Jamii Bora Bank sues EY in Sh451m Uchumi shares row
Mr Jonathan Ciano, former Uchumi Supermarkets CEO (left) and Jamii Bora Bank CEO Samuel Kimani. Ernst & Young is accused of failing to disclose critical information that would have informed the prospective investors of the true financial position of the retailer. PHOTO | FILE
What you need to know:
This is one of the rare occasions that an audit firm is facing legal action over the quality of its report — a move that is expected to open a new front in the raging corporate accountability debate.
If determined in favour of Jamii Bora, the suit will open a new window for investors to hold book inspectors accountable for losses made in respect of investment choices based on their advice.
Jamii Bora Bank has moved to court seeking to recover millions of shillings it claims to have lost when it bought a large stake in Uchumi Supermarkets on the strength of a report produced by the audit firm Ernst & Young that gave the retailer a clean bill of health.
The bank, which is Uchumi’s single largest shareholder, says it sank Sh451 million in the retail chain during the 2014 sale of shares through a rights issue only to discover later that the decision was based on false information contained in a report prepared by Ernst & Young.
Ernst & Young is accused of failing to disclose critical information that would have informed the prospective investors of the true financial position of the retailer as a loss-making venture not worth of investing in.
“The forensic audit by KPMG thus revealed that Ernst & Young negligently prepared the accountant’s report and as a result Ernst & Young misrepresented the financial position of Uchumi Supermarkets Limited,” Jamii Bora says.
This is one of the rare occasions that an audit firm is facing legal action over the quality of its report — a move that is expected to open a new front in the raging corporate accountability debate.
If determined in favour of Jamii Bora, the suit will open a new window for investors to hold book inspectors accountable for losses made in respect of investment choices based on their advice.
Jamii Bora insists that Ernst & Young is liable for the economic losses suffered in the 2014 rights issue because it only participated in the share sale on account of information contained in the Information Memorandum that the audit firm produced.
Jamii Bora bought 46,580,524 Uchumi shares in the 2014 rights issue, a decision it says was based on the report by Ernst & Young, which at the time were the retailer’s external auditors.
The Uchumi rights issue raised Sh1.6 billion — more than the Sh896 million target the retailer had set for the share sale.
Jamii Bora reckons that a forensic audit on Uchumi by KPMG has since revealed that Ernst & Young was negligent in its interrogation of the retailer’s books, leading to its misrepresentation as a financially safe and sound investment venture.
But Ernst & Young has questioned the existence of any report by KPMG, arguing that the document Jamii Bora is relying on in its suit is unsigned and cannot be admitted as an authority.
The accounting firm holds that the audit report is not the sole determinant of an investor’s decision to purchase shares, making it unfair for Jamii Bora to demand compensation.
Ernst & Young says information in its report was accurate to the best of its knowledge, adding that the report remains accurate to date as it was done using information provided by Uchumi’s management, in line with auditing provisions.
Jamii Bora reckons that the damages and losses it has suffered in the sum of Sh451,952,299 was solely caused by Ernst & Young’s negligent misrepresentation of information regarding the financial position of Uchumi since the retailer was at the time technically insolvent.
Ernst & Young, however, insists that the 2014 information memorandum had a disclaimer that advised investors to conduct their own independent investigations to establish Uchumi’s creditworthiness.
Jamii Bora claims that Ernst & Young did not disclose the existence of a questionable Sh1.1 billion asset sale and leaseback deals Uchumi had with RentCo East Africa.
It has also faulted the audit firm for failing to detect that Uchumi’s actual net loss for the six months ending December 31, 2014 was Sh1.9 billion and not the Sh262 million it reported.
Ernst & Young says the information memorandum and the accountant’s report did not recommend the purchase of Uchumi shares, and that each investor had a duty to carry out due diligence before participating in the rights issue.
“Ernst & Young avers as expressly stated in the information memorandum that the information therein, including the accountant’s report was not a recommendation to Jamii Bora or any other shareholder to take up the rights issue and as a consequence each investor had to exercise due diligence and carry out proper analysis before participating in the rights issue,” the audit firm says, adding that the scope of its responsibilities in preparing the accountant’s report did not amount to a forensic audit.
“The defendant completed and reported the accountant’s report on October 8, 2014 and was not tasked as part of its engagement in the rights issue to audit the results of Uchumi for the six months ended December 31, 2014,” Ernst & Young says. Jamii Bora has also accused Ernst & Young of failing to disclose that Uchumi’s subsidiaries in Uganda and Tanzania made losses to the tune of Sh555 million and Sh376,000 respectively.
Justice Fred Ochieng will on March 1 rule on whether Jamii Bora can file its affidavits afresh, as the initial one was not verified by an authorised advocate.
Ernst & Young has also opposed the suit on grounds that the documents were irregular and wants the suit dismissed.
The audit firm is in a separate suit fighting attempts by the Capital Markets Authority (CMA) to cite it for negligence. The CMA has also based its claim on the KPMG audit report.
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