Ernst & Young raises queries over CMC accounts

Auditors Ernst & Young have raised queries over financial statements published by auto dealer CMC Holdings after failing to get all the necessary information linked to offshore accounts.

CMC said the auditors expressed a qualified opinion on the financial statements, auditing lingo meaning that there were information gaps in the balance sheet and earnings statement.

“The auditors have expressed a qualified opinion on the group financial statements based on the existence of certain offshore bank accounts that are not recorded in the group’s books of account,” CMC said in a statement.

“The board together with the relevant authorities has instituted investigations into this matter with a view to bringing it to a conclusion.”

CMC has been in the eye of a storm since late 2011 when Peter Muthoka, its leading shareholder, was ousted as chairman in a boardroom coup.

Bill Lay, the CEO of the auto firm, stoked the wars further when he accused Andy Forwarders, a logistics firm owned by Mr Muthoka, of overcharging the auto dealer to the tune of Sh1.5 billion over a period of five years.

He also accused his predecessor, Martin Forster, and long-serving directors Jeremiah Kiereini and Charles Njonjo of illegally funnelling the company’s funds to secret New Jersey accounts — which is the subject of Ernst & Young’s opinion.

The allegations intensified the boardroom wars culminating in a series of legal suits and suspension of CMC shares from trading at the Nairobi bourse.

The boardroom wrangles have also led to investigations of audit firm Deloitte, which quit as CMC external auditors last February on what the company linked to the difficulties encountered in obtaining information from the company for two consecutive years, 2010 and 2011.

Deloitte is being investigated by the Institute of Certified Public Accountants of Kenya (ICPAK) following a complaint by the Capital Markets Authority (CMA) that the audit firm mis-stated the motor dealer’s accounts, thereby inflating its earnings.

Deloitte is also accused 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.

It is also blamed for failure to disclose CMC’s subsidiary in South Sudan in the annual reports and failure to unearth details of the offshore accounts.

“We relied on information and records presented by the management and if they had deliberately lied to us, it was going to be impossible for Deloitte or any other auditor to detect the fraud,” said Deloitte in its defence over ICPAK probe.

The exit of Deloitte came about at a time when the auto dealer had gone for seven months without an internal auditor, leaving the entire audit function in limbo.

CMC appointed Ernst & Young in the last quarter of 2012 and tapped Wilson Njoroge from Del Monte as internal auditor following a directive from CMA.

“At the time, CMC did not give us enough information about the accounts such as their ownership, location and balances for us to write a similar qualified opinion,” Sammy Onyango, the managing partner at Deloitte, told the Business Daily on Thursday in reference to the Ernst & Young opinion.

“The opinion is a reserved one indicating that the auditor does not give the accounts a clean bill of health,” he added.

Shareholders will not have an opportunity to query the accounting gaps since the firm has delayed its AGM on what it attributed to court cases.