Holding auditors to account next big step for Kenyan shareholders

In the recent past there have been a lot of governance scandals globally. There are many causes of such corporate scams, which have mostly been attributed to the board of directors failing in its fiduciary role to the shareholders.
The directors are charged with managing the company while the shareholders own it.

They also have the expertise in management and are in charge of the day-to-day running of the company. The directors, therefore, have a lot of information which the shareholders may not necessarily have.

The board may mismanage the company leading to a loss in the share value. Kenya has had its fair share of corporate scandals with a number of corporations that were considered success stories suddenly going under due to bad governance. The main cause in my view is due to some directors concealing information as well as cooking books of account to misrepresent performance.

Some directors misrepresent performance because they are under pressure to perform.

They therefore inflate profits so as to have a reflection of good performance when in fact this is not the accurate position.

Other directors misappropriate funds by diverting income into non-existent ventures.

Today, I want to highlight the role of auditors in good governance. In some countries, auditors are appointed by the shareholders while in others are appointed by the directors. Some boards have an audit committee which oversees the appointment and remuneration of auditors. In Kenya, the Companies Act 2015 allows the auditors to be appointed either by the directors or the shareholders.

In my view, unless there is a serious cause for concern, the audit committee should appoint and oversee the auditors as opposed to the members. This is because the directors have the expertise to supervise the auditors and hold them accountable for their reporting.

Other countries stipulate that the audit committee should comprise independent directors. An independent director is a director who has no direct interest in the affairs of the company and is usually appointed due to their neutral ole. Such directors fit well in the audit committee and this has been the international best practice. Board members, however, could also oversee the auditors. For example, they could block the reappointment of a particular auditor as well as sack auditors by resolution.

Auditors are very important for good governance because they are the ones who certify that the books of account are true and fair.

They have a big role to play in the financial affairs of the company. In performing their roles, they have a number of rights, the most important being the right to information. An auditor can seek any information from the company and its officials to enable one file the audit report. It is a criminal offence to give false information to an auditor.

This, therefore, means directors who cook books of account to misrepresent performance can be prosecuted under this provision.

Despite the existence of reprieve in the Companies Act, I have not yet come across a case in the corporate world where an official of a company has been prosecuted for trying to conceal financial information from an auditor.

Auditors who give false financial information in their audit reports also commit a criminal offence which is punishable by fines and jail term. Inasmuch as it is a common practice globally for auditors to collude with directors for financial misreporting, in Kenya I am yet to come across a case where an auditor was penalised under this law.

If the existing provisions of the Companies Act 2015 are upheld then cases of financial misreporting may be fewer. However, shareholders are still not aware of their rights to good governance which is a hindrance to upholding their rights.