Nuts and Bolts of a Scandal in Kenya

Global Integrity
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Global Integrity’s Kepher Otieno has been busy muckracking in Kenya. Here he details a distressed company’s creative bookkeeping that should be all too familiar to readers familiar with Enron, Worldcom and the like. Corruption & fraud: it’s not just a Western-nation problem.

Livelihood threatened at troubled Sony

By Kepher Otieno

The Sony Sugar Outgrowers Company (Soc) in Awendo is in trouble.

This follows massive corruption allegations that have plunged the company into financial crisis. It has been put under receivership.

Other than missing machinery, funds running into millions of shillings cannot be accounted for. In some cases, money that should have been paid to the company directly was paid to individuals.

Parts of a grounded tractor at the Outgrowers Company. Picture: Kepher Otieno.
While the firm has been placed under receivership, what is indicated on the books is completely different from what is on the ground.

Loans running into millions of shillings remain unpaid, leaving the company heavily indebted.

In March last year, Soc was put under receivership by the Kenya Sugar Board (KSB) due to the high amounts of debt.

At the time, the company owed KSB Sh423, 280, 000 from a loan it failed to service over the years.

The principal loan of Sh359, 411, 204 had been used to buy tractors. However things went out of control when the company failed to service the loan accruing to an interest of Sh46, 821, 000.

With Soc unable to honour repayments, KSB had to place it under receivership. This was part of a solution to salvage the company from collapse after suggestions to auction it failed, owing to its low asset value.

Valuers said the company was too indebted to be auctioned and even KSB would not meet the requirements. Auctioneers are paid as per the Auctioneers Act and to auction Soc would require a 21 days notice. The headache in this case has been sourcing for money to effect the services which include putting up an advertisement in the newspapers.

The last option, therefore, was to place the company under receivership. A receiver manager, Mr Maurice Selebwa, was seconded by the sugar board to help revive it.

But Selebwa is not a happy man. The ghost of corruption at the company keeps haunting him.

For instance, tractors bought through a loan have not been operating. They have been parked at the company grounds. Reviving them has proved difficult.

Some of the tractors have been immobile for the last 20 years yet Selebwa’s task as spelled out by KSB was to revive the stalled machineries.

“I hardly sleep as I ponder over the best remedy to pull Soc from its financial troubles. The Herculean task has been to make the company viable and more responsive to the farmers’ increasing needs,” says Selebwa.

A spot check by The Sunday Standard within the company precincts revealed grounded tractors with several parts of the machines rusting in the grass.

These include engines, trailers, tyres, shells of motorbikes and scattered parts of the machines and number plates strewn all over the parking yards.

Some parts of the machines are alleged to have been looted by former workers and senior managers. However, investigations are yet to close in on the chief suspects.

“KSB assumed that the machines only needed to be serviced and put back on road but when I called the company from which they were bought to carry out an evaluation, we found out that only 13 out of 41 tractors could be resuscitated,” Selebwa explains.

The logbook that Selebwa received indicates there were 41 tractors yet in actual sense, only 13 could be verified. But even these had suffered mechanical breakdown.

Asked about the other tractors, Selebwa says: “I can only talk about what I received. I cannot tell you where the other tractors are although I have the logbooks.”

Greatest challenges

While records indicate that former managers handed over intact tractors, Selebwa says he only found scrap metals and assorted parts of the tractors.

“Records show that the tractors are intact, but what is on the ground is completely different,” he explains.

When he took over the company assets, KSB gave Selebwa tough terms of reference. One of the terms was to come up with a good business plan in 60 days, which he did. He then brought in a team of evaluators from the Ministry of Public Works.

The total asset value of every single machinery evaluated totalled Sh8.9 million but the company had spent Sh165, 376, 000 million to purchase the machines over the years.

“This is one of the greatest challenges that I had to settle at this giant institution,” he says.

The latest audit was done in 1998. An independent audit report conducted by a team of internationally recognised certified public accountants then established massive corruption had taken place at the company.

Unfortunately, the recommendations by Kassim Lakha Sam Vir Abdulla were not exposed.

The report indicates that June 30, 1998, the balance sheet of the company had an excess of current liabilities over current assets amounting to Sh114, 708, 730 million with an accumulated loss of Sh36, 095, 730 million making the company insolvent.

The auditors were unable to verify motor vehicles, tractors, motorcycles and trailers with a net book value amounting to Sh20,184,785 million.

Five tractors and three trailers with a net book value of Sh10,764,732 were registered in the name of a third party, the auditors found out.

The auditors were also unable to verify the absence of a register containing details of trailers with a net book value of Sh25,470,264 million yet their logbooks existed. Also unclear was the Company’s inventories and cash at hand, amounting to Sh6, 256, 937 and Sh116, 256, 607 million respectively.

Authenticity of transactions of payment of Sh2, 625, 444 on discount given by Farm Engineering Industries was capitalised. Donation of Sh3 million by the Swedish Government for feasibility study carried by Agro Systems Limited was not reflected in any of the released financial statements of the company.

Payments of transport sub-contractors amounting to Sh2, 989, 367 could not be traced. Also missing was the listing of loans given to farmers amounting Sh74, 165, 968 million. Further investigations revealed that individual loan accounts were not maintained in the ledger book.

Auditors also reported a fraud by company workers amounting to about Sh10, 460, 000 million while KSB loan was not reconciled with ledger account. A difference of Sh3, 575, 514 was detected in the flawed transaction as per the Audit report. Some cheques payable to the company were paid to individuals.

Farmers now want the auditors report to be acted upon before Soc is handed over to them.

Originally published in The Sunday Standard. Republished with permission of the author.

Read more in the Global Integrity Report: Kenya.

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