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Deloitte Fined After Failing to Detect a Non-existent Sh 2.1B Chase Bank Account

According to a Capital Markets Authority (CMA) investigation report, Deloitte failed to verify a false claim made by Chase Bank that it had Sh2.1 billion in a Central Bank of Kenya (CBK) account.

The non-existent account is thought to have inflated the bank's cash position, prompting investors to offer it Sh4.8 billion in 2015 via a corporate bond that closed 10 months before the collapse.

The capital markets regulator fined Deloitte on Wednesday after the audit firm failed to detect a non-existent Sh2.1 billion Chase Bank account at the central bank, which enticed bond investors to offer billions to the bankrupt lender.

In addition to the Sh10 million fine, Deloitte is under investigation by the Capital Markets Authority (CMA) for failures that resulted in bond investors losing Sh4.8 billion following the collapse of Chase Bank.

“The cash and balances at CBK were overstated in the published information memorandum by Sh2, 152,806,000. This overstatement inaccurately enhanced the liquidity position of the bank and materially influenced the decision of investors to subscribe to the medium-term note,” the CMA report sated.

Deloitte told CMA investigators that it obtained independent balance confirmation from the CBK and other banks, and that it also tested management's bank reconciliation statements.

"The miscalculation did not cause the bank to breach the minimum liquidity ratio of 20 percent as per the prudential guidelines,” Deloitte stated in defence.

However, when the regulator requested Deloitte's audit working papers, they revealed that Chase Bank management had included the CBK Settlement account as a reconciling item, resulting in the overstatement.

This indicated that the auditor was aware of the reconciling item that had not been verified and was later found to be incorrect.

The CMA imposed the highest penalty on Deloitte, fining three former Chase Bank executives and five board members a total of Sh36 million for their roles in the bank's Sh10 billion bond.

Duncan Kabui, a former Chase Bank managing director, was fined Sh5 million and barred from serving as a director or key personnel of any issuer in Kenya's capital markets for ten years.

Duncan Kabui, a former Chase Bank managing director. PHOTO FILE

Former CEO Paul Njaga was fined Sh5 million, and the ex-finance director was fined Sh5 million and barred from working in a CMA-regulated firm for five years.

Board members Anthony Gross, Laurent Demey, Muthoni Kuria, and Rafiq Sharrif will each receive Sh2.5 million for their participation in the scandal.

Audit firms dealing with similar investigations have concluded that it is difficult for external auditors to uncover accounting fraud concealed by executives.

Following the CMA complaint, ICPAK is expected to refer Deloitte to a disciplinary committee.

If found guilty, Deloitte partners' practising certificates could be suspended, harming the firm's reputation not only in Kenya but throughout the region.

Deloitte has been accused of professional misconduct in the past for handling the books of loss-making Mumias, CMC Motors, and the defunct Dubai Bank.

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