Imperial Bank owners mulling action on external auditors

Imperial Bank shareholders are contemplating suing audit firm PKF for professional negligence, the second time such action would be contemplated since 2006 when Trust Bank depositors were cleared by the appellate court to sue KMPG Peat Marwick.

The shareholders portrayed themselves as victims of deceit by the deceased CEO Abdulmalek Janmohamed and of professional incompetence of the auditors and the Central Bank of Kenya (CBK) in their first Press briefing since the October collapse of the bank.

“Investigations revealed that the external auditors appear to have failed in their duty to conduct the audit according to laid-down standards, and to have failed to perform basic tests, while it appears that the CBK not only failed in its supervision duties but also failed to respond to “tip-offs” given directly to them,” said the bank’s chairman Alnashir Popat.

PKF were the auditors of the bank in 2003 when the fraud is said to have started. Imperial, like Trust Bank, collapsed with billions in deposits and is now known to have practiced black book (parallel or unofficial) banking.

Asked whether the shareholders will be seeking legal redress from the auditors, the bank’s lawyer Richard Harney said: “It is under consideration.”

A report by US forensic audit firm FTI Consulting who unravelled the fraud that is filed in court notes: “Audit firms have taken out an indemnity insurance but litigation is likely to be necessary,” indicating a likely legal showdown.

Auditors usually argue their view of a company is dependent on the documents shared by the management, usually wriggling out of professional blame.

CBK’s supervision department has come under the spotlight following disclosure that it had received emails alerting it of unsound practices in the bank yet it did not dig into the lender’s affairs.

The board claimed there were no signs on the health of the lender to arouse suspicion by shareholders or non-executive directors.

As per the Banking Act, it is the role of the board of directors to hire and check top management.

Mr Popat, said Mr Janmohamed, whom he referred to as a disturbed man, doctored documents presented to the board, impending decision making.

“Mr Janmohamed was a colleague, friend and to many of us an extended member of the family and none of us could have imagined a betrayal at this level,” said a teary Mr Popat.

The board said the shareholders were yet to receive any formal response from the Central Bank on their proposed revival plan.

Shareholders have indicated willingness to inject fresh capital of Sh10 billion, which will be complemented by conversion of depositors savings.

CBK has, however, publicly said it expects the shareholders to bear a heavier burden than depositors in the revival process, demanding Sh20 billion from the owners.

READ: Imperial seeks Sh20bn deposit conversion into equity

Mr Popat said shareholders had not been furnished with the status report of the bank, which would justify the higher capital demand.

The shareholders argue they are not obligated to inject new capital but made a voluntary proposal in an effort to keep the institution afloat.

READ: Imperial Bank owners and CBK feud over reopening delays

CBK has, however, handed over some of the bank’s liabilities to KCB and DTB, which have paid out savings of up to Sh1 million to persons who had deposits in the bank.

The regulator has indicated it will be handing out more assets and liabilities to the two banks, which will pick out the good business they are willing to absorb.