The Capital Markets Authority (CMA) has announced an enforcement action against Ernst & Young LLP (EY Kenya). The company served as the Reporting Accountant for the Uchumi Supermarkets Limited (USL) Rights Issue in 2014.
Following protracted legal battles, the CMA has imposed a financial penalty of Ksh. 10 million on EY Kenya.
The Authority’s action stems from EY Kenya’s role in the USL Rights Issue and the subsequent utilization of the proceeds. After conducting a Notice Show Cause (NTSC) hearing and considering the report of an Ad Hoc Committee, the CMA Board determined that enforcement action was warranted under sections of the Capital Markets Act.
In addition to the financial penalty, the CMA has directed EY Kenyato ensure all employees involved with the audit of financial statements of issuers listed on the Nairobi Securities Exchange (NSE) and CMA licensees undergo remedial training on areas highlighted in the NTSC for the next three years. This training must be supervised by another EY member firm, with reports submitted to the CMA and the Institute of Certified Public Accountants of Kenya (ICPAK). Failure to comply could lead to EY Kenya being barred from providing professional services to listed companies and CMA licensees.
The investigation, initiated in 2015, revealed that the USL Rights Issue of 2014 involved various regulatory violations. Specifically, the inquiry uncovered serious misrepresentations in the USL’s financial statements, which were included in the Information Memorandum for the Rights Issue.
Furthermore, the CMA recommended that ICPAK take disciplinary action against EY Kenya, being the External Auditors and Reporting Accountants. They also want action to be taken against the engagement audit partners for the period 2010-2015, Michael Kimoni and Joseph Cheborbor. This recommendation is based on their failure to ensure adequate and accurate disclosure of material facts in USL’s annual report and financial statements, as required by regulatory requirements.
The enforcement proceedings against EY faced significant delays due to a legal challenge. The Authority first issued an NTSC to EY Kenyaon 31 August 2020. However, EY Kenya filed High Court Petition No. 385 of 2016 on 15 September 2016, successfully obtaining conservatory orders that halted the administrative action.
The legal challenge concluded with a judgment delivered on 2 March 2017, where the High Court upheld the Authority’s mandate to undertake the enforcement process. EY Kenya subsequently appealed this decision, but the Court of Appeal dismissed the appeal on 3 February 2022, finally affirming the High Court’s ruling and clearing the way for the CMA to conclude its enforcement action.
The CMA has previously taken similar enforcement actions against former members of the Board and Senior Management of USL.
EY Kenya was also sanctioned with a two-and-a-half-year (30-month) ban by the World Bank Group in 2024. The debarment relates to sanctionable practices in connection with the Somali Core Economic Institutions and Opportunities Program (SCORE) and the Second Public Financial Management Capacity Strengthening Project (PFM II) in Somalia.