CMA statement on fining Ernst & Young Ksh 10M for Uchumi Supermarkets Audit Issues
Capital Markets Authority (CMA) Statement On Fining Ernst and Young LLP For Uchumi Supermarkets Limited For Accounting/Audit Issues.
in line with its investor protection and oversight mandate, the Capital Markets Authority (CMA) has taken enforcement action against the EY, who were then the Reporting Accountant for the Uchumi Supermarkets Limited (USL) Rights Issue. This relates to the firm’s role as the Reporting Accountants during the USL Rights Issue in 2014 and the subsequent use of the proceeds.
Following the Notice to Show Cause (NTSC) hearing conducted by the CMA Board and subsequent consideration of this matter by an Ad Hoc Committee of the Authority, pursuant to Section 25A as read together with Sections 11(3)(cc), 11(3)(w) and 34A of the Capital Markets Act, the Authority has imposed a financial penalty of Kshs 10,000,000.00 against EY.
The Authority also directed EY 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 EY 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 EY being barred from providing professional services to issuers, companies listed on the NSE and CMA licensees.
Further, it was recommended that ICPAK takes disciplinary action against EY, being the External Auditors and Reporting Accountants, and Mr. Michael Kimoni and Mr. Joseph Cheborbor, who were the EY engagement audit partners for the period 2010-2014. This is due to their failure to ensure adequate and accurate disclosure of material facts in the 2014 annual report and financial statements of USL in accordance with the applicable regulatory requirements.
In 2015, the Authority initiated an inquiry into the affairs of USL which revealed various regulatory violations regarding the Rights Issue in 2014. The Authority’s inquiry revealed serious misrepresentations in the financial statements of USL, which were included in Information Memorandum during the Rights Issue.
As a result, the Authority issued a NTSC to USL board members, some members of the senior management team, and its External Auditors and Reporting Accountants, EY. The Ad hoc CMA Board Committee was appointed to consider and make a determination on the allegations made against EY.
The Authority initiated administrative proceedings against EY by issuance of NTSC dated 31 August 2016. EY was required to respond to the allegations contained in the NTSC, relating to its role as External Auditors and Reporting Accountants of USL during the Rights Issue in 2014. EY filed a High Court Petition No. 385 of 2016, Ernst and Young LLP v 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 EY 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.
EY 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 EY leading to this determination.
The Authority has previously taken enforcement actions against former members of the Board and Senior Management of USL.