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.
CREDIT: THE NATION
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