EXECUTIVE SUMMARY

This paper explores the developments in the Kenya financial services market to address

corporate governance irregularities experienced in the recent years. It examines the crucial role

played by the Capital Markets Authority as a regulator of the Nairobi Stock Exchange in addition

to the role of the NSE in ensuring proper compliance to the Regulator’s laws and guidelines.

Moreover, it examines the role of professional institutions such as KASIB, ICPAK the FiRe awards

and the CCG in curbing corporate governance irregularities in Kenya. The basic premise of the paper is

that there are no adequate legislation and enforcement procedure in place within the CMA and the NSE,

leading to massive falsification of financial reports, conspicuous dealings in the NSE and illegal

collaboration of stockbrokers with the intention to defraud investors. It is based on the recent collapse of

many stockbrokerage firms and consequent loss of investor confidence in the capital markets. As a result,

it offers recommendations on possible cause of action in order to curb corporate governance irregularities

that lead to tremendous loss of investor money and confidence throwing the country’s capital markets into

jeopardy.

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Table of Contents

INTRODUCTION......................................................................................................Page 3

CONTENT...................................................................................................................Page 6

Cases of cooperate governance irregularities in Kenya....................................Page 6

Role of the NSE.................................................................................................Page 7

Role of the CMA..............................................................................................Page 13

Role of Professional institutions

1. ICPAK..................................................................................................Page 15

2. KASIB.................................................................................................Page 17

3. CCG....................................................................................................Page 18

CONCLUSION AND RECOMMENDATIONS.......................................................Page 20

WORKS CITED..........................................................................................................Page 23

INTRODUCTION

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“The proper governance of companies will become as crucial to the world economy as the

proper governance of countries.” Clearly stated by James D. Wolfensohn, President of the

World Bank (Gatamah, 2004 September)

Corporate governance has emerged as a major policy concern for many developing countries

following the financial crisis in Asia, Russia, and Latin America. The collapse of Enron suggests

that even the highly industrialized countries such as the U.S. are not immune to the disastrous

effects of bad corporate governance. Studies have shown that low corporate governance

standards raise the cost of capital, lower the operating performance of industry, and impede the

flow of investment (Agrawal and Knoeber; Daily and Dalton; Himmelberg, Hubbard, and Love).

Following the corporate scandals of Enron, WorldCom, and Tyco, more and more countries have

embarked on corporate governance reforms to better protect the interests of investors.

In Africa, significant study has been done on corporate governance, the King’s Committee

Report and Code of Practice for Corporate Governance in South Africa published in 1994

continues to stimulate corporate governance in Africa (Rossouw, 2000). Training, technical and

awareness raising support has also been extended by the World Bank and the Commonwealth

Secretariat to various African countries such as Botswana, Senegal, Tunisia, Mali, Mauritania,

Cameroon, Gambia, Mozambique, Mauritius, Sierra Leone and Zambia to help them put in place

appropriate mechanisms to promote good corporate governance (Private Sector Initiative for

Corporate Governance, 2009). East African Regional conferences were held in Kampala,

Uganda, in June 1998 and September 1999 to create awareness and promote regional co-

operation in matters of corporate governance. At the June 1998 Conference, it was resolved that

each member state of East Africa be encouraged to develop both a framework and a code of best

practice, to promote national corporate governance (Private Sector Initiative for Corporate

Governance, 2009). Efforts are also under way to harmonize corporate governance in the East

African region under the auspices of the East African Cooperation, and through the

establishment of a regional apex body to promote corporate governance. In Kenya, the Private

Sector Initiative for Corporate Governance continues to liaise with Uganda and Tanzania

towards the establishment of a Regional Center of Excellence in Corporate Governance. On

October 8, 1999, the Corporate Sector at a seminar organized by the Private Sector Initiative for

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Corporate Governance formally adopted a national code of best practice for Corporate

Governance to guide corporate governance in Kenya, and mandated the Private Sector Initiative

to establish the Corporate Sector Foundation (Private Sector Initiative for Corporate Governance,

2009). Although corporate governance is now rather popular, in 1990 it was a murmur, therefore,

within this context, that cutting-edge work in the area of corporate governance was only

underway in Kenya in 1998.

According to Ferrell Corporate Governance is the formal system of accountability, oversight, and

control aimed at removing the opportunity of employees to make unethical decisions. Where

accountability is how closely workplace decisions are aligned with a firm's strategic direction

and its compliance with ethical and legal considerations, oversight provides a system of checks

and balances that limit employees and mangers' opportunities to deviate from policies and

strategies and that prevent unethical and illegal activities. While control as the process of

auditing and improving organizational decisions and actions (O.C, Fraedrich, & Ferrell, 2008). A

more inclusive approach to cooperate governance has been proffered, one that creates

governance systems that consider stakeholders welfare in tandem with cooperate needs and

interest thus promoting the development of long-term relationships. The Capital Markets

Authority identifies this in their definition of cooperate governance for the purpose of their

guidelines. “The process and structure used to direct and manage business affairs of the company

towards enhancing prosperity and corporate accounting with the ultimate objective of realizing

shareholders long-term value while taking into account the interest of other stakeholders”

(Capiatl Markets, 2002).

