Audit watchdog refers Deloitte to disciplinary unit
Audit firm Deloitte risks losing its operating licence when its alleged mishandling of troubled CMC Motor’s financial statements is forwarded to a disciplinary committee appointed by the Treasury.
Audit firm Deloitte risks losing its operating licence when its alleged mishandling of troubled CMC Motor’s financial statements is forwarded to a disciplinary committee appointed by the Treasury.
The move by the accounting watchdog follows 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 accused of not recognising losses from CMC assets that are damaged, failure to disclose the auto firm’s subsidiary in South Sudan in the annual reports, abetting the booking of undelivered vehicle sales as revenues and not capturing interest payments for cars sold on credit. Besides Deloitte, the former CMC finance director Shashi Shah will also be grilled over the breaches and the understatement of overdrafts by classifying bank borrowings as cash owed to suppliers.
“We have received complaints against Deloitte and a finance director that have been referred to the disciplinary committee,” said Caroline Kigen, the chief executive of the Institute of Certified Public Accountants of Kenya (ICPAK) – the accounting watchdog – in an interview on Tuesday. “This is a complaint of great public interest and it will be expedited,” added Ms Kigen.
If found liable, the practising certificate of Deloitte partners could be suspended—which could hurt the standing of the firm not just in Kenya but across the region, given that the financial services firms is the second largest audit firm in the region.
It could also face a reprimand from the disciplinary committee through the Kenya Gazette and the media, hurting a company that hinges on its reputation to close deals. “In this case, we will be investigating the company and not individuals,” said Ms Kigen, a signal that ICPAK would be keen to reprimand the audit firm over its partners that reviewed CMC’s annual accounts.
The CMA had advised CMC to consider changing Deloitte as its external auditor, though the auditor had on February 28 resigned, citing frustrations in getting information from the company. The seven-member disciplinary committee is headed by Jonathan Ciano, the CEO of Uchumi Supermarkets and it includes a representative each from the Attorney General’s office and an organisation that promotes corporate governance.
“This is not a light matter and it will be damaging to Deloitte whichever way the enquiry goes,” said a member of the committee who requested not to be named because of his involvement in the investigation.
In Kenya, Deloitte is the second largest audit firm behind PriceWaterhouseCoopers (PwC), with blue chip clients like Kenya Airways, Bamburi Cement, ScanGroup, NIC Bank and Centum Investment, and the probe is set to shake the core of its customer base.
Of the top 45 firms at the Nairobi Securities Exchange (NSE), Deloitte controlled 26 per cent of audit fees in the year ended December 2010, PwC (43 per cent), Ernst & Young (15 per cent) and KPMG (14 per cent).
The impending inquiry marks the second time one of the Big Four audit firms will be investigated by ICPAK after the investigation of PwC in the wake of Uchumi Supermarket’s near-collapse in 2006 on whether its opinions were in step with the set professional standards. PwC was found to have operated above board. The Business Daily failed to get a comment from Sammy Onyango, the managing partner at Deloitte, after his mobile phone went unanswered and he did return our text messages.
Sufficient information
In CMC, the disciplinary committee will be seeking to find out whether the financial mis-statements were known to Deloitte and if it issued opinions without obtaining sufficient information. “Our findings are that, as at March 2010, revenue included vehicles sold but not delivered…this is not in compliance with accounting standards and it led to the net profit being overstated by Sh116 million,” said CMA investigations report by South Africa’s Webber Wentzel.
Deloitte has been CMC’s auditor since 2005 when it replaced PwC.
These latest developments also turn the spotlight on the auditors’ responsibility in failing to detect the alleged inflation of invoices and diversion of funds from the company by its directors — the two issues at the centre of the boardroom wars.
