Mumias Sugar was closed for what the management says is routine
maintenance but, in actual sense, it is due to cane shortage. The
shortage is likely to worsen as farmers are abandoning cane farming.
FILE NATION
Blatant looting and financial malpractice by successive managers
of Mumias Sugar Company could be responsible for the current situation
in which the principal employer in western Kenya is feared to be
breathing its last.
One of the recent internal audits
points to a deliberate violation of control procedures by managers in
charge of due diligence for a period dating as far back as 20 years.
Sunday Nation has
obtained documents, some filed in court, detailing serious fraud that
has even prompted the Ethics and Anti-Corruption Commission (EACC) to
recommend legal action against some of the leading audit firms in the
country.
The firms allegedly colluded with the
management to conceal false claims amounting to Sh2.6 billion in 2008 —
sending the miller to its death bed.
“After analysis of
your report, we are of the view that the matter is civil in nature
since it points to professional negligence on the part of (names
withheld) company. Kindly, therefore, be advised to seek civil redress
to safeguard your rights,” a Mr Abdi Mohamed notes on behalf of the EACC
chief executive officer in a letter dated July 24, 2013.
But
it is perhaps the internal audit that lays bare the full extent of the
rot, which could not have happened without the knowledge of company
honchos.
It estimates that about Sh2.08 billion was embezzled in the period it covered and notes the figure could be higher.
Titled Key Issues of Concern in MSC’s Internal Control Environment,
the report reveals that every process at the company was intentionally
abused for the benefit of certain groups of individuals right from cane
farms to the company.
Has significant violations
“The
entire process has significant violations that could have been avoided
if senior management were keen on compliance. Large amounts of cash have
been lost as a result over the years,” the report sums up.
One
of the egregious findings by the auditors is that the firm would give
large amounts of sugar on credit to well-connected cash customers
without credit ratings or bank guarantees as required by law. Some would
even be supplied before clearing outstanding debts.
The
sales department is also accused of favouring some customers by
revealing to them classified information as to when sugar prices were
going to be revised upward so they could stock up ahead of time.
“Amazingly,
customers were allowed to use different orders depending on which one
was favourable — effectively denying the company the benefits of price
increase,” reveals the audit, adding that Sh23 million was lost in one
such manoeuvre.
Mumias declared a Sh2.7 billion loss
this fiscal year. It is also required to pay another Sh5 billion in
loans borrowed over time.
The company has been closed
for what the management says is routine maintenance, but the closure is
really due to a shortage of cane. With the shortage biting and farmers
abandoning cane farming, the listed company shows no signs of being out
of the woods any time soon.
There are also serious
allegations that over the same period of time, the management
deliberately interfered with the books of accounts to declare false
profits to portray an image of a healthy company that was in reality in
dire straits.
“The profit of Sh1.5 billion on page 32
would substantially be reduced in the event the claim succeeds and the
users of the financial statements could discover that the financial
statement in question did not reflect the true and fair view of the
state of affairs in the company,” notes Mr Gabriel Atoko, a former chief
accountant in charge of systems, in one of the exhibits before the
court.
The documents also indicate that in 2007, the
management of Mumias Sugar Company allegedly took Sh2.6 billion from
Mumias Outgrowers Company (Moco) –– money that was owed to farmers ––
lumped it into their accounts and declared it as part of their profits.
Nairobi Governor Evans Kidero was the firm’s managing director at the time.
The figure shot up
When the matter of money owed to the outgrowers came up in Parliament in 2011, the figure shot up.
Agriculture
assistant minister Gideon Ndambuki said the company was holding close
to Sh3.7 billion belonging to Moco. This is almost the same figure
lawyer Patrick Lutta, acting for Moco, cites in the court case.
In
court papers, however, former Mumias Chief Executive Peter Kebati says a
forensic audit revealed that a huge sum of money had been
misappropriated by Moco directors and employees.
One of
the letters by a former company accountant filed as evidence in court
accuses the management of failing to credit the value of cane delivered
to the factory amounting to as much as Sh783 million for a period of 75
days.
Analysts say the death of the cane development
fund spelt doom for the company as it meant the firm could no longer
obtain sufficient raw material for processing.
The
company managers retained 15 per cent of the farmers’ cane proceeds to
buy farm inputs as well as facilitate land preparation, but since this
practice ended in 2008, the supply of cane has decreased.
Many
farmers have uprooted the crop because they increasingly feel they do
not get value for their investment amd have to wait too long to get paid
for what they have delivered.
When he appeared before
the parliamentary committee on agriculture last week to shed light on
what ails Mumias, Agriculture Secretary Felix Kosgei said Mr Kebati
awarded tenders worth over Sh150 million without seeking the approval of
the board’s tender committee.
One of the exhibits
before court warns of the company’s imminent collapse because of the
unbilled cane account. The shortage has led to harvesting of immature
cane that does not meet the required standard.
A report
by KPMG, which the board is sitting on, also discloses what could be a
scandal to rival others like the infamous Goldenberg that nearly brought
the economy to its knees during the Moi regime.
Power
generation, ethanol production, and water purification projects are
cited as some of the ventures the company went into without ensuring
their viability.
“There was nothing wrong with the
projects; the only crime they did was to veer off the core business of
the company which is cane crushing. How do you get raw materials for the
new outfits when you do not recruit new farmers?” said Mr Lutta, who
also comes from Kakamega County where the firm is situated.
Current
managing director Coutts Otolo will have to apply prudent skills, be
ruthless when necessary, and learn from the mistakes of his predecessors
if he is to turn around the fortunes of the limping giant.
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