Capital Markets

CMA wants Deloitte penalised for ‘abetting’ fraud at CMC Holdings

CMC

CMC Holdings showroom in Nairobi. PHOTO | FILE

The Capital Markets Authority (CMA) has gone to court in a bid to secure stiffer penalties on audit firm Deloitte & Touche and former finance director of CMC Holdings Sobakchand Shah for abetting alleged fraud and mismanagement at the motor vehicle dealer.

In an appeal filed at the High Court on Friday, CMA is seeking orders to set aside a recent ruling by the Institute of Certified Public Accountants of Kenya (ICPAK) that virtually let Deloitte off the hook and laid out punitive measures against Mr Shah that the regulator has termed as lenient given the scale of the alleged misconduct.

CMA wrote to ICPAK in March 2012, asking the professional body to investigate the conduct of Mr Shah and Deloitte and take the necessary action, which could include the withdrawal of the audit firm’s operating licence.

Deloitte could also face a reprimand from the disciplinary committee through the Kenya Gazette and the media, hurting its standing in the consultancy business where integrity is key to acquiring and retaining clients.

CMA reported Mr Shah and Deloitte to ICPAK after reports of massive fraud, conflict of interest, and breach of fiduciary duty at CMC that cost its shareholders billions of shillings.

READ: CMC report on secret fund audit ready

The Sunday Nation obtained the letter dated November 4, 2014, written by ICPAK’c chief executive Patrick Ngumi to Mr Shah, informing him of the organisation’s decision on the matter.

ICPAK imposed a fine of Sh20,000 on the former CMC executive in addition to another Sh50,000 to meet the cost of hearing the matter.

He is also suspended for two years from the institute and will have to attain 60 hours of continuous professional development before he is readmitted.

The letter is silent on Deloitte, and its findings have drawn the ire of CMA which now wants the court to compel ICPAK to look into the matter afresh.

“That the decision and determination of the Disciplinary Committee of ICPAK — be set aside,” reads one of the CMA’s prayers.

“The complaint by the appellant (CMA) be heard afresh by the disciplinary committee of ICPAK. In the alternative, ICPAK be directed to appoint a special committee to undertake an inquiry on the complaint by the appellant.”

The regulator says the ruling, as it stands, sets a bad precedent and does not give adequate weight to the severity of the issues raised and their implications.

CMA says the disciplinary committee erred by failing to give any reasons, justification or legal reasoning for the “failure to consider and deliberate on the role and acts of Deloitte, its partners and finance and accounting staff in CMC at the material time.”

The regulator accused Deloitte of misstating the auto dealer’s accounts by abetting the booking of undelivered vehicle sales as revenues and not capturing interest payments for cars sold on credit, thereby inflating its earnings.

CMA also accused the audit firm of failing to detect the existence of illegal offshore accounts that were fed by suppliers who over-invoiced the motor dealer.

Clean bill of health

CMA sees the lack of reference to Deloitte’s role as an implicit acquittal of the audit firm, which gave the motor dealer’s books a clean bill of health during its tenure.

Mr Shah had served as the company’s finance director for years until his departure in 2010.

Deloitte replaced PricewaterhouseCoopers (PwC) as CMC’s auditors in 2006 and continued in that role until 2012 when the firm resigned, citing the motor dealer’s boardroom wars which it said made its work difficult at the time.

Deloitte’s CEO Sammy Onyango, who is listed as one of the interested parties in the appeal, has previously defended his firm from claims that it failed to expose the scams at CMC.

Mr Onyango said the audit firm relied on information supplied by management and did not raise any suspicion.

He further argued that CMA only learnt of the malpractices after insiders in the company fell out and started exposing the underhand dealings.

READ: Deloitte blames CMC bosses for audit woes

He said the only way the issues could have been detected was if a forensic audit had been conducted or if an insider blew the whistle, adding that this is beyond the mandate of a normal audit work.

The CMC scandal came to light after former CEO Martin Forster left behind documents revealing the existence of the offshore accounts from which payments to several directors and senior managers were made.

The findings prompted CMA to launch a forensic investigation into the affairs of CMC, leading to damning evidence that saw the regulator forward the case to ICPAK for action.

CMA says the institute made its ruling without giving it a hearing, denying it an opportunity to make presentations including detailed evidence of its members’ misconduct.

The regulator insists that ICPAK must expressly investigate whether Deloitte played a part in the accounting failures and alleged fraud at the motor dealer.

“The disciplinary committee erred by failing to consider that the entity instructed by CMC Holdings, as external auditors at the material time, was Deloitte and further failed to determine whether the said firm was vicariously liable for the failures, omissions, negligence and breaches by its partners, duly authorised representatives and agents,” the regulators says in its appeal.

Globally, audit firms have come under scrutiny for abetting or failing to identify fraud in numerous cases including that of Enron, the collapsed American energy firm.

It is not clear whether ICPAK considered the role of PwC in the affairs of CMC given that some of the fraud dates back to years when the advisory firm was CMC’s external auditor.

The overcharging of CMC by suppliers and management of the foreign accounts began in 1996 and continued until late 2000s. PwC had served as CMC’s auditors for a decade before departing in 2005.

The latest verdict from ICPAK marks the second time one of the Big Four audit firms has come under scrutiny from the institute after the investigation of PwC in the wake of the near collapse of Uchumi Supermarkets in 2006 on whether its opinions were in step with set professional standards.

PwC was found to have operated above board in that case.

Following the resignation of Deloitte, CMC hired Ernst & Young as its new auditors.

The vehicle firm has since been acquired by Dubai-based Al-Futtaim Group, making it a private company and not subject to CMA regulations.

However, the markets regulator is seeking more punitive action against Deloitte and Mr Shah as a future deterrent and to help restore investor confidence in the Nairobi Securities Exchange where local and foreign investors hold over Sh2.3 trillion.

CMA accused Mr Shah of multiple offences including overseeing the publication of 2010 accounts that understated the company’s overdrafts by Sh750 million.

He was also accused, together with other members of CMC’s board, of adopting a risky credit-based sales strategy where the company would borrow to finance its customers’ purchases.

A forensic audit report by South Africa’s Webber Wentzel found that CMC lost billions of shillings through this model.

CMA says it is disappointed by ICPAK’s failure to enforce its professional standards more strictly in addition to failing to recommend to the Director of Public Prosecution further action on the CMC scandal.

The regulator has been fighting a drawn-out battle to recover about Sh200 million — including fines — from former CMC chairman Jeremiah Kiereini who is alleged to have received Sh65 million from the offshore accounts illegally.

First published by Sunday Nation