Deloitte fined for Sh2.1bn hidden hole in Chase Bank

Deloitte Building Nairobi. FILE PHOTO | NMG

The capital markets regulator on Wednesday fined Deloitte after the audit firm failed to detect a non-existent Sh2.1 billion Chase Bank account at the central bank that enticed bond investors to offer the collapsed lender billions.

In addition to being fined Sh10 million, Deloitte faces further scrutiny after the Capital Markets Authority (CMA) asked the accountants regulator to probe the consultancy for failures that saw bond investors lose Sh4.8 billion after Chase Bank’s collapse.

Deloitte failed to verify a false claim from Chase Bank that it had Sh2.1 billion in a Central Bank of Kenya (CBK) account, according to a CMA investigative report seen by the Business Daily.

The non-existent account is believed to have inflated the cash position of the bank, encouraging investors to offer it Sh4.8 billion in 2015 through a corporate bond, which closed 10 months before the collapse.

Chase Bank went into receivership in April 2016 after failing to meet its financial obligations. Its ex-chairman Mohamed Zafrullah Khan was charged with conspiring to defraud depositors of Sh1.7 billion, in a case that undermined confidence in the country’s banking sector.

“The cash and balances at CBK were overstated in the published information memorandum by Sh2, 152,806,000. This overstatement inaccurately enhanced the liquidity position of the bank and materially influenced the decision of investors to subscribe to the medium-term note,” said the CMA investigations report.

“Management recommends to the ad hoc committee to make a finding that Deloitte was negligent.”

The CMA announced its ruling Wednesday.

“Deloitte and Touche, the CBKL reporting accountant at the time, has been fined Sh10 million,” the CMA said.

“Further the committee recommends that the conduct of the accounting partners during the respective audit periods be referred to ICPAK [the Institute of Certified Public Accountants of Kenya ].”

Audit firms facing similar investigations have reckoned that it’s difficult for external auditors to unravel accounting malpractices covered up by executives.

ICPAK is expected to refer Deloitte to a disciplinary committee following the CMA complaint.

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. Deloitte 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 whose reputation hinges on closing deals.

Deloitte is the second largest audit firm after PwC, with a string of blue chip clients and the probe is set to shake the core of its customer base.

The CMA hit Deloitte with the highest penalty as the regulator fined three former Chase Bank executives and five board members a total of Sh36 million for their role in the bank’s Sh10 billion bond.

Former Chase Bank managing director Duncan Kabui was fined Sh5 million and disqualified from being a director or key personnel of any issuer in the Kenyan capital markets for a period of ten 10 years.

Former CEO Paul Njaga has been fined Sh5 million while the ex-finance director has been handed a Sh5 million fine and a five-year ban from working in a firm regulated by the CMA.

Board members Anthony Gross, Laurent Demey, Muthoni Kuria and Rafiq Sharrif are to pay Sh2.5 million each for their role in the issuance and use of the bond.

The four were members of the audit and risk committee. Mr Gross has also been directed to attend corporate governance training for a period of not less than five days.

Another board member, Richard Carter, has been fined Sh1 million.

Mr Khan, former general manager finance Makarios Agumbi and ex-general manager corporate assets James Mwaura blocked the CMA probe through the capital markets tribunal.

Deloitte told the CMA investigators it obtained independent balance confirmation from the CBK and other banks, adding it also tested the bank reconciliation statements prepared by management.

``The miscalculation did not cause the bank to breach the minimum liquidity ratio of 20 percent as per the prudential guidelines,” Deloitte said in defence contained in the CMA investigations report.

“A downward adjustment of Sh2 billion would have caused the liquidity ratio to decrease approximately 43.5 percent.”

But when the regulator asked Deloitte to provide its audit working papers they showed the Chase Bank management had included the CBK Settlement account as a reconciling item which caused the overstatement.

This suggested that the auditor was aware of the reconciling item that was not verified and later turned out to be wrongful.

Deloitte has previously been accused of professional misconduct in handling the books of loss-making Mumias, CMC Motors and the collapsed Dubai Bank.

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