CMA (Capital Markets Authority) has imposed a KSh 10 million financial penalty on UK-based Ernest&Young Accounting and Audit firm for their failure to ensure adequate and accurate disclosure of material facts in the 2014 Annual Report and Financial Statements of listed Uchumi Supermarkets Limited. This fine comes more than 10 years after the allegations against the audit firm first surfaced.
According to Investigations by CMA, Uchumi Supermarkets used proceeds from the Rights Issue, which raised KSh 1.6 billion against a target of KSh 896million, to pay supplier debts instead of the intended branch expansion. The listed retailer also presented financial statements for the rights issue to investors, which had serious misrepresentations.
Ernest&Young were then the Reporting Accountant for the Uchumi Supermarkets Limited Rights Issue.
CMA said its action against the Audit firm relates to its role as the Reporting Accountants during the Uchumi Rights Issue in 2014 and the subsequent use of the proceeds.
Following the Notice Show Cause (NTSC) hearing conducted by the CMA Board and subsequent consideration of this matter by an Ad Hoc Committee of the Authority; the Authority has imposed a financial penalty of KSh10,000,000.00 against the Audit firm.
CMA also directed the accounting and audit firm to ensure all employees involved with the audit of financial statements of issuers, companies listed on the Nairobi Securities Exchange (NSE) and licensees of the Authority undertake remedial training on areas highlighted in the NTSC for the next three (3) years.
The training should be supervised by another Ernest&Young member firm and submission of training reports to the Authority and the Institute of Certified Public Accountants of Kenya (ICPAK).
Failure to do this could result in Ernest&Young being barred from providing professional services to issuers, companies listed on the NSE and CMA licensees.
ÇMA Disciplinary measures against Ernest&Young Auditors and Accountants
Further, CMA has recommended that ICPAK takes disciplinary action against Ernest&Young, being the External Auditors and Reporting Accountants, and Mr. Michael Kimoni and Mr. Joseph Cheborbor, who were the Ernest&Young engagement audit partners for the period 2010-2014.
This decade old legal feud began in 2015, when CMA initiated an inquiry into the affairs of Uchumi Supermarkets Limited, which revealed various regulatory violations regarding the Rights Issue in 2014.
The Authority’s inquiry revealed serious misrepresentations in the financial statements of the listed retailer, which were included in Information Memorandum during the Rights Issue.
As a result, the Authority issued a show cause letter to the then Uchumi board members, some members of the then senior management team, and its then External Auditors and Reporting Accountants, Ernest&Young.
The Ad hoc CMA Board Committee was appointed to consider and make a determination on the allegations made against Ernest&Young.
The Authority initiated administrative proceedings against Ernest&Young by issuance of show cause letter dated 31 August 2016.
Ernest&Young was required to respond to the allegations contained in this letter, relating to its role as External Auditors and Reporting Accountants of Uchumi Supermarkets Limited during the Rights Issue in 2014.
Ernest&Young filed a High Court against CMA on 15 September 2016 seeking to stop the enforcement proceedings.
The High Court issued conservatory orders restraining the Authority from continuing with the administrative action against Ernest&Young until the matter was heard and determined.
The Petition was heard, and judgement delivered on 7 March 2017 where the Court upheld the Authority’s mandate in undertaking the enforcement process.
Ernest&Young appealed the judgment of the High Court to the Court of Appeal, upon which the Appeal was dismissed on 4 February 2022 upholding the High Court decision.
Consequently, the Authority initiated the enforcement proceedings against Ernest&Young leading to this determination.
The Authority has previously taken enforcement actions against former members of the Board and Senior Management of Uchumi Supermarket. Those sanctioned include former Uchumi Supermarkets CEO Jonathan Ciano, former Finance Director Chadwick Okumu and former Directors James Murigu, Bartholomew Ragalo and Khadija Mire.
Interestingly, three former directors of Uchumi Supermarkets, Mirungi, Ragalo and one Joyce Ogundo were cleared of fraud charges in a separate case by Justice George Odunga.
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