Saccos break audit rules over Kuscco fraud losses

This violates the IFRS 9 accounting rules, which require lenders such as saccos to book expected losses on assets upfront. 

The accounting watchdog, the Institute of Certified Public Accountants of Kenya (ICPAK), reckons the staggered provisions are inconsistent with best practices, saying it was not consulted over the matter.

But the Sacco Societies Regulatory Authority (Sasra), the sector regulator, has defended its decision to approve the staggered losses, saying insisting on upfront provisions would have triggered a run on the co-operatives’ deposits.

“Some Saccos are taking the Kuscco hit as a one-off, others are spreading it across two or three years. This is important because saccos are not populated by sophisticated investors,” Peter Njuguna, the chief executive of Sasra, said in an interview.

Read:  Nyati sues Sasra over Kuscco loss provision order

“If we gave the directive that all should make upfront provisions in compliance with IFRS9, it could cause a run on Sacco deposits and risk the institutions as a going concern.”

Malpractices at Kuscco include the cooking of books, large-scale theft by executives, bribery, unexplained bank withdrawals and conflict of interest through issuance of contracts to firms owned by top managers and masking the schemes through manipulation of financial statements to report non-existent profits.

In the end, Sh13.3 billion has been lost, the umbrella body of saccos is insolvent to the tune of Sh12.5 billion and Sh24.8 billion it received from 247 saccos as deposits are at risk.

Saccos such as Qona, formerly Safaricom Sacco, have acknowledged the breach after partially providing for the Kuscco losses.

“Contrary to IFRS, the board has provisioned the loss for the next four years,” Qona states in its 2024 annual report.

“The sacco had invested Sh134.7 million (Sh104.0 million in interest-earning deposits and Sh30.7 million in shares) in Kuscco which unfortunately was declared insolvent and as a result there is no guarantee of recovering the money.”

The IFRS 9 rule, which was designed to respond to concerns arising from the global financial crisis of 2008, allows firms to predict and recognise financial losses earlier for stability. The firms are expected to provision for the expected losses upfront.

Besides Qona, some of the top saccos that have breached the rule include Nyati, Sheria and Mhasibu, which has provided Sh34 million for investments worth Sh408 million in Kuscco.

Nyati Sacco has made a 10 percent provision against its Sh90 million investment in Kuscco.

It has sued Sasra over the provisioning order, adding that the write-off will shield Kuscco and the regulator from their obligations.

Sheria has provided Sh12.6 million against Kuscco’s investments of Sh126.8 million.

In 2013, EU regulators challenged banks over their failure to properly apply the accounting rule aimed at making sure their provisioning for souring loans is timely and sufficient.

Saccos that have made full provisions include Stima (Sh108 million), Kimisitu (Sh353.95 million), Balozi (Sh437.55 million) and Kenpipe (Sh149.18 million).

The State has asked big saccos to make provisions on their Kuscco investments and lower their dividend pay and outlook to protect their liquidity.

Read:  Sacco savers face dividend cuts on Kuscco fraud losses

The dividend freeze or cut is a blow to sacco members who have enjoyed annual payouts that ranged between 8.22 percent and 10.22 percent in the five years to 2023, including during the Covid-19 economic hardships.

Saccos owed billions of shillings are being advised to stagger the provisions over the coming years while some have been directed to tap bank loans for the risk buffer.

The State has cast doubts on the ability of saccos to recover their investments in Kuscco, underlining the extent of fraudulent activities in the umbrella body.

The rot has left Kuscco with assets of Sh5.2 billion against liabilities of Sh17.7 billion liabilities, sinking the organisation that operated without a regulatory watchdog into Sh12.5 billion insolvency.

A forensic audit by consultancy firm PricewaterhouseCoopers (PwC) revealed the cooking of booking and theft.

The audit retrieved the trove of incriminating information from e-mails, computer logs, M-Pesa statements and documents of at least 23 top managers at Kuscco in a review that placed eight executives in the spotlight including then managing director George Ototo, finance manager George Owino and Chairman George Magutu.

The PwC audit unearthed the cooking of financial books to the tune of Sh9.3 billion following understatement of costs like commissions and interest expenses and overstating incomes—a scheme which saw Kuscco book phantom profits.

The audit shows that between 2018 and 2023, Sh206 million may have been stolen through withdrawals from Kuscco Sacco savings bank account in the name of replenishing cash at Kuscco Fosa branches.

Records unearthed by PwC indicated false entries of commissions of up to 3.0 percent. As a result, the executives withdrew Sh1.6 billion, but paid

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