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’ 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 such as Safaricom , Standard Chartered Bank and Cooperative Bank .
“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 […]