Therefore, at the core of Corporate Governance is the manner in which the power of a

corporation is exercised in the running of the corporation’s total portfolio of assets and resources

with the objective of maintaining and increasing shareholder value and satisfaction of other

stakeholders in the context of its corporate mission. It is concerned with creating a balance

between economic and social goals and between individual and communal goals while

encouraging efficient use of resources, accountability in the use of power and stewardship and as

far as possible to align the interests of individuals, corporations and society (Private Sector

Initiative for Corporate Governance, 2009). Integrity is highly emphasizes in good cooperate

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governance. It creates a compliance and ethics culture so that employees feel that integrity is at

the core of competitiveness while providing mechanisms for identifying risks and for planning

for recovery when mistakes or problems occur (O.C, Fraedrich, & Ferrell, 2008).

The inability of corporations in meeting the requirements of good cooperate governance results

in cooperate governance irregularities. Good Corporate Governance seeks to promote responsive

and accountable corporations, legitimate corporations that are managed with integrity, probity

and transparency and the recognition and protection of stakeholder rights. These ideals are

necessary for any country in order to attract investors- both local and foreign and assuring

efficient management and security of their investments in a transparent and accountable process.

It also promotes competitive and efficient companies and business enterprises by enhancing the

accountability and performance of those entrusted to manage corporations. It is imperative to

note that with efficient companies or business enterprises, the country is able to create

employment and wealth. The lack of investment in companies leads to stagnation and collapse. If

business enterprises do not prosper, employment declines, tax revenue falls and invariably

economic growth hindered. The country needs well-governed and managed business enterprises

that can attract investments, create jobs and wealth and remain viable, sustainable and

competitive in the global market place. Good corporate governance, therefore, becomes a

prerequisite for national economic development.

The purpose of this paper is thus to explore the developments by the key institutions; Capital

Markets Authority (CMA) and Nairobi Stock Exchange (NSE) in their role of monitoring and

curbing corporate governance irregularities; the legal and other measures that they have taken

within the past 5 years. In addition, this paper will examine efforts by other institutions; Kenya

Association of Stockbrokers and Investment bank (KASIB) and the Institute of Certified Public

Accountants in Kenya (ICPAK) and the Centre for Corporate Governance (CCG) in addition to

collaborative ventures such as the FiRe awards, in encouraging the practice of good corporate

governance. This paper acknowledges the role played by other key institutions such as the Kenya

Shareholder’s Association (KSA) and the Institute of Directors in Kenya (IoD-K). However, due

to the significant role played by CMA, NSE, ICPAK and KASIB relative to the other mentioned

institutions the paper will not intensely examine their role.

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CONTENT

Cases of cooperate governance irregularities in Kenya

In recent years, Kenya has witnessed the collapse of many business enterprises and incurred

tremendous costs due to weak corporate governance structures within the organizations. Despite

the good laws that exist in theory, there is still a window for senior managers to misappropriate

shareholders wealth. Ms Priscilla Sampa, Lusaka Stock Exchange (LuSE) legal counsel and

company secretary, while addressing a corporate governance workshop in Lusaka identified

excessive compensation, improper loans, self-dealing, under performance or shirking as crucial

pointers of sinister motives that the public should note (Wahome, 2009). This came in the height

of Nairobi Stock Exchange report of low investor confidence levels due to weak corporate

governance structures that cost investors billions in losses as traders irregularly traded in clients’

shares.

One of the most recent irregularities in Kenya involved Nyagah Stockbrokers. A stockbrokerage

firm put on statutory management in 2008 after failing to meet its financial obligations.

Consequently, over 25,000 investors lost vast amounts of money, lodging claims to the Capital

Markets Authority for compensation through the Investor Compensation Funds (ICF). The CMA

spent Shs302 million to paying investors a maximum of Shs50,000, since the State cannot afford

to compensate the full amount invested, Nyagah stockbrokers top management (owners and

directors) assets must be sold in order to compensate each and every investor of the firm. Based

on a forensic audit done by PricewaterhouseCoopers (PwC) that was leaked to the public. PwC

reported the firm might have gone down with about Shs1.3billion of public funds and in addition

to this diversion of funds by management, fraud by the staff, occurrences of collusion by other

stockbrokers in the NSE, and even office of the regulator (Bonyop, 2009).

