HomeOpinion Analysis
Opinion Analysis
Share
Bookmark
Print
Email
Rating
CMC Holdings showroom located in Industrial Area along Lusaka Road. The firm’s boardroom wrangles have brought to the fore the necessity for investors to keep their boards of directors accountable for listed companies. File
Shareholders investing in NSE-listed companies can only create wealth when their boards conduct themselves with utmost integrity and shun deceit and choreographed corporate lies.
Lately the media has blamed shareholders for these management flaws due to failure to attend annual general meetings (AGM) and identify fraudulent activities by going through firm’s financial reports. However, how many shareholders have the capacity to analyse and understand contents of firm accounts? This is why they pay management and auditors to ensure that the books of accounts speak truth and no lies.
I choose to blame corporate board members, accountants and auditors. Why? Corporate board membership is currently a full time job for some individuals who have connections and operate like cartels. In any case, the background of many board members is suspect. Boards of listed companies are money minting machines for selected Kenyans. Because individuals were brought to the board by certain influential members, such individuals must dance to their music, and therefore can’t question any wrongdoing by such people.
Trust me, board members in listed companies in Kenya wilfully and knowingly disregard corporate governance regulations, engaged in unnecessary expenditures and massive illegal dealings that affect financial health of such companies and in some cases may lead to their collapse. The badly kept secret is that the corporate mess displayed at CMC Motors and East African Portland Cement Company is unfortunately being reenacted in many other listed firms.
Just spend some time cranking data presented in financial reports of listed companies in Kenya and you will agree. To succeed in fraudulent management, the management, accountants and auditors make sure that they present annual accounting reports which are as complex and confusing as possible.
Accountants and auditors are part of these well-orchestrated fraudulent games by directors. The way audit functions provides loopholes for management to commit fraud because of weak regulatory standards. In order not to lose their jobs, accountants and auditors sex up the books to show illusionary profits – a mirage of sorts. In fact, the work of auditing has been transformed into a meaningless ritual which entails only filing a report.
Stock investors, the Capital Markets Authority, and the Nairobi Securities Exchange can look for the following obvious red flags from the listed companies and become suspicious: fake sales and revenue reporting based on a bank loan pyramid schemes to make it look like new sales are coming in. This is in addition to massive inventory trading tricks where illegal loans are offered to customers to buy their inventory.
There is also the use of most confounding accounting rules to make the numbers look better for the market to believe the fabrications being presented. Some create special-purpose subsidiaries and off-shore ventures to hide debt, documentation and create fake revenue.
Similarly, there are substantially large payouts to lobbyists – disguised as corporate social responsibility – to make sure that ICPAK and Parliament keep accounting rules a mystery.
In addition, there is persistent pursuit of a merger and acquisition (MA) amid shareholders’ reservations in order to get market attention and further use MA accounting rules to cloud their financial statements. Moreover, many listed firms are constantly in court due to tax disagreements with KRA because the firm is either evading tax or pursuing tax refunds on taxes not paid.
There are cases where firms submit good results, yet investment analysts give poor recommendations of the stock to investors. More serious is the use of proforma financial reports constructed on basis of assumptions and fantasy forecasting not presented to shareholders, and which present the best possible appearance of firm performance. In themselves, such reports are nothing but corporate fiction.
To perpetrate some of these wayward practices, some listed firm directors use breakfast briefing meetings where they invite friendly analysts. This is meant to shore up market confidence of the firm, even amid dismal performance.
The implications are that there are no accounting reports by directors, written or verbal, that you can rely on with certainty. Even look at the disclaimers contained in all recent initial public offerings (IPO) prospectus and you will see what I mean.
In the first communication by the company to potential shareholders, the directors, through accountants and auditors, are simply telling their investors that “you cannot rely on any fact we have presented in this document”. In fact, this is the only truthful piece of information you will ever receive from a listed firm, and after the IPO, it will always be downhill.
Onyuma is an Accounting and Finance lecturer at Laikipia University College. sonyuma@yahoo.com
.