Ernest & Young fined Sh10million over Uchumi’s 2014 rights issue failures

The controversy-laden top global advisory firm, Ernst & Young (EY) has been fined Sh10 million after it was implicated over its role as reporting accountant during the scandal-ridden Uchumi Supermarkets Limited (USL) 2014 Rights Issue, marking one of the regulator’s most consequential enforcement actions targeting a top audit firm.

The Capital Markets Authority (CMA) imposed the financial penalty and also flagged the firm for disciplinary review after regulators found material misstatements in the retailer’s financial statements.

“EY, being the External Auditors and Reporting Accountants, failed to ensure adequate and accurate disclosure of material facts in accordance with applicable regulatory requirements,” the CMA said.

The penalty follows a long enforcement process that was paused for years as EY contested CMA’s actions in the High Court and the Court of Appeal. EY filed Petition No. 385 of 2016 seeking to block the proceedings but the High Court dismissed the petition in 2017, ruling CMA acted within its mandate. EY then appealed, but the Court of Appeal upheld the decision in 2022.

Besides the fine, CMA has ordered EY to put all staff involved in the audit of listed companies and licensees through three years of remedial training supervised by another EY member firm.

CMA and ICPAK will receive periodic reports and the watchdog has warned that failure to comply could result in EY being barred from providing services to issuers and licensees.

“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.”

“Following the Notice to Show Cause (NTSC) hearing and consideration by an Ad Hoc Committee, the Authority has imposed a financial penalty of Kshs.10,000,000.00 against EY.” CMA added.

Failure to comply could see the audit giant barred from offering services to listed firms and licensed entities.

CMA has also recommended disciplinary action by ICPAK against EY and two former audit engagement partners Michael Kimoni and Joseph Cheborbor for failing to ensure full disclosure of material facts in USL’s 2014 financials.

The enforcement action follows a protracted legal battle.

EY had sought to block the proceedings through a 2016 High Court petition, but both the High Court and Court of Appeal upheld CMA’s mandate, paving the way for the final determination.

The Authority has previously sanctioned former USL board members and senior management involved in the rights issue.

This is not the first time Ernst & Young has been involved in controversy.

Last year, EY Kenya was slapped with a two-and-half-year ban by the World Bank Group owing to a conflict of interest by the consulting company in Somalia.

The World Bank said the 30-month debarment is in connection with sanctionable practices as part of the Somali Core Economic Institutions and Opportunities Program (SCORE) and the Second Public Financial Management Capacity Strengthening Project (PFM II) in Somalia.

EY Kenya has been sanctioned following its failure to disclose a conflict of interest during the selection and implementation of four contracts under the SCORE and PFM II projects, and the involvement of an agent in those contracts.

As a consequence, EY Kenya and any affiliates it controls are now ineligible to participate in any World Bank Group-funded projects and operations. The lender added that EY Kenya admitted culpability and offered to meet specified integrity compliance conditions as a requirement for release from debarment.

In 2022 in Washington, USA, the Securities and Exchange Commission charged Ernst & Young LLP (EY) for cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter. EY admits the facts underlying the SEC’s charges and agrees to pay a $100 million penalty and undertake extensive remedial measures to fix the firm’s ethical issues.

“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”

EY admitted that, over multiple years, a significant number of EY audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.