The collapse of stockbrokers has, over the years resulted in a confidence crisis at the NSE. In the

last 3 years, two others Francis Thuo and Discount Securities Limited have also gone under

taking with them millions of investor funds and trust in the bourse. Discount Securities Limited

especially risked NSSFs workers pension fund losing billions invested. There was also the

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suspension of Bob Mathews stockbrokerage licenses and insufficient funds to meet clients’

obligation.

Common concerns raised involved investors complaints touching on certain brokers, some

money that was not adding up and overdrawn bank and clearing accounts. Concerns have also

been raised that some brokers are living off their clients’ money by selling their shares without

their authorization, while others are failing to effect instructions promptly or pay proceeds at the

end of 5years as is required under NSE regulations. Therefore, recent move of commercial banks

in buying out stockbrokerage licenses may be the answer to the current investor confidence

issue. Given these deplorable events, we must question the efficiency in the role of CMA and the

NSE as the key players in maintaining integrity, accountability in the capital markets.

Role of the Nairobi Stock Exchange

The Nairobi Stock Exchange (NSE) constitutes as a voluntary association of stockbrokers and

was registered in 1954 as a society under the Societies Act.8 (…). In 1990, it was incorporated

under the Companies Act as a company limited by guarantee and without a share capital.

Although like itself, the Capital Markets Authority licenses its members and the listed companies

are approved by the Capital Markets Authority, the Exchange is primarily responsible for

regulating members and the conduct of listed companies through its various rules and

regulations. Of particular importance is its role in monitoring and enforcing continuing listing

obligations, which are geared towards ensuring comprehensive and timely disclosure,

particularly of material information pertaining to the performance of listed companies.

Despite its role, the NSE up to 2007 was limited in the extent of control it can have over the

market intermediaries, it could not control the makeup or structure of the board of directors or in

the appointment process of top administrative posts. Consequently, the NSE until 2007 had no

punishment or sanction powers over the listed companies. They merely suggested on the best

practices but had no real power to ensure that listed companies complied with the best practices

of corporate governance. This created a gap for companies to compromise and it thus important

to note that it was between this period that the major fraudulent activities by stockbrokerage

firms occurred. Therefore, during the 2007-08 budget speech the government acknowledged the

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need to protect the integrity of the stock exchange and to protect the small investors from

unscrupulous market players; the NSE additional sanction powers came into effect in 2008,

January.

These additional sanction powers are held in the 2009, April ‘Corporate Governance Market

Intermediaries regulation’ and the ‘Conduct of Business Market Intermediaries regulations’

(Development, 2003). They are are intend to regulate activities by stockbrockers in the NSE by

setting up clear rules and punishment for irregularities in their transactions and operations. The

Corporate Governance Market Intermediaries regulation’ develops a Corporate Governance

Framework which ensures that; there is strategic guidance of the market intermediary, effective

monitoring of the management by the board, and the board’s accountability; and timely and

accurate information is available on all material matters relating to the market intermediary,

including its financial structure, performance, ownership and governance. Secondly it develops

an Accountability and Responsibility framework that requires the board of public listed

companies to have formal schedule of matters specifically reserved to it for decision to ensure

that the direction and control of the market intermediary is firmly in its hands (Capital Markets

Authority, 2009, April 15)

While ‘Corporate Governance Market Intermediaries regulations’ encompass the governance of

public listed companies the ‘Conduct of Business Market Intermediaries regulations’ gives the

code of business conduct of market intermediaries in their handling of arising ethical issues that

create conflicts. Paramount to the codes of conduct are the identification of areas of conflict of

interest and the adoption of appropriate policies to curb these ethical issue. In the event where

the conflict of interest between the organisation and the clients cannot be avoided, then full

disclosure to the client is necessary in order to minimize damage to the client and to put the

client’s interests ahead of its own.

Areas regarding money laundering the ‘Corporate Governance Market Intermediaries

regulations’ requires that in each occasion a client places an investment order with a market

intermediary, the market intermediary ought to obtain details as to the origin and source of the

money or funds used or to be used for the investment (Capital Markets Authority, 2009, April

15). Where the money or funds originate from outside Kenya then a confirmation from the

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remitting entity of the nature of its business and details as to the source of the money or funds is

therefore necessary (Capital Markets Authority, 2009, April 15). A written declaration by the

client confirming the accuracy of all information given and that the money or funds used for the

investment in securities does not arise from the proceeds of any money laundering or other illicit

activities (Capital Markets Authority, 2009, April 15). The market intermediary thus maintains

this information obtained from the client as part of the records.

