Auditors cannot detect if invoices are inflated unless suppliers point it out..
The company charges a certain price to suppliers and they accepted it & paid up..

How were EXTERNAL auditors expected to recognise the fraud??

Following the defense above, have we ever heard of any audit company in kenya, that had the "the luck to uncover fraud" from any of the listed companies and reported it? I can't remember any....... CMC had issues, audit passed over years, remember AK issues audit passed etc... is it that they are not lucky or do they turn a blind eye and use the defense above to argue that they relied on management representations..... so why do we pay them? if all they do is rely on management representation which is cooked

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I think most auditors in Kenya 'eat' with their clients. That is why they do not unearth malpractices when carrying on audits. In most government offices, when auditors come to check the books, the officers take them for 'lunch' and the auditors just pass the books. I belief this is what happens in companies offices too. I am reading a book on Enron (The smartest people in the room) and it looks like the auditors of this company were rubber stamping everything the management wanted. Now the big question is, what are we investors going to do to ensure that we do not befall the same fate as our colleagues in CMC? We need to be vigilant and we need to organize in order to 'know' what is happening to the companies which we invest in. Why do companies open off shore companies? I asked this question in a thread regarding Centum and I am still waiting for an answer. Who are the owners of these offshore companies? Are shareholders represented on them? Food for thought

@Jamani - you are nearly there to get it on enterprise corruption. Read the history of arthur andersen. Someone also pointed out a book called 'the number'. Read it too. Then you'll understand why we have enron's, cmc's etc as the fraud gets confessed when the deals have been settled long ago. The fox is a good entertainer... As time passes by, it is forgotten and then the 'wash, rinse, repeat' cycle restarts... So who's next after cmc....

http://en.wikipedia.org/wiki/Arthur_Andersen

Exactly.. How?? I expect that their procedures would entail a review of the invoices posted on the company's financial systems and as well as vouching a sample of the physical invoices... but if both records contain the cost + the 0.5%, how is the auditor supposed to tell that there is a fraud..

and yes, auditors uncover fraud in listed companies in Kenya all the time and report this to the board (there is no requirement for them to report to shareholders). For instance, the fraud that led to a number of dealers losing their contracts with Safcom was reported by their external auditor. The only thing is the figures involved MUST be material (when considered against the company's overall position) in order for the auditors to qualify his opinion on the financial statement.

@accelriskconsult, The external auditors rely on information given by management and that they deem adequate to make a reasonable opinion. That is clear. My point was the need not to spare any stakeholder when such scandals occur. Something like this.

http://www.time.com/time.../0,8599,1867092,00.html

or the Arthur Andersen story

It is an open secret in corporate Kenya that external auditors usually have some clue of big buck shady deals. Companies are not amorphous entities but a collection of human beings. Every finance/accounting person in Kenya has relatives or ex-collegemates working with the Big 4. Mid-level managers talk with external auditors when they meet at the club. Things will be discussed and hints dropped over a beer. From the Nation story, the CMC case at some point involved 17 senior managers. It is not possible to keep a secret among so many people. Will leak through ex-employees, employee relatives, employee spouses etc.

I have no proof but the external auditors definitely knew there was something stewing. They either 1. as you rightly state were not provided with adequate information by CMC management to unearth the fraud or 2.they looked the other way because neither the client nor the auditors wanted to rock the boat.

The latter is reinforced by 2 things you have already observed-1.many FDs/CFOs are usually the former external auditors of the company they work for.2.Deloitte will probably not be voluntarily pulling out of their relationship with CMC anytime soon.

It is not an attack on auditors but rather an attempt not to insulate any stakeholder from scrutiny. The law is definitely on the auditors side though.

There's one question I cannot get out of my head, If this dirty old man was stealing pocket change from a small company like CMC, can you imagine how much he might have stolen from eabl if at all he had the chance to dip his dirty old fingers in that jar?

Diageo should do an audit through his chairmanship and if he's still the chairman, he should be forced to step aside to allow for investigations. I can bet they'll unearth something.

As for the new MD Bill, I hope there're no skeletons in your closet... but being in the motor vehicle industry, I doubt you are that clean...

@ accelriskconsult, this is my take, I also think @ RVP has very strong / valid argument.

Your questions are most relevant questions as these are the departments with responsibility of detecting irregulalities and fraud. External audit relies on the internal audit function to an extend, but we may also wish to know where the departments (if at all existed) reported to –the board? the Board Audit Committee?. There might be many audit finding/recommedations made but not implemented or left to gather dust.

Whereas the scope and objectives of internal audit vary widely and are dependent on the responsibilities assigned to it by management the size and structure of the company, the skills and experience auditors, normally internal audit operates in one or more of the following areas;
a. review of accoounting systems and related internal controlsb. examination of financial and operating information for m anagement, including detailed testing of transactions and balances
c. review of the economy, efficiency and effectiveness of operations and the functioning of nonfinancial controls
d. review of the implementation of corporate policies, plans and procedures
e. Special investigations

You may also follow some discussions on internal audit in relation to external audit functions here.

http://www.theiia.org/fu...tid=8&threadid=3909

Whsltle blowing will definitely help, but the question we ask is, does the company have a whistle blowing policy in the first palce? Do they have hotline numbers/email?.

@accelriskconsult & @mozenrat...good points and the reality is that probably there is alot of similar irregularities being perpetrated in some of the companies at the detriment of shareholders. CMA is starting to get some teeth,CBK has been quite vigilant though my worry is IRA. We might get some shockers from the insurance industry.

Another dirty old and smelly man is one Sir Mharles Cugane Jojo. MO1 is becoming a strange dirty old man as time goes on. He steals Samburu's land and sells the same some years later to KWS for 400m. Who did he buy the land from initially and how much did he pay for it.

Another Kamzee who has been hiding behind his dirty smile is one Kjenga Narume. He used to screw his secretary with promises of marrying her.

If he did that with one who is now coming forward, how many others has he done but preferred to remain silent in shame? And he wants to be recognised as a Kikuyu elder. Kikuyu elders are not anointed based on funny billions, its all about a man who has lived a straight life.

Don’t blow the whistle

A law may be enacted that would make it harder to expose corruption.

http://www.economist.com/node/21540312