Audit reveals how inflated tenders cost CMC Sh1.1 bn

Jan 28th, 2012 | By | Category: Media Release

 Motor dealer CMC Holdings lost more than Sh1.1 billion in inflated charges paid over five years to a transport and logistics firm owned by CMC board member and former chairman Peter Muthoka, a forensic audit by Price water house Coopers (PwC) has found.

The report — which was commissioned by the management of the NSE listed company — potentially opens the door for CMC to claim the money from Mr Muthoka and other senior executives who are alleged to have colluded to defraud the motor dealer. CMC’s chief executive, Bill Lay, accused Mr Muthoka’s transport and logistics services firm, Andy Forwarders, of overbilling shortly after his appointment as CEO last year, sparking a vicious boardroom war that nearly paralysed operations at the company. That claim led to the replacement of Mr Muthoka as chairman by Mr Joel Kibe on September 8, last year, further driving a wedge between directors that saw the capital markets regulator suspend CMC’s shares from trading at the Nairobi Securities Exchange (NSE). “It is our view that as a result of the dealings between Andy and CMC, the company has suffered a substantial loss of around Sh1.1 billion,”. “In broad terms Andy charged CMC around double what it would have paid on an open tender basis,” it concluded.

Another Capital Markets Authority (CMA) commissioned forensic audit report by Webber Wentzel of South Africa is expected next week. PwC said the loss would have been avoided had CMC procured for logistics services through competitive tendering. The audit revealed that Andy Forwarders increasingly took over most of CMC’s transport, freight and warehousing services since 2003, culminating in the signing of an exclusive five-year contract in 2010 by former CEO Martin Forster who was ousted in March last year. The report noted that even though Andy claimed to have provided CMC reliable logistics services, the lack of competitive tendering, frequent price increases and inflated exchange rate costs saw the company pay above market rate charges. PwC recommended that the money be recovered through negotiations with Andy Forwarders and the suspected senior staff who are supposed to have negotiated favourable rates for CMC. It, however, added that criminal charges can be pursued against directors and employees of CMC who were responsible for the losses. The audit firm noted that CMC can only recover excess charges billed within the past six years since claims going beyond this period would have no legal standing.

On Thursday, Mr Lay declined to comment on the PwC report.

“I cannot divulge or comment on any contents of the report before it is discussed by the CMC board and the Capital Markets Authority,” he said. Mr Lay terminated Andy’s contract in September and hired Damco and SDV Transami to handle CMC’s transport and logistics services. Mr Muthoka, who is also the single largest shareholder of the firm with a 24.7 per cent stake, on Thursday said he did not recognise the audit report, which he said was partisan. “My lawyers have made it clear that we will not accept contents of that report because it was commissioned by management without authorisation of the board,” Mr Muthoka said. “The board was not involved in setting the terms of reference for the investigation and as such we do not consider the report to be fair and balanced.”  In an interview with PwC as quoted in the report, Mr Muthoka defended the high charges by Andy on the basis that his firm was offering superior services compared to rivals such as SDV Transami and Express Kenya. He added that since Andy took over CMC’s logistics services, the auto dealer closed down a claims department that would seek refunds for frequent losses of parts, among other imports. The report highlights the weak internal controls at CMC, which Mr Muthoka allegedly used to cement Andy’s stranglehold on the auto dealer’s logistics contracts. For instance, between 2003 and 2008, no tendering was done in the award of contracts for logistics services to Andy, which took over additional responsibilities such as warehousing and tractor freight. In the period, Andy introduced above-market-rate charges which the management only stopped on a few occasions but failed to recover the excess sums. In March 2009, a tender was for the first time undertaken for transport services to CMC Uganda, a subsidiary of the auto dealer that complained about the excessive charges. Andy was still picked despite its high charges “purportedly on basis of good service record,” according to the report. In June 2010, former CEO Martin Forster signed a five-year contract that made Andy the exclusive logistics service provider to CMC. The contract was drawn up by Andy’s lawyers and Mr Forster did not consult CMC’s directors, employees or lawyers. Mr Forster said he awarded the contract to Andy to win Mr Muthoka’s protection from other directors who were determined to kick him out of the company. CMC Motors has recorded a steady decline in profitability since its 2008 peak performance when its net earnings stood at Sh927.1 million. That more than halved to Sh406.6 million in 2010 and the firm has warned shareholders that its net profit for the year ended September last year would fall by a further 25 per cent. The dwindling fortunes have been blamed on high operating costs amid a decline in demand from major clients such as the government, which has announced it will cut its purchases of vehicles by billions of shillings in the short term.

According to PwC, the directors and employees of CMC who allowed or pushed for the fraudulent logistics contracts can be charged on various grounds including breach of fiduciary duty and unjust enrichment. “We note that a claim and possible criminal sanctions may be sustained against Mr Muthoka or CMC employees if … it is shown that indeed there was collusion between any employee of CMC and any officer of Andy in relation to the provision of logistics services,” reads part of the report. Mr Muthoka is accused of using a carrot-and-stick strategy when dealing with CMC’s senior management to gain new busines or maintain high charges. CMC’s finance director Mary Ngige, for instance, told PwC that Mr Muthoka instructed her to give logistics manager Benson Mbaluka a Suzuki Grand Vitara upon his promotion in May 2010. Roy Kyalo, a former sales manager at CMC, told PwC that Mr Muthoka was behind his dismissal following his efforts to stop the ‘irregular’ transfer of Land Rovers from the KVM bonded warehouse to Andy, among other incidents. Mr Forster claimed that his dismissal in March 2010 was prompted by his plan to transfer Andy’s tractor freight business to Marubeni, a Japanese logistics firm that charged up to 90 per cent less compared to Andy. Mr Muthoka accuses Mr Lay of irregularly hiring a sales agent, Pewin Motors, in a deal that could have cost the company up to Sh11.7 million in inflated commission charges.


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