Since insider trading became such an issue, the Codes of business conduct also regulate Client

transactions. In the event a client’s order has been received the stockbrokers must effect the

execution of that order without delay and deal on the terms that are the best available to the

client. In addition, market intermediary should also take reasonable steps to ascertain if any of its

clients are insiders and maintain records accordingly to assist in the monitoring of insider

dealing. The Regulations also require stockbrokers to inform the CMA of any fraud on the

market intermediary or by any of its employees; any disciplinary action against any of its key

personnel; any action against it that may lead to bankruptcy (Capital Markets Authority, 2009,

April 15). These codes are to ensure that there is no discrepancy between what the Exchange and

the Authority; enhancing information symmetry and stemming market manipulation.

The Automated Trading System (ATS) at the NSE has been running since 2006, making

transactional processes easier for stockbrokers who can access the NSE from their offices via a

Wide Area Network (WAN). The NSE runs this ATS system but the stockbrokers control the

orders in it; this creates the probability of fraud. The Exchange is limited in fully monitoring the

stockbrokers, to counter this; the client signs a ‘trading order form’ to authorize the order. The

NSE thus handles any complaints by clients about stockbrokers and irregularities investigated

through their broker back office system in the process of restore investor confidence. The back

office system of the ATS curbs irregularities by putting up a Kshs.5 million fine on stockbrokers

or a prison sentencing and even a complete ban from trading.

During the Budget Speech of 2009, a number of requirements regarding corporate governance of

members of the NSE were proposed. Owing to the collapse of over 6 stockbrokerage firms due

to lack of sufficient capital by 2010, December 31 investment banks will be expected to have

increased their capitalization to Kshs.250.0 million from the current Kshs.30million and

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stockbrokers to Kshs.50.0 million from Kshs.5million (Mwangi, 2009). This is to eliminate

failure such as the Nyagah Stockbrokers case. Adequate capitalization puts Nyagah Stockbrokers

in a position to compensate its investors instead of government covering the costs. Secondly, the

members are expected to publish semi- annual and annual financial statements in at least two

daily newspapers with national circulation and display the audited accounts in a conspicuous

position (Mwangi, 2009). This further encourages the effective disclosure of information

allowing investors to analyze financial markets and make informed decisions. Each firm was to

be designated a compliance officer whose powers can even override that of the owner and the

director. Stockbrokers were to also take up of professional indemnity that is not less than 5 times

their daily average turnover. In addition, business should seek regulatory approval before

changes in shareholders, directors, chief executive and key personnel (Mwangi, 2009).

Consequently, the legislation on increased capitalization is causing a major realignment in the

capital markets. Commercial banks are now buying brokerage and investment banks to gain

more power in the NSE. Banks are now targeting and buying out stockbrokers struggling to stay

afloat due to their capacity for raising the new capital level. On the other hand, banks only

acquire stock brokerage licenses by buying out existing firms, after the CMA halts issuance of

new licenses (Anyanzwa, 2009). Therefore, unfolding clash over the equity business between

commercial banks and brokerage firms recently surfaced after Cooperative Bank of Kenya

announced its acquisition of a 60% controlling stake in Bob Mathews limited, which was

renamed to Kingdom Securities Ltd (Anyanzwa, 2009). Plus NIC bank and ABC Bank that

bought out Solid investments and Crossfield brokerage firms respectively. Observers view the

move as timely and critical in the restoration of investor confidence however, market

intermediaries fear being out of business.

Indeed this is a concern for the NSE as it must effectively manage and look out for the best

interest of the public listed companies. Thus, NSE has proposed a review of the mergers and

acquisition policy with a view of clamping down on more takeovers that are likely to expose

existing players to severe competition from highly capitalized commercial banks. Apart from the

competition, emerging, serious conflict of interest issues arise, as capital markets and the

banking industry are competitors. In addition, the Banking Act regulates commercial banks yet

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they are operating in the capital markets, and should be regulated by the CMA Act, this gives

commercial banks an unfair advantage over stockbrokerage firms. In the long run, this re-

capitalization would kill competitiveness and entrepreneurship in the Kenyan market, thus to

renew investor confidence a long-term approach suggested by many stockbrokers is maintaining

integrity in the capital markets.

Recently studies on the possible demutualization of the bourse before end of 2009 to improve

governance have been underway. Demutualization is the separation of ownership from the

management of a stock exchange, or the separating ownership and trading rights. NSE ownership

would be shared out to stockbrokers, the Government and the CMA Development Fund and NSE

employees. Changing the corporate structure of the NSE is in line with addressing the weakness

and challenges regarding corporate governance and conflict of interest currently facing the

Exchange. Separation of ownership would drastically raise the badly needed investor confidence

in the institution and could even unify regional exchange-the East African Stock Exchange. On

the other hand, stockbrokers are not too pleased, their main argument being that they have a right

to decide whom they cede their ownership. On closer examination, one realizes that

stockbrokers’ primary fear is the government’s influence on the free flow of the capital markets.

