Punish those who looted Mumias Sugar

Around the time that a damning forensic audit report shows that Mumias Sugar Company was embroiled in fraudulent accounting and corporate governance contraventions, it stood tall as a model of astute management.

The company and its CEO got top honours at that year’s COYA awards. Mumias won several marketing and public relations awards, enjoyed Super Brand status, was ISO certified, and received an A+ credit rating from the Global Credit Ratings Company a FiRe award for excellence in financial reporting.

In the wake of what has happened at the company in the past few years, one would expect that these plaudits should be recalled because, clearly, they were fraudulently obtained. Cases of corporations using creative accounting to cover up fraud are not uncommon. US conglomerates Enron, WorldCom, AIG, and Lehman Brothers did it for years.

The external auditors who abdicated their duty of giving a fair picture of the financial health of the company must be held responsible for the mess that has brought Mumias to the brink of collapse.
In 2006, when the directors and executives of CMC Holdings were found culpable for several corporate governance contraventions, the Capital Markets Authority (CMA) was quick to crack the whip.

Trading of CMC shares was suspended and the officials who were adversely mentioned were disqualified from holding directorships in listed firms. A complaint against the external auditor was filed with the disciplinary committee of the Institute of Certified Public Accountants of Kenya (Icpak).

Although the cases of Mumias and CMC bear striking similarities, the responses of the authorities have been very different. The CMA and Icpak have been strangely silent on the contraventions at Mumias.

INDEPENDENT BODY

The CMA’s inaction may be interpreted as a desire not to be seen as taking a stand contrary to the official government position as the authority is, after all, an arm of the government.

However, this does not augur well for the industry, because, as the capital markets grow, the CMA will need to transform itself into an independent regulatory body with the necessary prosecutorial powers to effectively regulate the markets.

The Icpak does not have the capacity to discipline persons or entities that do not adhere to its code of conduct. This undermines the quality of the market’s financial reporting, casting doubts on the reliability of the financial statements of listed companies.

If those responsible for Mumias’ woes are not brought to book, the culture of corporate impunity will continue unabated, threatening the structure of Kenya’s capital markets and hampering the push to turn them into a global trading hub.

To echo the words of a former commissioner of the US Securities Exchange Commission, Mr Arthur Levitt: “If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere.

If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country, regardless of how steadfast a particular company’s practices, may suffer the consequences.”

The writer is an author and the executive director of Clan Consulting Ltd. [email protected].