Corporate News

PwC faces legal action over forensic audit of motor dealer

Photo/File  Land Rovers from CMC Motors. A forensic audit conducted by PwC into the affairs of the motor dealer has seen the auditor taken to court by one of the directors in what promises to be a landmark case.
Photo/File Land Rovers from CMC Motors. A forensic audit conducted by PwC into the affairs of the motor dealer has seen the auditor taken to court by one of the directors in what promises to be a landmark case.  

PricewaterhouseCoopers’ forensic audit of troubled motor dealer CMC has attracted legal action in what promises to be a ground-breaking suit for Kenyan accountants.

In the suit that goes to the heart of PwC’s business, Peter Muthoka — the largest shareholder at CMC — is questioning the integrity of the audit firm, accusing it of multiple offences including failure to comply with generally accepted accounting standards and of making findings based on unreliable and speculative information.

PwC is also accused of publishing and distributing a report containing material falsehoods, expressing false opinions based on third party reviews without interrogating them and of failing to report that CMC’s dealings with Andy Forwarders was on contractual and consensual terms.

The suit – the first to be filed against a Kenyan audit firm over the outcome of a forensic investigation – is expected to open up the accounting profession to public scrutiny and to define the boundaries of their liability for damages suffered by the subjects of their investigations.

Mr Muthoka, who is represented by Nairobi lawyer Ochieng Oduol, wants the court to declare the forensic audit null and void because it was not authorised by the CMC board of directors and is in violation of the motor dealer’s memorandum and articles of association.

PwC, through its lawyer, Kimani Kiragu, of Hamilton and Mathews has denied all the charges, arguing that it compiled the report within the scope of materials that CMC made available.

The challenge to PwC and its head of forensic audit, Martin Whitehead, muddies the waters for CMC chief executive Bill Lay and his chairman, Joel Kibe, who have sued Mr Muthoka for Sh1.5 billion that Andy Forwarders allegedly over-invoiced the motor dealer since 2006.

It erects a new hurdle for their suit, which is based on PwC’s audit report whose integrity is now in question and its author under legal scrutiny.  

Though PwC’s subsidiaries have fought many legal battles around the globe, including class action suits over its failure to detect falsehoods in information provided for auditing purposes, this is the first time that the Kenyan arm is facing a suit over its findings in a professional assignment.

Mr Muthoka is seeking court orders to invalidate the January 23 forensic report and expunge all unjustified adverse findings, opinions and recommendations made against him on matters affecting the business of CMC Holdings.

On Thursday, Mr Muthoka urged Mr Justice Daniel Musinga to declare that CMC’s September 23, 2011 engagement of the forensic auditor to carry out investigation on matters affecting CMC’s business, was undertaken in violation of the company’s memorandum and articles of association.

The Andy Forwarders chairman is further asking the court to issue a permanent injunction restraining PwC from circulating, publishing further or presenting in any manner the report.

He is also seeking payment for general damages and compensation for breach of duty and negligence in the preparation and presentation of the report.

CMC has sued Mr Muthoka for Sh1.5 billion he is alleged to have defrauded the company through inflated charges by logistics service provider Andy Forwarders.

CMC Holdings and CMC Motors Group jointly sued Muthoka and Mr Joseph Kivai, accusing them of conflict of interest in their handling of affairs between Andy and CMC.

PwC said in its report that Andy improperly obtained between Sh1 billion and Sh1.1 billion in five years by deliberately inflating the prices of logistic services provided to CMC.

On Thursday, CMC and Daniel Kabuba Maina — a minority shareholder — filed an application seeking to be joined as parties to the suit, arguing that their participation would help the court in adjudicating the dispute.

Mr Justice Musinga will make a decision on whether to join the parties as litigants on April 23.

Mr Maina is seeking to have CMC shares worth Sh1.1 billion allegedly acquired by Mr Muthoka and Andy Forwarders between 2006 and 2011 held in trust.

He wants to restrain both Andy and Mr Muthoka from influencing, directing or in any way participating in the affairs of CMC as director.

Through his lawyer, Ahmednasir Abdullahi, Mr Maina told Mr Justice Musinga that he sought court intervention to protect CMC’s minority shareholders and the greater public interest, saying the court had a duty to safeguard the interest of shareholders in public companies from few controlling interests.

Mr Maina claims to own 15,200 shares in CMC and argues that the continued stay of Mr Muthoka as a director of the firm would be untenable following the audit by PwC.

The PwC report accused Mr Muthoka of breaching his statutory duties owed to the company in his capacity as a director.

The minority shareholder says that there is an arguable case to believe that Mr Muthoka committed a serious economic offence against both the CMC and shareholders and that his continued stay will hurt both the name and standing of the motor firm.

Mr Oduol wants the audit report set aside, saying it is worthless and cannot be used as an authentic document to victimise his clients.

He is also opposed to CMC and Mr Maina joining the suit because “both are not auditors to challenge the report.”