Indeed a crucial debate arises on the extent of free markets. According to Omilly Godfrey, a

stockbroker in the NSE, before the change in ownership a demutualization law and amendment

of the CMA Act would be necessary in order to prevent any suppression of the country’s

emerging market. In addition, he stated the importance of a cap or maximum shareholding in the

demutualized NSE for any one group or individual. This is in the argument that controlling of the

bourse by any one individual or group would be counter -productive. Owing to the potential

conflict of interest given that, the NSE would be self-listing itself; clear regulations to guide such

a listing are paramount (Gikunju, 2007).

Apart from legislative measures, the NSE has also undertaken other routes to eliminate corporate

governance irregularities. Of these is the ‘Listed Companies Forum’. Launched this year, it is a

quarterly interactive forum, with two objectives. The first is to form an accessible platform

where listed companies can receive from the Exchange an in-depth brief on the performance of

the markets. The second is an interactive forum at which the Exchange discusses matters of a

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common theme to its listed companies. The forum also invites capital markets professionals to

discuss topics of interest to listed companies. The objective of the quarterly forum is to enhance

the value listed companies derive from being listed on the Exchange. This forum is beneficial as

it can discuss issues of importance to investors such as good corporate governance –

independence of directors; more frequent disclosures; more free float that not mean loss of

control; importance of meeting with investors and analysts.

The Complaints Handling Unit (CHU) launched on 18th August 2009, collaboration with the

Exchange, the CMA and the Kenya Association of Stockbrokers and Investment Banks KASIB.

The CHU is a one stop point of reference for investors to lodge complaints, track progress and

receive required information. Based on the core themes that run the exchange, centralization and

automation, it is hoped that issue resolution will become faster, more transparent and reliable.

This benefits investors as it is a one point of reference for investors, providing ease in analyzing

complaints received and monitoring follow up and feedback not to mention, providing a

standardized format of collecting and reporting complaints.

The main concern to listed companies is that CMA consent is required for new Issues, bonds and

the like, and the CMA may well refuse consent if it considers that the Corporate Governance

Guidelines have not been followed. As a result, public listed companies under the NSE become

more careful in their transactions and disclosure policies in order to keep within the CMA’s

regulation. While the Stock Exchange, working with the Capital Markets Authority, has

contributed significantly to improving corporate governance disclosure amongst listed

companies, its impact at the national level has not been significant owing to the small number of

listed companies, most of which are foreign-owned and controlled. However, the Exchange has

played a critical role in the development of capital markets and stock exchanges in Africa to

facilitate and ease the flow of capital, an important factor in enhancing corporate governance and

disclosure.

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Capital Markets Authority

Capital Markets Authority has worked to improve market confidence by laying out rules and

regulations to govern operation of players in the Nairobi Stock Exchange market. For a long

time, disclosure requirements were insufficient and there was inadequate protection of investors.

At the same time, outdated laws and cumbersome licensing complicated entry, impeded efficient

operation and discouraged orderly exit (Mugambi, 2009). In 2002, the Capital Markets

Authority, working with the Nairobi Stock Exchange, developed a new legal and regulatory

framework that conforms to the best international practices (Development, 2003). Of the rules so

developed, the key ones in ensuring corporate disclosure by listed companies include the Nairobi

Stock Exchange Listing Manual, the Capital Markets –Securities, Public Offers, Listing and

Disclosures- Regulations 2002, the Capital Markets Guidelines on Corporate Governance

Practices by Public Listed Companies in Kenya (Development, 2003).

The Capital Markets Guidelines on Corporate Governance Practices by Public Listed Companies

in Kenya 2002 were established in response to the growing importance of governance issues both

in emerging and developing economies and to promote growth in domestic market. The objective

of the Guidelines, is to strengthen Corporate Governance practices by listed companies in Kenya

and to promote the standards of self-regulation so as to bring the level of governance practices in

line with international trends. The Guidelines are general principles, and recommended best

practices for good corporate governance. It lays out the steps to be taken by listed companies in

their endeavor to achieve international standards in corporate governance. To note, is that the

Guidelines do not have the force of law. They are described as "Guidelines". Gazette Notices are

distinct from Legal Notices cannot change, or create new law. However, as stated above, CMA

expects Listed Companies to comply with these guidelines as part of their Continuous Listing

Obligations. Failure to comply may well lead to a company being censured, suspended or

delisted for failure to comply.

On the examination, the Guidelines some contradictions cropped up making us question their

effect. For example, Part 2.1.6 of the Guidelines says, "No person shall hold more than five

directorships in any public listed company at any one time". This compared to Part 3.1.3 (ix)

"No person shall hold more than three directorships in any public listed company at any one time

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in order to ensure effective participation in the board". The wording is ambivalent, we

understand the intent but we cannot reconcile the contradiction between "five" and "three". This

contradiction seemingly small can create chaos with everyone choosing to use the part that best

benefits them.

