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Markets regulator gets nod to probe auditors of Uchumi

The High Court has allowed the Capital Markets Authority (CMA) to proceed with investigations of Ernst & Young, which has been accused of helping to cook Uchumi Supermarkets’ books together with the retailer’s former managers.

A forensic audit report by KPMG showed that Uchumi’s accounts for financial years 2010 to 2014 and an information memorandum for its 2014, Sh895 million rights issue — prepared by E&Y as the retailer’s auditors at the time — contained misleading information.

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.

E&Y however filed a case against CMA and the attorney-general asking the court to terminate the show cause process fearing potential enforcement actions from the regulator.

High Court Judge John Mativo on Monday issued a judgement rejecting E&Y’s application, paving the way for CMA to proceed with its investigations of the audit firm.

“As stated above, I find that the petitioner moved to court rather too early acting on apprehension, but as at this point in time I find that the steps already taken by the first respondent (CMA) are in conformity with the law and no breach of a fundamental right or threat had taken place or has been sufficiently proved,” the judge wrote in the judgement.

“In conclusion I decline to grant any of the reliefs sought in the petition. Each party shall bear its costs for this petition,” the judge said.

Potential enforcement actions that E&Y could face include fines and being required to compensate investors who acquired Uchumi shares based on the discredited prospectus.

Jamii Bora Bank has already sued E&Y seeking to recover the Sh451 million it invested during Uchumi’s rights issue, arguing that it acquired the shares on the basis of information approved by the audit firm and which contained misrepresentations.

READ: Jamii Bora says Sh500m Uchumi buyout was a con

The Capital Markets Act states that where it is not practicable to compensate investors, financial penalties are to be paid into the Investor Compensation Fund.

The law provides for a fine not exceeding Sh30 million for companies that make “false, misleading, or deceptive statement in a prospectus; or omit information or a statement from a prospectus which is required under this Act to be included.”

Uchumi has accused its former external auditor and management team of exaggerating the retailer’s financial position to the tune of Sh1 billion.

E&Y said in its petition that it did not participate in CMA’s inquiry nor was it given an opportunity to participate prior to the decision and issuance of the show cause notice.

The audit firm added that there was no fair hearing. The judge rejected E&Y’s argument, saying the regulator moved procedurally and within the law.

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