Experts query Alliance Capital forensic auditors

 It has emerged that the appointment of Grant Thornton Consulting Limited to conduct a forensic audit into financial dealings of Alliance Capital Limited (ACL) is flawed as it acted as the firm’s external auditor.

A fortnight ago, the High Court Commercial Division in Blantyre ruled that ACL should liquidate for failing to meet standards of a sound financial establishment mandate to function in the country.

The Reserve Bank of Malawi (RBM), which is now acting as liquidator, outlined several steps to liquidate the investment and portfolio management firm, which included engaging an audit firm to investigate ACL’s transactions.

However, The Nation investigations have established that Grant Thornton previously audited ACL’s financial statements until 2019, the period when investments estimated in excess of K60 billion were mismanaged by the company’s directors.

This means, according to corporate legal experts and financial analysts, Grant Thornton are conflicted and cannot conduct an investigation into financial transactions they previously audited on behalf of ACL.

Issues surrounding ACL started filtering into the public domain in March last year, when the High Court of Malawi Commercial Division gave the company eight days to settle in full K373.5 million owed to one of its clients, a Blantyre-based family.

After failing to do so, RBM governor, who is also registrar of financial institutions, suspended ACL’s portfolio manager licence for “gross violations of financial laws” for 12 months, with effect from March 2021.

But things did not improve and in April this year, RBM applied for the winding up of ACL on grounds that the company was insolvent, with its net capital excessively below the minimum regulatory capital  requirement of K50 million.

Corporate law expert and certified insolvency practitioner John Kalampa observed in an interview on Wednesday that it was improper for RBM to engage Grant Thornton because “one primary reason is that an apparent conflict of interest exists”.

He said a liquidator, during liquidation, is obliged to trace and recover assets even from shareholders, directors or related parties, if proved that they somewhat benefitted or defrauded the company or its creditors.

Kalampa said: “Part of the things the liquidator will scrutinise are the audited financial statements. It is, therefore, difficult to envisage that a person who acted as an external auditor can objectively review and criticise their own work.

“This is not to suggest that there was any lack of professional conduct or care by Grant Thornton. No. The issue is simply that no person should be placed in a position where duty and personal interest may conflict.”

He suggested that the best way was to appoint an independent and fair-minded liquidator.

Another corporate law expert James Kaphale said he felt Grant Thornton were not supposed to conduct the audit because they failed to raise a red flag when people’s investments were being messed up.

He said: “Grant Thornton fails the objectivity test in this case as they will not be objective in reviewing and criticising their own work. This is against corporate governance principles as they are compromised and tainted, hence, the results of their audit will be received with suspicion.

“It was a misnomer for Reserve Bank of Malawi as a financial regulator to appoint Grant Thornton, considering they are conflicted and compromised.”

 On his part, financial analyst James Kamwachale Khomba, a professor of finance and corporate strategy at Malawi University of Science and Technology said while it was a fact the country does not have adequate experts in forensic auditing, RBM needed to engage a different firm altogether.

He said: “I think RBM just opted for Grant Thornton

 as a matter of urgency; otherwise, if we had a great pool of experts, the best was to go for a different firm altogether, not anybody who was previously attached to the falling company.”

According to the ToRs, Grant Thornton is expected to investigate all transactions made by ACL to determine if any fraud, misconduct or financial crime was committed.

Institute of Chartered Accountants in Malawi acting chief executive officer Charles Chimpeni said from a code of ethics point of view, Grant Thornton Consulting Ltd engagement poses a self-review threat because ACL (in liquidation) is a public interest entity.

“The engagement on forensic audit falls under arrangement called Agreed Upon Procedures or Non-audit Assurance Services. The terms of reference and scope of work is different from an audit assurance

 where auditors are engaged to express opinion on a company’s financial statements,” he said.

However, Chimpeni agreed with the experts, saying in such situations there are safeguards to ensure independence and objectivity, one of which is having different engagement staff and partners managing each of the separate engagements.

When contacted for comment, Grant Thornton managing partner Lamion Gama asked for a questionnaire which he did not respond to and did not pick up his phone after our several attempts.

Similarly, RBM did not respond to our inquiry when asked to justify the appointment of the forensic auditor despite several promises to do so since Tuesday.

Last week, RBM governor announced that the central bank had outlined steps to liquidate ACL, the first being preparing a statement of affairs of the firm followed by preparation of proof of debts against the company.

The bank also requested all persons with claims against ACL to file them with the liquidator’s office and provide supporting evidence within 60 days from November 17 2022.

The governor has also indicated that between November 18 and 24 2022 the bank would be holding meetings in Blantyre, Lilongwe and Mzuzu.

During the said meetings, the disgruntled investors expressed anger and frustration at RBM on why they decided to engage Grant Thornton.

Meanwhile, RBM has revoked the licence of Alliance Stockbrokers Limited (ASL), a sister company of ACL, for noncompliance with financial services laws. ASL and ACL are both subsidiaries of Alliance Holdings Limited (AHL).

ACL, incorporated as a private limited company on August 31 2004 as Alliance Investment Limited before changing its name to Alliance Capital Limited on September 30 2006, owes over 230 private businesses, individuals and State enterprises.

Minister of Finance and Economic Affairs Sosten Gwengwe told Parliament last week that Attorney General Thabo Chakaka Nyirenda and Director of Public Prosecutions Steven Kayuni had moved to institute criminal investigations into activities that led to liquidation of ACL.