Economy

CMA to probe audit firm Ernst & Young on Uchumi forged books

uchumi

Uchumi Supermarkets branch in Nairobi. FILE PHOTO | NMG

The Capital Markets Authority (CMA) has been allowed to investigate audit firm Ernst & Young (E&Y) over claims that it helped cook Uchumi Supermarkets’ #ticker:UCHM books, covering up transactions that left the retailer on its death bed.

The Court of Appeal ruled that the regulator was free to inquire from E&Y its role in Uchumi’s affairs amid claims the audit firm abetted fraudulent transactions involving the retailer’s former managers amounting to over Sh1.9 billion.

A bench of three judges said the audit firm failed to demonstrate that the CMA breached its right to fair hearing when it summoned E&Y executives in 2016 to shed light on Uchumi’s 2014 and 2015 audit reports, following a probe by rival auditor, KPMG.

A forensic audit report by KPMG showed that Uchumi’s accounts for financial years 2010 to 2014 — prepared by E&Y as the retailer’s auditors at the time — contained misleading information.

The capital markets regulator also claimed the audit firm may have knowingly allowed the publication of untrue figures in an information memorandum used in Uchumi’s 2014 rights issue that raised Sh1.6 billion, more than the Sh896 million target.

The judges’ ruling sets the stage for enforcement actions against E&Y, including fines, being required to compensate investors who acquired Uchumi shares based on the discredited prospectus, and restrictions in auditing listed firms.

Presently, the audit firm handles top companies listed at the Nairobi Securities Exchange #ticker:NSE such as Safaricom #ticker:SCOM , Standard Chartered Bank #ticker:SCBK and Cooperative Bank #ticker:COOP .

“Similarly, the allegations of bias were unfounded and baseless, and no evidence was adduced to show that the 1st respondent (CMA) was biased or would have been biased had the appellant responded to the allegations levelled against it in the notice to show cause,” Justices Hannah Okwengu, Fatuma Sichale and Imaana Laibuta said.

The judges said the audit firm was offered an opportunity to be heard, but squandered the chance by prematurely filing the court case.

The regulator on August 31, 2016, wrote a show cause letter to E&Y as part of an inquiry that also sought to establish the audit firm’s role in Uchumi’s affairs.

But E&Y moved to court, alleging bias and breach of its rights when the regulator sent it a show cause letter.

The High Court dismissed the case in 2017 but E&Y appealed the decision giving the CMA the nod to proceed with the probe.

KPMG did the special audit under the direction of the markets regulator, which had ordered enforcement proceedings against Uchumi in the wake of a petition claiming that E&Y helped the retail chain’s managers to cover up illicit transactions by manipulating the books of accounts.

Among the issues placing E&Y in the regulator’s crosshairs were questionable asset sale and leaseback deals totalling Sh1.1 billion and spending of Sh895 million raised from a rights issue in 2014.

A Sh350 million asset sale and leaseback deal with RentCo East Africa is one of those highlighted in the suit papers.

Besides, the CMA says details of Uchumi’s financial standing were faked in the information memorandum published to the public during the 2014 rights issue.

E&Y told the court that the KPMG probe condemned it without a fair hearing, and could therefore not be used as a basis for disciplinary action.

It argued that the CMA had never afforded it an opportunity to defend itself on the allegations of aiding book-cooking at Uchumi.

But the CMA insisted that its investigations on E&Y were legal as the law allows it to act on complaints such as the one Uchumi made against its former external auditors.

The regulator adds that in the course of its probe, E&Y was invited to and attended meetings to respond to allegations made against it.

“We have perused the record and, from the circumstances of this case, we are not satisfied that the appellant has demonstrated that there was a breach of any of its rights to a fair administrative action,” the judges said.

The court noted that E&Y attended the meeting of May 26, 2016, and was given an outline of the issues to be discussed.

“How then could it turn around and say that the process was not administratively fair? It is evident that, from the circumstances of this case, the 1st respondent was only making an inquiry and there was no indictment on the part of the appellant,” the judges added.

In 2016, the CMA took punitive action against former Uchumi executives Jonathan Ciano (CEO) and Chadwick Okumu (finance director) and three former directors after they failed to fully disclose material information to investors in the wake of the 2014 rights issue and misused proceeds of the cash call.

The regulator fined Mr Ciano Sh5 million and asked him to return Sh13.5 million for failure to disclose a conflict of interest to the board.

It also barred Khadija Mire, former Uchumi chairperson, from holding any position in any listed company for two years and asked her to refund some Sh1.77 million she earned in 2014 and 2015.

Mr Okumu, now at cash-strapped Tuskys Supermarket, was barred from holding any position in any listed company for two years.

Uchumi shareholders remain in the dark as the troubled retailer is yet to publish its financials for four years in an alarming regulatory breach.

The retailer has not released its financials for the year ending June 2018 despite several extensions from the regulator and subsequent financial calendar results for 2019, 2020 and 2021.

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