Directors blame audit firm Deloitte for Chase Bank’s fall

Directors of troubled Chase Bank on Thursday took the battle to the doorsteps of audit firm Deloitte, insisting that the auditor’s surprise U-turn on how to handle the bank’s Islamic assets triggered a series of events that led to the collapse of the lender in March.

Chase Bank board members led by ousted chairman Zafrullah Khan told the National Assembly’s Trade, Finance and Planning Committee that the treatment of Sharia banking assets – technically referred to as Musharakah was behind the lender’s suddent collapse - and accused Deloitte of professional misconduct in handling the bank’s books of accounts.

“It was evident that Deloitte were simply not interested in appreciating the nature and substance of the Musharakah assets or the principles of Islamic banking,” Mr Khan told the committee that is investigating circumstances that led to collapse of the bank.

The standoff over Islamic assets saw Deloitte issue a qualified audit opinion on Chase Bank’s accounts after restating several line items.

Chase Bank directors Thursday told MPs that Deloitte had directly submitted its report directly to the Central Bank of Kenya and caused publication of the same in local dailies without their involvement.

“Chase Bank therefore, as it stands, has no audited and signed financial statements for the year ended 31st December 2015,” the directors said.
The revised financials showed that Chase Bank had under-reported insider loans by a whopping Sh8 billion and consequently made an unprecedented Sh743 million full-year loss.

The Chase Bank team that was summoned to appear before the committee included suspended group managing director Duncan Kabui and four other non-executive directors Muthoni Kuria (current chair), Rafiq Shariff, Richard Carter and Anthony Gross.

“Deloitte’s insistence on treating this as a normal loan or advance can only be labelled professional ignorance at best,” said Mr Gross in submissions to Parliament.

The directors, however, had difficulties explaining why there were no profits accrued from the Sh6.9 billion invested in Chase Iman’s joint ventures financed under Musharakah and held through special purpose vehicles.

James Mwaura, Chase Bank’s general manager in charge of corporate assets, said the lender earned Sh48 million in rental income from the Sharia-compliant joint ventures.

One of the properties held under the disputed Islamic assets was The Watermark Business Park, which hosted the bank’s Karen branch, Mr Mwaura told the committee.

Another property is a car park at Chase Bank’s headquarters located at Riverside Drive, where the lender planned to build a new head office, the directors said.

READ: How Deloitte audit row caused a run on Chase Bank

Ms Kuria told the MPs that when Deloitte and the CBK raised queries about the Islamic banking assets, the properties were transferred to Chase Bank within 24 hours.

Other prime assets previously under Islamic banking charged but later forcefully transferred to the bank include 240 acres of land on Mombasa Road, a three-acre plot next to the German Embassy on Riverside Drive and various high-end properties in Dubai.

Deloitte in May told the team of MPs that Mr Khan and Mr Kabui connived to use Chase Bank’s Islamic window to conceal their plan to siphon cash from the lender to entities they co-owned.

“These companies are owned by the chairman, over 90 per cent of the ownership of those companies was the chairman and 10 per cent was the group MD,” said Fredrick Aloo, a partner at Deloitte in charge of auditing Chase Bank’s accounts, when he appeared before MPs.

The Central Bank reportedly seized assets worth Sh7.9 billion from Mr Khan and Mr Kabui – formerly disguised as Sharia-compliant joint ventures - which allowed the re-opening of Chase Bank on April 27, 2016 after a three-week closure. 

The besieged directors further told MPs that the Sh3.1 billion said to have been stolen from Chase Bank, arose from losses made in the course of business, adding that Sh800 million of the total arose from “foreign exchange losses in the normal course of business.”

“We have not been able to access the Bank’s IT system to verify what the balance of Sh2.3 billion is about. We would require access to the forensic audit report that is being prepared by Deloitte Forensic to understand what these entail before commenting,” they said.

Deloitte, while appearing before the same committee earlier last month, revealed that Mr Khan had pointed a finger at Mr Mwaura and finance manager Makarios Agumbi for the Sh3.1 billion “unsupported loans and advances.”

Mr Kabui told MPs that Chase Bank had lined up a Sh2.5 billion rights issue and another Sh2.3 billion private placement meant to shore up capital and liquidity following the collapse of Imperial Bank. “Both actions were stopped following the closure of Chase Bank.”