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.

Table of Contents
1
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
Corporate Governance formally adopted a national code of best practice for Corporate

3
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
governance. It creates a compliance and ethics culture so that employees feel that integrity is at

4
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.

CONTENT
5
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
suspension of Bob Mathews stockbrokerage licenses and insufficient funds to meet clients’
obligation.

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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
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.

7
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
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

8
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
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
9
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
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.

10
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
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.

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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.

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
12
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
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
13
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
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

14
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
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).

15
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.

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
16
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.

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.

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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
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.

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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

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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.

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

20
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,
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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