The Institute of Certified Professional Accounts of Kenya (ICPAK) said it was investigating the directors at the firm who reviewed Uchumi’s audit reports of 2014 and 2015.
The EY executives who are under probe by the accountants’ watchdog are staring at financial penalties, suspension of their licences and reprimanding in the Kenya Gazette if found guilty.
The probe is the latest move by ICPAK to tame a section of its members involved in cooking books, a trend that has contributed to massive investor losses, especially in publicly traded firms.
The accountants watchdog has opened investigations on Ernst & Young (EY) and the auditors associated with the audit firm over claims it helped cook Uchumi Supermarkets’ books.
The Institute of Certified Professional Accounts of Kenya (ICPAK) said it was investigating the directors at the firm who reviewed Uchumi’s audit reports of 2014 and 2015 amid claims the audit firm abetted fraudulent transactions involving the retailer’s former managers amounting to over Sh1.9 billion.
The EY executives who are under probe by the accountants’ watchdog are staring at financial penalties, suspension of their licences and reprimanding in the Kenya Gazette if found guilty.
“We are doing our independent probe on the EY directors who were involved in the exercise. The matter is before the disciplinary committee of ICPAK but I cannot disclose the number of individuals because this will be pre-judicial,” ICPAK chief executive officer Edwin Makori said on Wednesday.
Mr Makori did not give timelines on when ICPAK is likely to complete the disciplinary hearings, setting the stage for the sanctions that put EY in the spotlight and threatens its credibility.
The probe is the latest move by ICPAK to tame a section of its members involved in cooking books, a trend that has contributed to massive investor losses, especially in publicly traded firms.
Two years ago, the professional watchdog disclosed it was grappling with a rise in cases involving auditors and some of its members cooking books, contributing to massive investor losses at listed firms.
ICPAK’s disciplinary committee fined former CMC Motors finance director Sobakchand Shah Sh20,000 and a further Sh50,000 to meet the cost of a hearing in 2014.
The fines were for failure by Mr Shah to disclose financial malpractices at CMC Motors, including a secret account held in Jersey Island.
ICPAK’s move against auditors at EY comes days after the Court of Appeal ruled that the CMA was free to inquire from the audit firm its role in Uchumi’s affairs amid claims the audit firm abetted fraudulent transactions.
A bench of three judges said the audit firm failed to demonstrate that the CMA breached its right to fair hearing when it summoned EY 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 EY 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.
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 EY helped the retail chain’s managers to cover up illicit transactions by manipulating the books of accounts.
Among the issues placing EY 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.
EY 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.
In 2008, audit firm PricewaterhouseCoopers (PWC) has been cleared of any malpractice in the lead up to the collapse of Uchumi Supermarkets in 2006.
ICPAK absolved the firm from accusations that it did not raise the alarm that the supermarket chain was crumbling under debt. Uchumi later re-opened in a State-backed recovery plan.
The investigator’s mandate in the PwC case included probing whether Uchumi’s audits for the years ended June 30, 2004, and June 30, 2005, were conducted in accordance with international standards on auditing and the requirements of the Kenya Companies Act.
The investigation was also to determine whether the “reporting Accountant” report of August 26, 2005, for the Uchumi Rights Issue was followed procedure.
