CMC suffers a blow as auditor quits and bank stops credit line
Photo/File
CMC Holdings showroom located in Industrial Area along Lusaka Road. CMC has suffered a double blow after audit firm Deloitte withdrew its services and a local bank cut a key credit line to the company.
Troubled motor dealer CMC has suffered a double blow after audit firm Deloitte withdrew its services and a local bank cut a key credit line to the company, complicating efforts to pull it out of the loss-making pit into which it fell last year.
Deloitte made its intention known to the CMC management on February 27 in a letter signed by its chief executive, Sammy Onyango.
Deloitte’s letter to CMC chairman Joel Kibe, cites persistent boardroom wrangles in the motor firm as the reason for its decision to quit, saying it had become difficult to continue in the role under the circumstances.
“Under these circumstances, it is not possible for us to carry out our responsibilities effectively,” Mr Onyango says.
“We have therefore decided not to offer ourselves for re-appointment as your auditors.”
CMC chief executive Bill Lay, however, claimed that Deloitte’s exit was not surprising as it was imminent.
“CMA (the market regulator) had asked us to change our auditors and we planned to do so in the next AGM,” he said.
But the audit firm said it had resigned from auditing CMC because of the difficulties it had encountered in obtaining information from the company for two consecutive years of 2010 and 2011.
People familiar with the on-goings at CMC said Deloitte has been uncomfortable in the task of auditing the motor firm since rival PricewaterhouseCoopers (PwC) was called in to conduct a forensic audit into the company’s finances since 2006.
Deloitte’s discomfort arose from the fact that PwC had itself audited CMC for nearly 10 years until the end of 2005.
Deloitte, therefore, saw the restriction of forensic audit to the period after PwC’s exit as selective and risky to its interests as a consulting firm.
PwC’s terms of reference included investigating the alleged diversion by directors of CMC funds into foreign accounts in Jersey Island that preceded Deloitte’s appointment as auditors, raising the question as to whether PwC could be impartial in the probe.
Deloitte’s exit leaves CMC shareholders highly exposed coming at a time when the company is without an internal auditor and its governance structures weakened by the protracted boardroom wrangles.
CMC’s internal auditor quit in April and is yet to be replaced, meaning the entire audit function is now in limbo.
The latest developments also turn the spotlight on CMC auditors’ responsibility in failing to detect the alleged inflation of invoices and diversion of funds from the company – the two issues at the centre of the boardroom wars.
PwC and Deloitte have throughout their tenure as CMC auditors certified the company’s books as reflecting a true picture of its profitability and financial position.
Deloitte embarked on the task of auditing CMC last October, a month after the motor dealer’s financial year ended, but does not appear to have concluded the exercise five months later.
Inability to finish the audit is said to be part of the reason CMC has not held its annual general meeting – that traditionally takes place in late February or early March.
CMC’s shareholders should also worry that the auditors, who have promised to attend the upcoming AGM to present the 2011 report, are leaving in the middle of a bruising battle for control of its board.
That battle has seen the market regulator, CMA, seek court injunction against the lead shareholder, Peter Muthoka’s, attempts to hold a special AGM for purposes of electing new directors.
Only shareholders can appoint external auditors at an AGM and the failure or inability to convene the meeting means CMC could stay without auditors for a long time.
Mounting pressure on CMC’s business now risks extending the suspension of its shares from the Nairobi Securities Exchange (NSE), as the market regulator seeks to protect minority shareholders from a possible rapid erosion of the company’s market value.
Deloitte’s exit came 10 days after Standard Chartered Bank blocked CMC’s credit line saying it had come to the conclusion that the boardroom wrangles amounted to a default of the financing agreement it has with the motor dealer.
“Please note that recent reports that have come to our knowledge in respect to disagreements among members of the board of directors of CMC Holdings constitute an event of a default,” said the bank’s relationship manager, Ian Amogola, in a letter dated February 16.
“We have with immediate effect suspended all the limits as advised in the banking facility letter dated June 7 2011.”
Standard Chartered has also appointed two senior managers, Paul Wanyoike and Francis Njenga, “to work out a repayment plan in respect of the company’s outstanding debt” to the lender.
CMC’s financiers are said to have held a meeting with management mid last month in which they expressed concerns over the motor dealer’s weakening financial position.
CMC’s financial statement for the year ended September 30, 2011 shows it had current liabilities totaling Sh9 billion, an increase of Sh200 million compared to the 2010.
The motor dealer’s cash flow position deteriorated to an overdraft of Sh2.3 billion from Sh1.2 billion, while sales declined 7.1 per cent to Sh11.8 billion as the company slid into net losses of Sh181 million compared to a full-year profit of Sh407 million in 2010.
CMC is said to have requested for a rescheduling of outstanding debt, indicating that it is finding it difficult to finance its obligations.
KCB, StanChart, Barclays and CFC Stanbic are the company’s main bankers, according to the 2010 annual statement.
The motor dealer owes KCB an estimated Sh3.5 billion advanced mainly for import financing.
On Thursday, Mr Lay denied that any bank had suspended credit lines to his company.
“CMC continues to receive support from banks, franchise holders, and other suppliers,” he said in a telephone interview.
That Deloitte and StanChart have cited boardroom wrangles as reasons of their latest actions takes the ball to the doorsteps of the shareholders who alone have the mandate to knock sense into the directors’ heads or kick them out altogether.
CMC’s troubles became public in March last year following the sacking of former chief executive Martin Forster and a subsequent boardroom coup that saw the ouster of long-serving chairman Jeremiah Kiereini.
The hiring of Mr Lay two months later only served to further polarise the board. The new CEO added fuel to the smoldering boardroom war after he accused current and former board members of fraudulent dealings with the company.
Mr Lay accused Mr Muthoka of costing the company billions of shillings through inflated charges for transportation, clearing and forwarding services provided by his company, Andy Forwarders, to CMC.
He also accused his predecessor Mr Forster of opening an offshore account that was used to divert funds from the company for distribution to a small clique of senior managers and board members.
But Mr Muthoka has hit back at Mr Lay accusing him of signing a skewed sales agency contract with Pewin Motors on his first day in office that has cost CMC millions of shillings in inflated invoices.
Early this month, the boardroom wars also caught the attention of Jaguar Land Rover South Africa, who are the region’s main franchise holders for CMC’s range of iconic luxury cars, Jaguar and Range Rover models that are popular with Kenya’s elite and the Land Rover brand that is mostly used by state agencies.
Mr Lay, Mr Kibe and a Ms Pamela flew to Jaguar Land Rover headquarters in Pretoria on February 15 to make a pitch for the Kenyan dealership.
But in a lengthy letter dated March 2, the Jaguar Land Rover operations director for Sub Sahara Africa, Nigel Clarke, and the managing director for South Africa and Sub Sahara Africa, Kevin Flynn, however term the trio’s presentation during the meeting as “disappointing.”
“The presentation and subsequent debate was lacking in clarity, commitment and vision for our brands development in Kenya. It only served to highlight a number of grave concerns which we have discussed previously,” states the letter.
Top among Jaguar Land Rover’s concerns is the seeming lack of funding for CMC’s business operations.
The letter states, for example, that the South African firm has received information of the funding difficulties that CMC is experiencing locally.
It also indicates that Jaguar Land Rover’s credit insurers, Euler Hermes, have withdrawn CMC’s insurance cover citing funding concerns.
“Our concern is that the current funding arrangements and the request to reschedule current debts will restrict our business development in Kenya as CMC’s ability to fund key areas of the business is now in question,” states the letter.
