Audit turns spotlight on deal that cost CMC Sh11.6m
Land Rovers from CMC during a ceremony to flag off police vehicles last year. An audit report says the motor dealer hired Pewin Motors to handle sales to the government in a controversial deal. File
CMC’s finance director Mary Ngige hired a controversial sales agent on flawed terms that have since cost the motor dealer Sh11.6 million, according to the Webber report.
The audit, which looked into CMC’s corporate governance structures and its internal control systems, found that Mrs Ngige signed the Pewin Motors contract on June 1 against the wishes of lead shareholder Peter Muthoka who at the time chaired the company’s caretaker board committee.
Pewin was hired to handle sales to the government— the single biggest buyer of CMC vehicles. Webber auditors cite as an example the Sh9.1 million that CMC has since paid Pewin for sales in which the motor dealer made a net loss.
“This is as a result of a flawed contract which should have been drafted to exclude the payment of commission on loss-making sales,” the Webber auditors say.
Illegal commission
Pewin, whose contract chief executive Bill Lay signed on his first day in office, earns six per cent commission on sales of CMC brands that it has initiated.
The Webber auditors also found that Pewin has been paid an illegal commission of Sh2.5 million for government orders authorised before its appointment as an agent. “A further Sh227,328 is due to the agent in respect of a local purchase order (LPO) authorised before its appointment,” the report says.
The South African auditors have termed the Pewin contract as onerous on CMC leaving the task of dealing with it in the hands of the management.
The deal had initially offered Pewin a sales commission at the rate of three per cent for the Ford/Mazda, Volkswagen and Suzuki brands but this was later raised to six after it was reported that the agent had been receiving payments above the contract rate. CMC amended the contract on August 3, 2011 doubling the commission rate to six per cent.
Gross sales
The auditors say that since Pewin was hired on June 1, 2011, it has been paid Sh25.3 million with a further Sh7.7 million due on total sales worth Sh554.6 million.
Of the Sh554.6 million gross sales, the cost of sales was Sh462.7 million, leaving a gross margin of Sh91.9 million or 16.6 per cent before Pewin’s commission is paid. This leaves the net margin after the agent’s commission is paid at Sh58.8 million or 10.6 per cent.
Mr Lay, who appointed Pewin, defended the controversial contract in an interview with Webber, arguing that it was necessary to curb corruption in sales to the government.
Mr Lay said his assessment of CMC’s relationship with the government was that it was unprofessional and vulnerable to corruption. In his view, Pewin was to act as a professional intermediary to manage the relationship and regularise the company’s government procurement business.
Mr Muthoka, who has since been voted out of the CMC board, raised the red flag over the Pewin contract, describing as “whopping” the six per cent commission rate on gross sales.
The former CMC chairman had claimed that the agent received Sh11.7 million for the sale of 50 Land Rovers to the government yet the transaction was concluded three months before Pewin was hired.
This particular allegation has however been nullified by the Webber report.
“The GOK (government) LPO 839626 for 50 Land Rovers for a total purchase price of Sh168.2 million was originated by the government on March 29, 2011 but only authorised by the State on June 13, 2011 after the contract had been awarded to the agent,” reads the report.
“The commission on this sale was Sh10 million which was paid to the agent after CMC had been paid in full by the government on October 31, 2011,” Webber auditors say.
It remains a mystery as to who initiated the Pewin contract as Mr Muthoka has denied allegations by Pewin’s managing director Peter Kirigua that the former chairman was among the first CMC officials to interview him.
Agency business
Mr Kirigua told Webber that Mr Muthoka interviewed him on or about April 19, 2011 alongside fellow directors Paul Ndung’u and Mrs Ngige who was then the acting chief executive.
He said he was offered the agency business at the meeting and that he wrote a letter to Mr Muthoka on April 21, 2011 in which he expressed his gratitude and confirmed his acceptance of the deal.
Mr Kirigua, a former employee of DT Dobie, added that negotiations had taken place and the offer made and accepted before Mr Lay joined CMC (on May 1, 2011).
But Mr Muthoka denied Mr Kirigua’s account, adding that he had warned Mrs Ngige not to sign any contract with Pewin.
