The Capital Markets Authority (CMA) has imposed a financial penalty of Sh10 million on audit firm Ernst & Young LLP (EY) for its role as the reporting accountant for Uchumi Supermarkets Limited during the retailer's 2014 rights issue.
The enforcement action follows a long-running inquiry, with the regulator citing "serious misrepresentations" in the financial statements that were used to raise funds from investors.
According to CMA, the penalty serves as a sanction for EY’s failure to ensure adequate and accurate disclosure of material facts in Uchumi’s 2014 annual report and financial statements. These documents formed the basis of the Information Memorandum used during the 2014 Rights Issue
The Authority initiated an inquiry in 2015 that revealed that the financial health of the supermarket chain had been misrepresented to investors, a violation of the Capital Markets Act.
The CMA said in a statement:
“The Authority’s inquiry revealed serious misrepresentations in the financial statements of USL (Uchumi), which were included in the Information Memorandum during the Rights Issue.”
Mandatory remedial training
Beyond the financial penalty, the CMA also issued a strict directive requiring EY to overhaul its training regarding public listed companies.
For the next three years, EY must ensure that all employees involved in auditing companies listed on the Nairobi Securities Exchange (NSE) and CMA licencees undertake specific remedial training covering the areas of failure highlighted in the regulator’s "Notice to Show Cause.”
The CMA also ordered that this training be supervised by a separate EY member firm and reported directly to the CMA and ICPAK.
The regulator warned that failure to adhere to these training requirements could result in EY being barred from providing professional services to any NSE-listed companies or CMA licensees in the future.
Partners in the spotlight
CMA also zeroed in on the specific individuals who were handling the Uchumi account at the time and recommended that ICPAK take disciplinary action against Mr. Michael Kimoni and Mr. Joseph Cheborbor, the EY engagement audit partners for the period between 2010 and 2014.
The regulator held these partners responsible for failing to detect or report the financial irregularities that eventually led to significant losses for shareholders and creditors when the retail chain went under.
Background
The 2014 Uchumi rights issue was intended to raise capital to revive the struggling retailer. The retail chain was seeking additional capital through issuance of 99 million ordinary shares at a discounted price of Sh9. The rights issue was oversubscribed by 83 per cent raising Sh1.6 billion against a target of Sh895 million.
However, shortly after the funds were raised, it emerged that the company was in a much worse financial position than had been reported.
A forensic audit by consultancy firm KPMG unearthed a massive fraud in the company which was covered up by cooking of figures.
Former director Polycarp Igathe ,who chaired the audit committee at Uchumi after board changes had been made following the discovery, said at the time:
"We discovered fraudulent financial reporting going back two to three years. The profits you saw and the cash flow were not right."
CMA takes Enforcement Action against Ernst & Young LLP (EY), the Reporting Accountant for the Uchumi Supermarkets Limited (USL) Rights Issue
