Firms will be forced to routinely change auditors

August 8, 2012
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Capital Markets Authority Chairman Kungu Gatabaki spoke to Capital FM Business on phone

, NAIROBI, Kenya, Aug 8 – Listed companies may soon be required to rotate the audit firms they hire for services to ensure transparency.

The Capital Markets Authority (CMA) is considering proposing such a measure following the corporate governance concerns that surfaced at CMC Holdings.

A final report on CMC’s operations by the regulator released on Tuesday revealed that directors and management signed misleading financial statements consequently putting the firm on a precarious business model.

Such evidence has raised questions concerning the extent to which audit firms participate in company activities and whether shareholders rights are protected moving forward to avoid recurrences.

“There are cases where some audit firms have become close to the companies they service. To improve corporate governance we would like to introduce a provision where audit firms are rotated after two terms of five years each,” CMA Chairman Kung’u Gatabaki said in a phone interview with Capital FM Business.

Capital Markets regulators in several advanced economies have already implemented such requirements.

“Auditing firms should keep an arms-length relationship with companies for obvious reasons, so closeness is avoided,” Gatabaki added.

According to the report, for the 2009 and 2010 financial years, the CMC board signed off accounts that were not prepared in compliance with the International Financial Reporting Standards.

A failure by the CMC board to adequately supervise the management led to an accumulated bad debts provision of Sh1.37 billion as at the end of September 2011

However the report revealed that the company’s external auditors had clearly brought to the attention of the board the risky nature of the business of the company.

Gatabaki cited a recent Citi Group report that disclosed information on Kenyan banks overstating profits by significant margins.

“The report just showed that auditing is not tight enough. We as the regulator will move to tighten these regulations and safeguard investments. I will be talking to ICPAK to engage its members and other companies on a way forward,” he said.

The CMA is seeking to have the guidelines in its Capital Markets Act become enforceable by the end of the year.

“We are working on moving some of the key provisions into enforceable obligations under our continuing obligations on public companies as opposed to merely having them in guidelines, to make sure we can address the concerns over penalties versus compliance out of desire,” CMA acting CEO Paul Muthaura said in an earlier interview.

The CMA took stern action against directors at the CMC board banning Charles Njonjo, Peter Muthoka, Jeremiah Kiereini and four others from sitting on any board of a listed company for flouting the capital markets legal and regulatory requirements in CMC.

Others were Martin Forster, Sobakchand Shah, Richard Kemoli and Andrew Hamilton.

The report described former CMC Group Managing Director Martin Forster as having a larger than life profile in the company.

The report accused Forster of participating in the opening and operation of offshore accounts that held millions of CMC funds to be shared by a select group of board members and staff, which the report now proposes to be paid back.

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