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When partners disagree: Inside Ernst & Young’s Sh450m dispute

By Macharia Kamau | September 1st 2020 at 00:00:00 GMT +0300

The Kenyan unit of one of the four biggest audit firms is embroiled in a fight with one of its partners that threatens to dent not just its credibility but also its purse.

Laban Gathungu, who claims he was irregularly removed as a partner, has sued Ernst & Young (EY) Kenya for Sh450 million.

Until November 2018, Mr Gathungu had been the partner in charge of the public sector business at EY, but the company terminated his partnership, an action he claims is null and void as it contravenes a 2015 partnership agreement that stipulates the process of kicking out a partner.

He has also disputed the grounds used in terminating his partnership.

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The process, according to EY’s partnership agreement – which is among the documents filed in court by Gathungu’s lawyers - entails being voted out by at least 75 per cent of partners.

The council of partners also has to demonstrate that a partner is incapacitated or has failed to commit time and resources to the company.

The company is at the same time required to give the partner a three-month notice, besides getting the go-ahead from the EY Africa board.

The partner too must present their case to the council of partners, which Gathungu claims did not happen in his case.

According to court papers, the onset of his problems was a 27.4 per cent reduction in his profit allocation for the year to June 2018 compared to what he had earned in the previous year.

This, according to his affidavit, was despite having worked harder, resulting in more revenues for the firm.

“Instead of a positive of at least 40 per cent as per my percentage growth in the previous year and my contribution in the business as a partner and also in comparison to the allocation to the other partners of my rank in the firm, this means my earnings were understated by 67.4 per cent,” averred Gathungu in the affidavit.

He questioned why he was receiving lower earnings and the firm, in response, accused him of gross negligence while overseeing a project in Somalia.

Gathungu had been overseeing an African Development Bank-funded project in Somalia up until the time his partnership was terminated in late 2018. 

The Drought Resilience and Sustainable Livelihood Project, whose aim is to improve livelihoods in the region, had EY as the implementation agent.

A whistleblower from one of EY’s sub-contractors Horn Economic and Financial Institute (Hefi) wrote to EY, alleging corruption by Hefi and EY staff.

The company accused Gathungu of failing to follow up on the issues raised by the whistleblower to the Kenyan and Africa office.

In an 18-page response to the accusations, Gathungu claimed he had been singled out and discriminated against.

“I have been the best performing partner in my field. I have supported many other employees, partners and colleagues and has always devoted my best to the defendant firm,” he said in the court papers.

“Despite working on the projects under investigation with other partners, I was singled out and blamed for improprieties allegedly exposing the company, while no other partner, including the engagement partner responsible for the project under the said investigation, was subjected to the same treatment.”

EY has denied the claims made by Gathungu. It noted that his removal followed investigations that had been carried out by EY’s South African office at the invite of EY Kenya.

“The plaintiff’s dismissal followed an independent audit and the plaintiff was given the opportunity to respond to the allegations but failed to do so,” said EY replying to the accusations levelled against it.

It added that following the incident, EY stopped doing business in Somalia. In addition to Gathungu being kicked out of the firm, other partners that were involved in the projects have been penalised financially.

It explained further that “under-performance, breach of risk management and quality maters or breach of the code” can result in a significant financial penalty.

“This explains the 27.4 per cent adjustment on the plaintiff’s drawings that resulted from the incident highlighted above, which led to the plaintiff being rated as ‘need to progress’ since his current trend was declining,” said EY.

The firm noted the investigations by EY South Africa had found Gathungu culpable for failing to escalate the issues concerning the project, including the concerns raised by the whistleblower.

It, however, did not file the report in court, citing confidentiality “due to the sensitivity of the information contained therein relating to the defendant (EY) and its clients”.

Gathungu in his 18-page response to the accusations said it was “inexplicable” how he was rated as “significantly beyond expectation” in 2017 and in the following year was rated as “needing to progress” before being kicked out without any explanation as well as without following the due process as per the binding partnership agreement.

EY said Gathungu’s responses were “not satisfactory and some responses were evasive and even at that stage the plaintiff failed to appreciate the seriousness of the matter.”

Pending the hearing and determination of the Sh450 million dispute, Justice Maureen Odero in December last year ordered, on an interim basis, that EY be restrained from proceeding with his removal process and continue to pay half of his monthly earnings. He was also given the go-ahead to audit the firm’s books to determine his full claim.

The audit firm in February this year filed an application for review of the December last year ruling, but the application was dismissed by the High Court in April this year for lack of merit.

EY had, however, not paid Gathungu, who filed  contempt of court proceedings, seeking to have his fellow partners committed to civil jail. He also sought an order to freeze the firm’s bank accounts.

EY in its affidavit opposing the contempt of court application said it had started paying and that restrictions that followed the March outbreak of coronavirus pandemic in the country had affected how the company works and, in turn, remitting payments to Gathungu.

Differences have also emerged on tabulating the half-pay, with the firm using his slashed pay as the base, while Gathungu wants it to use what he was earning before the fallout.

The contempt of court case resumes next month, while the main case will follow the conclusion of the interim application.

It is not the first time that a Big Four audit firm is facing a major partnership dispute.

KPMG East Africa was recently rocked by a fallout with one of its senior partners, who had served the firm for more than two decades.

The former senior partner Richard Ndung’u sought justice after his partnership was terminated on allegations that he had been having an inappropriate relationship with his personal assistant.

Mr Ndung’u sought arbitration, accusing KPMG of failure to follow the laid down rules in terminating his partnership. Last year, the arbitrators awarded Ndung’u Sh460.5 million and a further Sh1.9 million in special damages.

Ernst & Young EY
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