CBK proposes three-year limit for bank auditors to boost governance

What you need to know:

  • The impending rules come after external auditors were entangled in the collapse of three lenders, namely Dubai, Imperial and Chase banks.

The Central Bank of Kenya (CBK) has put banks on notice with plans to introduce three-year term limits for external auditors handling their books, in what is seen as the regulator’s response to corporate governance concerns in the sector.

The CBK governor Patrick Njoroge on Tuesday told MPs the regulator would draft rules requiring banks to periodically rotate their auditors to improve the quality and independence of evaluation reports.

The impending rules come after external auditors were entangled in the collapse of three lenders, namely Dubai, Imperial and Chase banks.

“We want to cap auditors’ terms to not more than three years. International best practice is for rotating,” Dr Njoroge told a National Assembly Trade, Finance and Planning committee inquiring into recent bank collapses.

“We need a fresh pair of eyes to look into the books,” the governor said.

Dr Njoroge was accompanied by CBK director of bank supervision Gerald Nyaoma.

The financial industry regulator said the planned auditor term limits will add to the new bank ownership transparency and governance rules announced last week.

Banks are racing to beat the August 1 deadline to disclose on their websites the particulars of top shareholders. There are also plans to set a term limit for banks chief executive officers and non-executive directors.

Dr Njoroge said some auditing firms have served the same banks for a long time to a point where auditors had ‘become comfortable and professional meeting attendees.’

Deloitte served as external auditors at distressed Chase Bank for more than 20 years, and had always given the mid-sized lender a clean bill of health.

However, Deloitte made a U-turn in March when it reclassified disputed Islamic banking assets as irregular insider borrowing, a move that precipitated the collapse of the lender in April.

Deloitte was also the firm handling Dubai Bank’s books of accounts and in early 2013 issued a qualified opinion on its 2012 statements - citing incompleteness of records, faulty core banking system and irregular loans.

PKF Kenya was advanced a $5 million (Sh500 million) low-interest loan by Imperial Bank, according to court papers, whose directors are accused of orchestrating a Sh34 billion fraud scheme at the lender.

A preliminary forensic audit by FTI Consulting revealed PKF Kenya had covered up the scam at Imperial Bank.

The new rotation rules are likely to hit the Big 4 audit firms – EY, Deloitte, KPMG and PricewaterhouseCoopers – which dominate the auditing of banks in Kenya.

This could open a window of opportunity for mid-tier global consultancy firms in Kenya such as RSM, Grant Thornton, Crowe Horwath, Parker Randall, Baker Tilly, Mazars, and BDO to have a slice of the lucrative bank auditing market.

Kunal Ajmera, the chief operating officer at consultancy firm Grant Thornton, said term limits for auditors will help address the ‘familiarity threat’ posed by long-serving external auditors.

“It is surprising it has taken long for CBK to introduce term limits and mandatory rotation of audit firms. It is long overdue,” said Ajmera in an interview with the Business Daily.