These rules have greatly enhanced disclosure requirements for listed companies on both initial

listing and continuing listing obligations. Building on the code developed by the Centre for

Corporate Governance, the extent of compliance with these guidelines forms an essential part of

disclosure obligations in the corporate annual reports. It is equally important for the extent of

non-compliance be also disclosed. as prescribed under The Capital Markets (Securities) (Public

Offers, Listing and Disclosures) Regulations, 2002. In these regulations, every public listed

company shall disclose, on an annual basis, in its annual report, a statement of the directors as to

whether the company is complying with these guidelines on corporate governance with effect

from the financial year ending during 2002. These developments have already made some quick

gains, with many listed companies making changes to their governance practices. Of particular

interest is the establishment of audit committees with independent, non-executive directors and

corporate governance disclosure in annual reports (Githongo, 2000). They have also improved

timeliness, requiring quarterly reports as opposed to the previous half-yearly ones. The CMA

also outlawed individuals holding at least 25% stake in the brokerage houses or holding any

management position (Mugambi, 2009)

Given the past collapse of 6 stockbrokerage firms, the CMA set up an Anti fraud unit (CMFIU)

teaming up with Criminal Investigation Department and cyber crime unit. Their mundane tusk

first is to complete previous investigations on stockbrokers and their staff, specifically

investigations on Nyagah stockbrokers and Discount securities. Consequently, the Authority

sued Nyagah’s managing director on fraud and diversion of investors’ funds amounting to

Kshs.523million for personal use. PwC claims more than diversion of funds by management but

also collusion by other stockbrokers and fraud by staff. Clearly, their system of investigation and

prosecution should be reexamined to ascertain employees not only the top management, involved

in market irregularities-fraud proper action is taken. Fortunately, the unit (CMFIU) realizes this

and in the process of drafting suitable strategies to manage risks associated with fraud through

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prevention, detection and response mechanisms (Kang'aru, 2009). This ultimately will increase

the declined investor confidence in the capabilities of the Authority in regulation of NSE.

A key initiative by the CMA is a public education program on understanding capital markets.

They intend to implement a comprehensive and targeted investor education and public awareness

program (Kang'aru, 2009).Despite the measures, their effect is primarily limited to public listed

companies and issuers of fixed income securities and debt instruments in Kenya’s capital market.

Consequently, private sector companies are not obliged to comply watering down the initiative

of curbing corporate governance irregularities. Companies in the private sector should also be

encouraged to practice good corporate governance.

Role of Professional Associations

Professional associations have also contributed a lot in enhancing corporate governance

disclosure. The Institute of Certified Public Accountants (ICPAK) has been the main crusader for

the adoption of international accounting and audit standards, which were adopted in Kenya with

effect from January 1999. In addition, the Kenya Association of Stockbrokers and Investment

Banks (KASIB) have also played a crucial role, by the development of a Code of ethics that

guides stock broking business. The Code of Ethics in the process of establishment is in the aim

of enhancing the of the NSE’s and CMA’s regulation. In addition, it seeks to create investor

awareness of the dealings of the NSE.

ICPAK

ICPAK is a statutory body established under the Accountants Act, 2008 for the regulation of the

profession of accountancy in Kenya. It serves as the umbrella body that oversees the activities of

qualified accountants. It has brought Kenyan reporting standards to world-class standards. This

endeavor has support from regional organizations such as the Eastern, Central and Southern

African Federation of Accountants and the Association of Certified Chartered Accountants. A

distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in

the public interest. Therefore, a professional accountant’s responsibility is not exclusively to

satisfy the needs of an individual client or employer. In acting in the public interest, a 15

professional accountant observes and complies with ICPAK Code of Ethics for Professional

Accountants 2009. The Code of Ethics for Professional Accountants includes the entire IFAC

Code together with specific requirements under Kenyan context. The IFAC Code of Ethics

establishes ethical requirements for professional accountants and has been prepared by the

International Ethics Standards Board of the International Federation of Accountants (ICPAK,

2009, July).

A weakness of auditing in preventing fraud and corruption is largely due to the fact that it deals

mainly with past events, past transactions. However, in recent years the profession has been

moving towards taking auditing closer to, or at the time when, transactions occur – real time

auditing with the help of software tools is the direction in which auditors are moving, though

progress is still slow. The statutory audit will, however never provide a guarantee that companies

are free from fraud and corrupt activities.

