Audit puts Ciano on the spot over Uchumi troubles

Damning report says listed firm’s bosses were linked to dubious deals involving staff, suppliers, financiers and landlords.

Thursday March 17 2016

From left: Treasury CS Henry Rotich, Uchumi Chairman Khadija Mire, transaction advisor Bob Karina and the then CEO Jonathan Ciano at the NSE bell-ringing ceremony for the chain’s rights issue on January 7, 2015. PHOTO | FILE | NATION MEDIA GROUP

From left, Treasury CS Henry Rotich, Uchumi Chairman Khadija Mire, transaction advisor Bob Karina and the then CEO Jonathan Ciano at the NSE bell-ringing ceremony for the chain’s rights issue on January 7, 2015. FILE PHOTO | NATION MEDIA GROUP 

By BERNARD MWINZI
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Sacked Uchumi CEO Jonathan Ciano and his chief finance officer Chadwick Okumu presided over the systematic plunder of the supermarket chain by a gang of employees, financiers, suppliers and landlords, a forensic audit report shows.

The company also cooked its books to understate losses and mislead investors and possibly regulators in its rights issue two years ago, the audit reveals.

Dodgy transactions included questionable procurement of goods and services, deals with financiers, and fraudulent payments to suppliers, all covered up using made-up numbers in financial statements.

The report, by audit firm KPMG, was completed in December but has remained a top secret affair, until now.

It faults the top leadership of Uchumi, specifically Mr Ciano and Mr Okumu, for losses running into billions of shillings at the listed firm.

Mr Ciano on Wednesday defended himself, saying KPMG had failed to take into account his views before condemning him.

He said it was unfair for anyone to assume that he was on the wrong as he was not given room to challenge the allegations.

“I asked them for the report, they have never given it to me. I cannot comment on the contents of a report I have never received or seen,” he said by phone.

However, KPMG says Mr Ciano “declined to meet us, citing his busy schedule”, but requested written questions, to which he responded by e-mail.

Mr Okumu also did not meet the audit team in person, but only corresponded with them via e-mail “on general areas”.

A source at the supermarket said the report had been shared with the Criminal Investigations Department.

SH330M MONTHLY LOSSES

The report shows that so bad was the situation at Uchumi that the management prepared false reports about its financial performance.

For instance, the forensic auditors were provided with two versions of trial balances as at December 31, 2014, for the firm’s half-year results.

Analysis of the trial balances and review of management accounts revealed significant differences between the three documents and the half-year Sh262 million loss statement released to the Nairobi Stock Exchange and shareholders later that year.

“We found a different set of records in Mr Okumu’s computer for the half year with a worse position in terms of the net loss for the period,” reads the report.

That “worse position”, according to Mr Okumu’s computer records, was a Sh501 million loss. But even Mr Okumu seemed not to have captured the financial hole Uchumi had dug itself into, as the forensic audit shows that the company had made a Sh1.9 billion loss in the half year to December 2014.

That means Uchumi was making a mind-boggling loss of Sh330 million a month, against the official figures of about Sh40 million.

In what raises questions about the Capital Markets Authority’s efficiency, the report also questions how the supermarket was allowed to offer a rights issue in 2014.

FRAUDULENT PROSPECTUS

The bone of contention is Uchumi's failure to disclose a sale and lease-back agreement — where a firm sells an asset to a financier, then leases the same from the buyer for a monthly fee.

Documents show that RentCo, a local property leasing firm, had entered an agreement with Uchumi worth Sh1.6 billion.

However, Uchumi did not declare this transaction to prospective shareholders, and therefore, according to the report, offered a fraudulent prospectus to the market, thereby deceiving investors who were buying into assets that had already been sold off.

“From our view, members of the Board were aware of the transaction and the reporting accountants Ernst & Young had captured this transaction in their management letter for the audit of the year ended June 30, 2014 and dated September 18, 2014, and were therefore aware of this deal and its implications,” reads the report.

This implies that the management kept crucial information about the commercial viability of the company from Kenyans, who went on to lose hundreds of millions of shillings in falling share values.

At the time of the rights offer, a share was priced at Sh13. It has since fallen to about Sh6, having lost half of its value in a market that is fast losing faith with one of Kenya’s most iconic and enduring brands.

Even worse, although the Sh900 million raised from the rights issue had been earmarked for refurbishing stores and as working capital, “over 90 per cent of the funds” were used to pay suppliers.

The Capital Markets Authority on Wednesday said it was engaging the management of Uchumi “on the refinement and strengthening of the draft forensic investigation report”, and that it had “highlighted key areas to be addressed to ensure the maximum enforceability of the findings”.

With regard to the reliability of information contained in public offer documents, the authority said it relies on the commitments made by the board of a company and independent assessments provided by auditors. 

To be continued tomorrow

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