If you sit on the audit committee of an issuer of securities licensed by the Capital Markets Authority (CMA), you either need to track uses of funds that your company has raised from the capital markets or keep Johnny walking into deep trouble.
Back in 2015 Chase Bank sought approval from the CMA to issue a Sh10 billion medium-term note (MTN) to the public. The first tranche of Sh4.8 billion was issued on June 22, 2015.
Nine and a half months later, the Central Bank of Kenya placed Chase Bank under receivership, on April 7, 2016. As a regulator, the CMA had to step in to take action to assure buyers of CMA-licensed securities that someone somewhere is keeping a keen eye on issuers who have taken funds from an insider information-starved public.
Having found issues of preparation of false and misleading financial statements, failure to disclose material information as well as conflict of interest, the CMA issued Notice To Show Causes to 12 recipients who were members of Chase Bank’s senior management, some members of the bank’s board of directors and the reporting auditor.
The press release then informs us that enforcement proceedings went ahead against nine of the 12 recipients, as three others chose to go to court to stop the enforcement action.
In a piece of communication that the CMA must have known would be pored over, torn apart and put together, the reader is left with some questions.
From a management perspective, the group managing director, the group finance director and the bank’s chief executive officer were penalised. From a board member perspective, the chairman of the audit and risk committee and three of his committee members were penalised.
One other board member (not quoted as being a member of the audit committee) was penalised, but the press release does not indicate why he was singled out from the rest of the unpenalised board.
Furthermore, as part of his penance, the chairman of the audit and risk committee is required to attend a corporate governance training for a period of not less than five days. Why he was specifically singled out as the only one who needs to be chased into the stable whose director responsibility horse has already bolted remains a mystery.
Towards the end of the press release, the CMA throws the reader an informative crumb: “After the conclusion of the administrative hearings, the Ad Hoc Committee determined that there was lack of effective oversight on the part of the CBKL board regarding use of funds raised pursuant to issuance of MTN (sic) in 2015...”
So readers are to connect the dots on this closing statement and glean their own conclusion on what happened. After all, regulators take actions in order to send strong messages to boards and managements of licensed institutions. Nature and communication abhor a vacuum so we must fill it ourselves. Thus I’ll shoot my own interpretative shot here.
Firstly, it can be assumed that funds raised in the MTN were not utilised for what they were ostensibly raised for and found their way into inappropriate uses.
Secondly, the gatekeeper or the watchdog over those funds was the bank’s directors and they didn’t do their job over the same time it takes from conception to birth of a human baby.
Thirdly, the regulator went even more granular and said not only was it the board, but it was the audit and risk committee of the board that had the specific responsibility to keep watch. Fourthly, there’s one board member out there who was not an audit committee member but the regulator felt he should be fingered anyway.
Why? We don’t know and the lesson here is therefore lost. What is now clear is why the CMA governance code requires shareholders to specifically vote for audit committee members at every annual general meeting.
So that shareholders know who is keeping specific watch over the organisation and to give them an express endorsement to take on that role.
This enforcement action should rightly cause a shudder to run along the unprotected backs of audit committee members. They have to oversee a company’s operations and ask the hard questions about the things that they don’t see.
But it goes a little bit further than that as even board members must ask themselves if they have the right people sitting on the audit committee. Responsibility cannot be delegated because when the chips are down, everyone is in the reputational trenches.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
