Top CMC directors found to have signed sham accounts

Directors and the management of troubled motor dealer CMC signed sham financial statements and put the firm on a risky business model that more than doubled its liability in a span of four years.

These are among the key findings of the Capital Markets Authority (CMA) after nearly a year of investigations into the affairs of the firm that has been at the centre of shareholder wars since May last year.

CMA on Tuesday released its final report on CMC’s operations indicating that CMC under the leadership of former head of civil service Jeremiah Kiereini and long serving managing director Martin Forster operated in blatant breach of corporate governance rules and in defiance of regulations that govern public listed companies.

For two consecutive years, for instance, they duped investors by signing off accounts that were not prepared in compliance with the International Financial Reporting Standards (IFRS).

“In 2009 and 2010, the board signed off accounts which were not prepared in accordance with International Financial Reporting Standards and which were later published and presented to other shareholders and regulators,” the report says.

CMC management, with a complicit board, also adopted risky business models that saw the motor dealer’s debt rise to Sh502 million at the end of financial year in September 2011.

The capital markets regulator also found that CMC board and management failed to put in place proper internal audit controls exposing investors to massive loss of funds through irregular deals whose ultimate damage is yet to be established.

Kungu Gatabaki, who chairs the CMA’s board of directors, last Friday said that the CMC board had failed to adequately supervise the management leading to an accumulated bad debts provision of Sh1.37 billion as at the end of September last year.

The report accuses CMC management – headed by former managing director Martin Forster – of completely failing the test of corporate management and of resorting to arbitrary management of the firm that is listed at the Nairobi Securities Exchange.

“The CMC case is an exhibit of an appalling failure of corporate governance. It is a classic case of the tail wagging the dog,” CMA chairman Kung’u Gatabaki said adding that Mr Forster, had a larger than life profile in the company that made his word was law.

“He called the shots and in many instances was more powerful than the company's Board of Directors,” Mr Gatabaki said in the statement released last Friday.

The market regulator has found that a number of CMC directors were beneficiaries of “the healthy trade” and failed to question Mr Forster’s management decisions including verifying what he was doing.

“The board with an exception of at most three directors slept on their job and abdicated their fiduciary duties to the company and shareholders to the group managing director,” the report says.

CMA’s report indicates that 19 directors of the motor dealer appeared before the ad hoc committee to respond to accusations made against them in the Webber Wentsel’s report.

Webber Wentsel is the South African audit firm that the regulator hired late last year to conduct a forensic audit into the motor firm.

The report accused Mr Forster of a number of breaches, including participating in the opening and operation of offshore accounts into which millions of CMC funds were stashed away and shared by a select group of board members and staff.

The long serving CMC boss was also found to have adopted a risky business model, including borrowing to lend, and failing to put in place mechanisms to manage risks associated with the model.

Webber Wentzel also found Mr Forster to have failed to exercise effective oversight by approving credit extension beyond the limit set by company’s board resulting into massive losses and of appointing a company secretary who was not qualified to hold the position.

He shares the burden of these allegations with Mr Kiereini and Mr Njonjo who are former directors.

The auditors also found that Mr Forster failed to disclose the extent of the company’s compliance with the guidelines on corporate governance practices and that he signed off the accounts that were not prepared in compliance with International Financial Reporting Standards in the year 2009 and 2010.

For these actions, CMA has declared Mr Forster ‘the most responsible for the failures in proper corporate governance at the motor dealer.’

He has consequently been barred from ever sitting on the board of any listed firm in Kenya and has to pay back to the company millions of shillings he received from the off-shore accounts.

Together with Mr Kiereini, CMA wants Mr Forster to pay the motor firm an amount equal to two times what he received from the motor dealer.

Seven former directors of the CMC (H) including Charles Njonjo, Richard Kemoli, Andrew Hamilton and Sobakchand Shah, some who opted not to appear before the ad hoc committee were disqualified from ever sitting in boards of listed firms.

They were barred after the regulator concluded that they failed to exercise effective oversight on management, failed to disclose the extent of the company’s compliance with the guidelines on corporate governance practices and signed off sham accounts.

The Webber Wentzel report indicates that CMC directors established an offshore account in St Hellier, Jersey Islands, whose main source of funding were cash deposits in a NatWest Bank account named Corival (1996).

The account which was established with help of accounting firm Ernst & Young was called “Fair Valley Trust” and was funded by inflating import prices of Land Rover, Nissan UD and Suzuki vehicles.

CMC would negotiate for arms-length cost with makers of these vehicles but then ask the car makers to inflate the prices and funnel the excess funds to foreign accounts.

More than 19 CMC employees were paid from the off-shore accounts between 2008 and 2011 amounting to approximately Sh70.56 million (£538,684) at current exchange rates.

Documentation on the accounts were recovered from a safe in the CEO’s office shows that the top 10 beneficiaries received Sh59.34 million (£435,050) while the other nine received Sh11.21 (£85,634).

The top five beneficiaries are named as former CMC chief executive Martin Forster D Percival, JP Lequez, JW Modlen and SZ Shah.

CMA has also delved into the activities of other directors, including Peter Muthoka who is the lead shareholder in the firm and was until last year a board member.

Mr Muthoka is accused of breaching corporate governance regulations by overshooting the legally set ownership limits shareholder without expressing intention to take over the company.

The businessman, through his firm Andy Forwarders held a 24.72 per cent stake in CMC, his wife Agnes Wambua held a 0.26 per cent stake while his son Felix Wambua held a 0.09 per cent stake amounting to a direct cumulative shareholding of 25.07 per cent.

Accounting firm Deloitte, who acted as the external auditor is also accused of not pointing out deficiencies at the troubled motor dealer particularly in respect to the preparation of the financial statements for which the market regulator has already raised a complaint with Institute of Public Certified Accountants of Kenya.

This is the first time the Kenya market regulator has taken such stern action against former and current members of the board of a listed firm.

Further investigations have however been recommended against Mary Ngigi and William Lay and their role in the execution of a contract between CMC and Pewin Motors through which the company incurred a loss of more than Sh20 million.