Despite the role of ICPAK in ascertaining good corporate governance practices regulators must

not wholly rely on external auditors in complete reporting and auditing of firms. This reliance on

external auditors is premised on the belief that the auditors are public spirited and will act on

behalf of either the public or the state, and that auditors are independent of the management

(Githongo, 2000). Such propositions are problematic, because within auditing firms the

emphasis is very firmly on being commercial and on performing a service for the customer rather

than on being public spirited on behalf of either the public or the state. In addition, auditors

often sell non-auditing services to their audit clients and serve their clients as counsellors and

advisors whilst the state looks to them to perform the more adversarial, regulatory function of an

independent auditor. This ultimately creates conflict of interest and more often than not

compromise efforts on good practices of corporate governance.

Many governments, Kenya included place considerable reliance upon regulation of major sectors

through accounting technologies. The role of the auditor, therefore, in helping increase

transparency and combat corruption is more in focus today than ever before and in an

environment that is more challenging than it has ever been.

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FiRe Awards

In 2002, the Institute of Certified Public Accountants of Kenya, the Capital Markets Authority,

and the Nairobi Stock Exchange launched the Financial Reporting Award (FiRe) which, in

addition to financial reporting, encourages corporate governance, corporate social responsibility,

and environmental reporting (Ongawe, 2009). Through The FiRe Awards the winners’ peers will

be encouraged to contribute to the creation of a sustainable environment by promoting dialogue

with their stakeholders country wide and assisting local communities, to achieve growth and

prosperity (Ongawe, 2009). Companies interested in preserving their reputations are

increasingly focusing on their compliance process – those management practices and systems

designed to motivate, measure and monitor the organisation’s legal and ethical performance

(Ongawe, 2009). PricewaterhouseCoopers, for example, have developed a management tool –

the ‘Compliance Process Diagnostic’ - to help companies identify measure and evaluate the

effectiveness of their compliance programmes. The Diagnostic tool works by prompting

management to assess the company’s own processes against performance criteria or indicators in

five key areas (Githongo, 2000). Companies which fulfil the relevant criteria are less likely to

have corporate environments which encourage or tolerate corrupt activity.

KASIB

The stockbrokerage fraternity has embraced corporate governance principles in the manner they

run their firms, which is expected to bring good stewardship and reduce fraud incidence in

Kenya. It remains open to the public who may have complaints against brokers, while

stockbrokers share information that reduce incidence of fraud (Ocoth, 2009). In the hope of

improving investing environment, KASIB is in the process of developing the code of ethics and

conduct of members to be formally launched in the future. These codes cover matters from

professionalism, Integrity of the Capital markets and most importantly Duties to clients

regarding fair dealing communication and confidentiality (Njoroge, 2009)

Many stockbrokers sometimes engage in fraudulent activities in the stock markets, because they

face the challenge of how to detect and deal with fraud. It is here that KASIB steps in to offer

workshops on how to detect and deal with fraud.

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Possibility of fraud through the ATS system is attributed to the lax back office operations,

allowing irregularities to occur. Working with the Exchange, KASIB is developing common

platforms for back office that will be linked up to the ATS at the Central Depository and

Settlement Corporation. Ultimately, to help monitor what members are doing, making it easier to

follow audit trails, and trace fraud since perpetrators often use 3 or 4 firms to hide their tracks

(Njoroge, 2009). However, the modalities are yet to be work out but have agreed, in principle,

that it is something that needs urgent addressing. Meanwhile the institution is involved in generic

one-day course on corporate governance for its members in the next month.

As previously mentioned, as a result of the raised capitalization legislation, stockbrokerage firms

have great concerns as they are not able to raise the stipulated amount. While commercial banks

with their wide capital base buy out the stockbrokerage firms such as Bob Mathews. Thus,

tension arises between stockbrokers, commercial banks and the CMA. According to KASIB,

these new legislation posses great challenges to stockbrokerage survival in the capital markets

claiming the legislation unrealistic given the 1 year notice. Therefore, KASIB is engaging the

government for continuous consultation because rules and regulations are not an end but a

means; any rule formulated must be practical. They are also on an endeavor to get the

government more involved in discussing these issues.

CCG

The Centre for Corporate Governance initially referred to as the Private Sector Corporate

Governance Trust (PSCGT) is a company limited by guarantee. It main objectives include

promoting the implementation of good corporate governance principles and practices in Africa.

Moreover, creating public awareness and sensitizing corporate leaders and policy makers on the

need for good corporate governance for enhanced public and political leadership. It has played a

crucial role in the establishment of the Institute of Directors of Kenya (IoD-K) and the Pan

African Consultative Forum on Corporate Governance (PACFCG).

