Kenya firms post false company results — study

 

A new Ernst & Young survey shows Kenyan firms over-report their financial performance to meet rising targets and please ever demanding shareholders. TEA 

By PETERSON THIONG’O The EastAfrican

In Summary

• In a global survey in which 100 Kenyan firms participated, the findings by the audit firm show 53 per cent of managers believed their companies over-report their financial performance.
• The Ernst and Young findings, governance experts said, are raising questions over the ability of local boards, regulators and auditors to police management and pick up “cooked” financial figures.

The company accounts you rely on to make investment decisions about Kenyan firms could be false, an Ernst & Young survey says.

In a global survey in which 100 Kenyan firms participated, the findings by the audit firm show 53 per cent of managers believed their companies over-report their financial performance, driven by increased pressures to hit targets in an increasingly challenging business environment.

One in five employees said they were aware of financial manipulation in their own company in the past 12 months — with the biggest targets of this misrepresentation being costs and sales.

According to the Ernst & Young’s 2013 Europe, Middle East, India and Africa Fraud Survey, “Navigating Today’s Complex Business Risks”, 79 per cent of Kenyan managers said their firms will be under pressure to deliver better results over the next one year.

A weak economic environment that hit the country ahead of the March 4 elections is said to have depressed earnings, putting managers under pressure to deliver profits. Firms such as KenolKobil and Kenya Airways reported weaker full-year earnings for 2012.

“Managers in businesses feel under pressure to deliver improved performance… and as getting more becomes challenging, some managers may see another option: meeting targets by misrepresenting performance,” says the survey.

Kenya’s corporate governance credentials have over the past five years taken several knocks.

In July last year, US financial behemoth Citi Group Global Markets released a controversial report that claimed Kenyan banks were overstating their profits, a claim that was dismissed by bank executives. The Citi Group report, “Don’t get Caught When the Music Stops,” warned about the exposure banks have to bad loans.

The analysts said banks had not provided for bad loans worth Ksh20.8 billion ($247 million) for the full year 2011.

The Kenyan banking sector made pre-tax profits of Ksh107.9 billion ($1.27 billion) in 2012, up 20.6 per cent from the Ksh89.5 billion ($1.02 billion) posted in 2011. The growth was largely attributed to income generated by increased loans and advances, coupled with regional expansion initiatives.

The survey puts the level of misstatement for financial service firms at 9 per cent, a figure the Kenya bankers association (KBA) vas to high for the sector given the tight regulation in the banking sector

“Commercial banks are typically audited by top-tier audit forms. This, combined with the robust regulation by the central bank Kenya as well as scrutiny from other agencies such as credit rating agencies will imply that any misstatements would not be deliberate errors hence not biased to either overstate or understate earnings,” said Habil Olaka, CEO KBA.

The Ernst and Young findings, governance experts said, are raising questions over the ability of local boards, regulators and auditors to police management and pick up “cooked” financial figures.

“It raises concerns over the role of directors, internal business analysts and supervisory institutions. Do they fail because they lack capacity or is it because they are part of the conspiracy?” asked Karugor Gatamah, the CEO of Africa Corporate Governance Advisory Services.

David Stulb, the global leader of Ernst & Young’s fraud investigation & dispute services practice said, “Given the challenging market conditions, companies face sustained pressure to meet growth and profit expectations. In this environment, some inevitably succumb to unethical behaviour.