Ernst & Young accused of helping Uchumi cook books

Audit firm Ernst & Young helped top Uchumi Supermarkets managers understate the retail chain’s debts to suppliers, make questionable valuations of some assets and omit crucial information to investors during a 2014 rights issue, the Capital Markets Authority (CMA) has said in fresh court filings.

Ernst & Young particularly stands accused of knowingly allowing publication of false figures in the information memorandum that Uchumi used in the 2014 rights issue that raised Sh1.6 billion — more than the Sh896 million target.

Top on the list of issues that have put Ernst & Young in trouble with the regulator is a Sh350 million sale and leaseback deal Uchumi struck with RentCo East Africa.

The CMA notes that while the deal was signed in September 2014 and cash exchanged the same month, it was recognised in Uchumi’s accounting books for the year ended June 30, 2014 — three months before it actually took place.

The arrangement with RentCo East Africa was, however, not disclosed in the information memorandum used in the 2014 rights issue.

“The sale and leaseback arrangement though a material transaction was not disclosed in the information memorandum during the rights issue. The CMA opines that such a transaction ought to have been disclosed.

This transaction was, however, improperly recognised in the financial year ended June 30 as cash received and other income, thereby enhancing the cash and revenue position of Uchumi,” the CMA said in the notice to show cause letter to Ernst & Young that is now part of the documentation filed in court.

The CMA has also pointed out contradicting entries in Uchumi’s books and financial statements, particularly the amounts owed to suppliers and unpresented cheques.

The regulator adds that as at June 30, 2014, Uchumi’s debt to suppliers was stated to be Sh1.078 billion yet in its audited financial statements the amount reads Sh1.033 billion.

The retailer’s unpresented cheques for the same period are indicated as Sh1.71 billion, contradicting the Sh746 million entered in the audited financial statements.

“In the above regard, it is alleged that Ernst & Young as Uchumi’s external auditors and reporting accountant facilitated or omitted to prevent publishing of information you knew to be untrue, incorrect and/or misleading contrary to provisions of the Capital Markets Act,” the markets regulator adds in the notice.

The CMA made the revelations in its response to a suit Ernst & Young lodged in court seeking to stop an inquiry into alleged misconduct by Uchumi’s external auditors.

The CMA in September issued a hearing notice to Ernst & Young, requiring it to offer insight into its involvement with Uchumi and whether it was culpable for any wrongdoing.

Ernst & Young has obtained a court order barring the CMA from proceeding with the hearing until the suit is heard and determined.

Ernst & Young says in its suit that the CMA’s notice to show cause implies that the regulator has already deemed the audit firm to be guilty of an offence.

Gitahi Gachahi, the Ernst & Young chief executive, says his firm was only furnished with part of the information from a report that rival accounting firm KPMG had submitted pointing to massive financial impropriety at Uchumi.

Mr Gachahi says the regulator had initially only sought for a meeting with Ernst & Young’s audit team through a phone call during which there was no mention of an inquiry or investigation of the audit firm, and that the notice to show cause came as an ambush.

But the CMA now says it followed the procedures set out in the Capital Markets Act in issuing Ernst & Young with the notice to show cause.

Attorney-General Githu Muigai, who has been enjoined in the suit, says Ernst & Young has not shown how its right to fair administrative action has been violated by the notice to show cause, and has asked Justice Edward Muriithi to dismiss the suit.

The CMA has also questioned the valuation of Kasarani Mall, a subsidiary of Uchumi that has a 20-acre piece of land in Nairobi’s Kasarani area.

The CMA says Ernst & Young’s revaluation of the land was skewed, as it escalated the asset’s worth from Sh450 million in 2010 to Sh2.2 billion in 2014 without consideration of crucial factors such as a bitter ownership dispute that has seen two caveats issued barring its sale.

The revaluation also failed to indicate the risks surrounding the land tussle and whether the Sh2.2 billion value was actually realisable.

“It is alleged that notwithstanding being aware of the above, Ernst & Young failed to require that the revaluation on the said property took into account the indicative impairment parameters which include uncertainty regarding ownership of the land, restriction on realisability and limitation on recoverability. This failure was contrary to International Accounting Standards-40 paragraph 72,” the CMA adds.

Justice Muriithi has ordered that the suit be heard by another judge, Louis Onguto, on December 21.