Its achievements mainly arise from conducting generic training program for directors and senior

management of corporations, thus inauguration the Five Day Residential Training Course for

Company directors in the Common Wealth in May 2001. The Centre has also diverges to areas

of education developing a curriculum for the MBA and Postgraduate diploma in Corporate 18

Governance to be used by the Nairobi University, the KCA University and other institutions in

East Africa. In addition, through this venture in education it has conducted various researches on

Corporate Governance in Kenya in the aim of defining the status of corporate governance in

Africa while building capacity of corporations in handling irregularities. As a result, CCG has

also developed and disseminated guidelines on corporate governance for shareholders, banking

sector, for disclosure among others.

19

CONCLUSION AND RECOMMENDATIONS

“Disclosure is the lifeline of capital markets and the information the market relies on,”

(Wahome, 2009). At the centre of good corporate governance practices is disclosure. In Kenya

various efforts to improve corporate governance practices and encourage disclosure, are in place,

a lot has been done to improve the legal and regulatory framework.

As discussed in this paper, legal, regulatory and policy reform is paramount. Enforcement

remains the primary problem in Kenya. The capacity of regulators to enforce compliance with

the law is terribly weak. They lack the resources both human and material to be effective and are

largely perceived as ineffective. The Office of the Registrar General is particularly constrained

and is unable to enforce many of the most basic requirements. The same applies to most

professional, trade and business associations. This leads us to believe that what we now need is

to build institutions that do not need saints to run them. This is what good corporate governance

is all about building corporate institutions -have effective checks and balances, internal control

mechanisms, reporting and disclosure processes and self regulating procedures, such- that they

do not require extra-ordinary people to run them.

The capacity of regulatory authorities to enforce the law is a critical area that should be

addressed. Systems for monitoring and evaluating compliance with good corporate governance

practices and strengthening the incentives for good corporate governance must be developed. To

maximize effectiveness, they must be coupled with effective networks for research to document

good practices and demonstrate their benefits to encourage their replication as well as identify

bad practices and their effects so as to discourage them. It is encouraging however to see that the

composition of boards and their performance are improving. Recruitment of non-executive

directors is more rigorous and the areas of strategy and risk management, which have generally

been ignored, are gaining more attention as noted in the KASIB code of ethics and the Capital

Markets Act. Committees, and particularly audit committees, are now a common feature; in the

Capital markets and the banking industry, they are a legal requirement. Stakeholders are being

recognized and respected. Disclosure is improving, in the banking industry; it is fairly elaborate,

public and timely. Listed companies are beginning to issue statements of corporate governance in

their annual reports evident from the FiRe awards.

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As the role and extent of corporate governance is evolving and expanding, so is the role of

auditing. It is evolving from the vouching of financial transactions, to reviews of internal control,

risk management, governance systems and continuous auditing. Conversely, certain realities that

are sometimes overlooked present themselves: First, auditors cannot prevent crime. They act as a

deterrent in supporting the control system. Secondly it must be remembered that the role of

auditors in providing assurance is crucial but auditors rely heavily on the cooperation of their

clients. It is sometimes forgotten that the ultimate responsibility for preventing, detecting and

reporting things like corruption lies primarily with the management of a company. Some argue

that there is the danger of a ‘sue the auditor’ mentality as if the responsibility for ensuring

transparency, integrity, compliance and ethical behaviour rests on the shoulders of the auditors

alone. There is thus a recognised need for governments, international organisations and

professions like auditing to work together to provide internationally recognised frameworks for

this exchange of data to take place.

It is not unlikely that in the coming years, especially as a result of the usual controversies

attendant to the privatisation process and the regular collapse of banks and stockbrokerage firms

in the country, that the accounting profession will increasingly find itself the focus of attention

when fraud and corruption are suspected to have happened. Questions will be asked by the press

to what the auditor knew and when they knew it. In this respect the tools adopted by the

profession to ensure transparency and accountability will be critical. There is still a lot that

ICPAK can do in identifying corporate governance irregularities; however they are limited in

competencies. For example a new standards proposed by the American Institute of Certified

Public Accountants (AICPA) in 1997 set out to mandate auditors to aggressively seek out, detect

and report cases of fraud using a detailed set of guidelines while using powerful computer

software to conduct forensic auditing. The sophistication of this type of software has increased

dramatically over the last five years. Software that allows accountants to ‘interrogate’

information using so-called data-mining tools that search huge amounts of electronic data for

signs of fraudulent activity, whether it is bogus loans, stolen shipments or shady transfers.

Another suggestion with regard to promoting accountability and transparency in auditing has to

do with businesses undertaking an audit of how ethical problems are currently being dealt with,

21

to test its behaviour both against external standards and against its own declared values. These

audits can comprise an important measure even for auditors before taking on a particular client.

Auditors can in special cases even assist businesses in conducting these audits. A major study is

presently being undertaken by the European Institute of Business Ethics with the aim of

developing the tools needed to undertake such ethical self-audits.

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