BY LUKE MULUNDA
The recent shut-down of Chase Bank has raised more questions than answers about the banking industry, placed a brighter spotlight on the role of external auditors and, most importantly, indicted regulators such as Central bank of Kenya and the Capital Markets Authority (CMA).
External auditors are doing a major disservice to shareholders and depositors by approving bad books or helping in cooking accounts. In this case Deloitte, especially comes into sharp focus, having also been the auditors of the distressed National Bank of Kenya.
These watchdogs are no longer the shareholders’ eye when it comes to checking company accounts. Instead, they have become accomplices in the crime of manipulating square pegs to fit into round holes to suit management’s desires.
Auditors who never audit
It brings to mind the accounting scam sometimes back at Haco Tiger Brands where managers crafted a pre-invoicing scheme that helped them shore up profits. Its external auditors, PricewaterhouseCoopers (PwC) had given the books a thumbs-up. It is the same firm that cleared Uchumi Supermarket’s books while it was experiencing financial strains that led to its collapse.
Deloitte blessed Mumias Sugar Company books only for the sugar miller to sink into huge losses. Again, Deloitte was the external auditors for CMC Holdings, Dubai Bank and Tuskys Supermarkets. All these firms are having financial issues, while Ernst & Young had its momentary fame over financial irregularities at East African Portland Cement.
With all this mess in banking, it is not an issue of pulling up socks. Analysts say it is time for these audit firms to be put in the dock since everyone now is questioning the relevance of the external auditing function. In December last year, CBK asked auditors to conduct an in-depth review of banks’ IT environments and issue a report on their findings. Nothing has come out of it.
Adequate auditing will never be achieved without strictness from regulators. Auditors charge exorbitant fees and must return value for it. If you haven’t realised, there are few firms doing most of the audit work in Kenya.
In some cases, one firm serves over two dozen clients. In this case the employees never spend adequate time browsing books and sifting other information for smoking guns. In the US, for instance, where auditing is really a big deal, one firm serves four to six clients and the auditor spends the whole year at these few clients.
Central Bank Governor Patrick Njoroge told MPs during his grilling over the collapse of banks that audit firms that presented misleading reports on the stability of the financial institutions under receivership, will be de-listed and will not be allowed to conduct audits of other financial accounts.
Where is CBK’s nose facing?
The feeling in the financial industry is that Central Bank should be more proactive than it is. Governor Patrick Njoroge appeared to defend the banking industry, yet the next day he put Chase Bank under receivership. That leaves a lot to be desired from CBK’s oversight role.
Like the Imperial Bank case, when it acted after the board raised issues, CBK auditors swarmed in at Chase Bank after the board sacked the chairman and managing director.
In this era of social media, CBK needs to be ahead of everyone as bank employees are beginning to play a more vigilant role (perhaps due to failure by CBK to act swiftly when signaled) and spreading the information through social media. That’s how Chase Bank found itself helpless with panic withdrawals.
That’s the only way it can restore confidence in the banking industry. For now, anyone banking with smaller (so-called tier II & III) banks is very worried. Not that they are all stressed but logically you can easily deduce. This state of affairs, with rumours already out that five other banks are sick, will hurt the small banks more and benefit the big players as depositors move to “secure” their funds. While big has suddenly become beautiful the big players are, however, not that immune to these toxic stuff. For now, with all the recent collapses we are witnessing, no bank is safer.
CMA’s cursed blessings
CMA is the other regulator that appears to have forgotten its job. Last year it approved Chase Bank’s bond through which it raised nearly Sh5 billion. Investors and depositors use such a move as a barometer to measure the health of a bank since approving a bond listing is, by all means, giving its finances and management a clean bill of health. Imperial Bank too got CMA’s blessings to raise Sh2 billion through a corporate bond only to go belly up a few months later. Two conclusions here: either CMA isn’t doing its job or its people are being compromised!
Then there’s Prof Njuguna Ndung’u, the former CBK governor whose term ended mid last year. Was he really supervising these banks? He should be brought to the table to explain why, barely a year after he left, Kenya is facing a banking crisis.
