CMA blocked from punishing Ernst & Young over Uchumi job
An Uchumi Supermarkets store in Nairobi. PHOTO | FILE
What you need to know:
EY says in a suit it has filed in court that KPMG never gave it a chance to respond to queries raised in the forensic interrogation of Uchumi’s books, as required.
The KPMG report exposed how top Uchumi managers cooked books to cover up massive fraudulent transactions amounting to over Sh1.9 billion leaving the retailer on its death bed.
EY has secured a court order barring the CMA from proceeding with hearings on whether EY should be punished until the legality of the regulator’s action is determined.
Consulting firm Ernst & Young (EY) has poked holes into an audit report prepared by rival KPMG, implicating it in the cooking of books at Uchumi Supermarkets to cover up massive fraud and irregular dealings.
EY says in a suit it has filed in court that KPMG never gave it a chance to respond to queries raised in the forensic interrogation of Uchumi’s books, as required.
“Prior to November 2, 2016 and, including the entire period that we were in correspondence with the CMA [Capital Markets Authority] as well as appeared before them, we had not been privy to nor supplied with a copy of the said KPMG report of May 12, 2016.
"EY has never been invited to appear before and or interviewed in any way before by KPMG before or after the issuance of the said report,” says the audit firm.
The KPMG report exposed how top Uchumi managers cooked books to cover up massive fraudulent transactions amounting to over Sh1.9 billion leaving the retailer on its death bed.
KPMG did the special audit under the direction of the markets regulator, which had ordered enforcement proceedings against Uchumi in the wake of a petition it received claiming that EY helped the retail chain’s managers to cover up illicit transactions by manipulating the books of accounts.
EY has secured a court order barring the CMA from proceeding with hearings on whether EY should be punished until the legality of the regulator’s action is determined.
EY has sued the CMA and Attorney-General Githu Muigai seeking to stop the disciplinary proceedings.
EY says the KPMG probe condemned it without a fair hearing, and can therefore not be used as a basis for disciplinary action.
“EY maintains its reservations and complaints against the KPMG report and the content therein. The extracts of the report as received by EY indicate that the same is a draft, unsigned and inconclusive.
"It is inconclusive and inadmissible in law and ought not to be relied on by the CMA in any of its processes or procedures,” EY chief executive Gitahi Gachahi says in court filings.
The CMA in its response to the suit says it was not part of the KPMG team that inspected Uchumi’s books and that it is therefore not in a position to know whether the retailer’s former auditor was given a chance to respond to the questions arising.
The capital markets regulator claims EY may have knowingly allowed the publication of untrue figures in an information memorandum used in Uchumi’s 2014 rights issue that raised Sh1.6 billion, more than the Sh896 million target.
Among the issues placing EY in the regulator’s crosshairs are questionable asset sale and leaseback deals totalling Sh1.1 billion and how Sh895 million raised from a rights issue in 2014 was spent.
A Sh350 million asset sale and leaseback deal with RentCo East Africa is one of those highlighted in the suit papers. Besides, the CMA says details of Uchumi’s financial standing were faked in an information memorandum published to the public during the 2014 rights issue.
Clandestine probe
Uchumi’s former external auditor has also claimed that the CMA’s investigations were clandestinely conducted, making them illegal.
Mr Gachahi holds that the CMA categorically said in a meeting with EY that there was no probe being carried out, and that the regulator was only seeking clarifications on some findings of the report.
EY insists that the CMA has never afforded it an opportunity to defend itself on the allegations of aiding book cooking at Uchumi.
But the CMA insists that its investigations on EY were legal as the law allows it to act on complaints such as the one Uchumi made against its former external auditors.
The regulator adds that in the course of its probe, EY was invited to and attended meetings with the CMA to respond to allegations made against it.
“EY was invited and did attend meetings with representatives from the CMA during the inquiry carried out. All the issues that were raised in the notice to show cause why enforcement action should not be taken had been substantially discussed in the meetings between EY and the CMA,” says Colin Maweu, the CMA’s head of enforcement.
Strike out the suit
The Attorney-General has asked High Court judge Edward Muriithi to strike out the suit, arguing that EY has failed to file evidence that it was not afforded a fair opportunity to be heard during the CMA probe.
“In inquiring into the affairs of EY, the CMA was acting within its legal mandate. EY was accorded an opportunity to present its case before the CMA therefore the issue of lack of a fair hearing does not arise in this matter.
The petition is frivolous as the threshold for a grant of orders sought has not been met,” Prof Muigai said.
Justice Muriithi has ordered EY and the CMA to appear before him on January 17 next year for a hearing.
