Kenyan managers, CEOs admit their firms are cooking books

More than a fifth of Kenyan executives have admitted to the existence of financial reports manipulation in their firms, turning the spotlight on the state of corporate governance in East Africa’s largest economy.

Ernst and Young (E&Y), a consultancy, says in a newly-released report that 23 per cent of Kenyan managers believe irregular adjustment of financial statements is prevalent in their firms, mainly driven by pressure to meet ambitious targets in an increasingly competitive environment.

The report, which was released last week, also says 41 per cent of Kenyan managers believe that most companies report financial performances that are better than the actual figures, an admission that puts to question the integrity of financial reporting in the country.

Kenyan managers polled by the audit firm admitted to having knowledge of at least one of three forms of financial statement manipulation happening in their firms over the past 12 months, all driven by the aim of meeting short-term financial targets.

The survey, which was conducted between December 2014 and January 2015 found that the manipulation occurs through recording of revenues before they are actually received, forcing customers to buy unnecessary stock and underreporting of costs incurred.

“Our survey confirms that some employees are willing to misstate financial information,” E & Y says after polling managers from 36 countries.

“Over 150 respondents said that misstating financial performance can be justified. Even more appear willing to take actions that could result in financial statement manipulation, the report says, capturing the global footprint of the problem.

This means Kenya was in good company as far as financial misconduct goes.

Globally, E & Y found manipulation most rampant in Oman where 99 per cent of executives admitted to one of the three forms of financial alterations happening in their companies in the past year.

India came in second with an affirmative response rate of 62 per cent, Saudi Arabia (43 per cent), United Arab Emirates (40 per cent) while Turkey completed the list of top five with 34 per cent.

Egypt, placed sixth, was the first African country on the list with a score of 32 per cent while Kenya ranked 11th with 23 per cent ahead of South Africa which polled at 22 per cent to take the 13th position in the list of 38 countries surveyed.

“More than one in five senior management respondents were aware of early recognition of revenue in their company,” was the report’s verdict on the global scale of the problem.

“The same proportion had heard of underreporting of costs in their company within the past 12 months.”

Besides admitting the existence of profit manipulation, 90 per cent of Kenyan executives reported that bribery and corrupt practices are prevalent in their companies.

A fifth found offering gifts to win business justifiable while another 15 per cent said offering cash payments to win business is reasonable and critical to the survival of their firms.

These damning conclusions have come in the wake of a series of financial scandals in some of Kenya’s largest companies.

Nairobi-based Haco Tiger Brands was last month accused by South Africa’s Tiger Brands, the majority shareholder, of profit manipulation and pre-invoicing, which inflated the company’s earnings by Sh879.1 million.

READ: Sacked Haco Tiger Brands MD under probe over profit scandal

Five top managers of the firm, which is 49 per cent owned by businessman Chris Kirubi, are said to have moved stock to third party warehouses to make it appear as if full year performance targets had been achieved.

The case has underlined the extent to which some managers are willing to go to earn their bonuses.

Three years ago, an audit into motor vehicle dealer CMC exposed how the firm’s management and directors signed misleading financial statements and allowed the company to adopt risky business models that partly facilitated the funnelling of funds into off-shore accounts, causing shareholders huge losses.

Cement maker, East African Portland Company’s (EAPCC) majority shareholders — the Treasury and the National Social Security Fund, in 2013 claimed that the firm’s financial statements had been doctored, sparking a bare-knuckle fight in the board.

More recently, financial manipulation has been alleged at sugar miller Mumias, Dubai Bank and family owned retail chain Tuskys Supermarkets, painting a gloomy picture of the state of corporate governance in Kenya.