic audit report by Webber Wentzel of South Africa is expected next week.

PwC said the loss would have been avoided had CMC procured for logistics services through competitive tendering. The audit revealed that Andy Forwarders increasingly took over most of CMC’s transport, freight and warehousing services since 2003, culminating in the signing of an exclusive five-year contract in 2010 by former CEO Martin Forster who was ousted in March last year.

The report noted that even though Andy claimed to have provided CMC reliable logistics services, the lack of competitive tendering, frequent price increases and inflated exchange rate costs saw the company pay above market rate charges.

PwC recommended that the money be recovered through negotiations with Andy Forwarders and the suspected senior staff who are supposed to have negotiated favourable rates for CMC.

It, however, added that criminal charges can be pursued against directors and employees of CMC who were responsible for the losses.

The audit firm noted that CMC can only recover excess charges billed within the past six years since claims going beyond this period would have no legal standing.

On Thursday, Mr Lay declined to comment on the PwC report.

“I cannot divulge or comment on any contents of the report before it is discussed by the CMC board and the Capital Markets Authority,” he said.

Mr Lay terminated Andy’s contract in September and hired Damco and SDV Transami to handle CMC’s transport and logistics services.

Mr Muthoka, who is also the single largest shareholder of the firm with a 24.7 per cent stake, on Thursday said he did not recognise the audit report, which he said was partisan.

“My lawyers have made it clear that we will not accept contents of that report because it was commissioned by management without authorisation of the board,” Mr Muthoka said.