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Ernst & Young Tower in downtown Toronto.
A feud pitting professional services firm Ernst & Young against its former top official Laban Gathungu has birthed a rare outcome – both parties sued each other and won.
The cases have also lifted the lid on why the World Bank blacklisted the consultancy’s Kenyan arm for 30 months.
The High Court in Nairobi has ruled that both sides proved their claims to the required legal standard, meaning they will exchange cheques, although Mr Gathungu has been left with a significantly bigger burden.
Mr Gathungu sued the firm in 2018 for unlawful removal. Later, Ernst & Young filed a counterclaim citing unethical practices by the former partner, that led to loss of funds from a project in Somalia and the 30-month World Bank projects ban.
Mr Gathungu has been awarded Sh43.12 million for unlawful removal as a partner at Ernst & Young Kenya in November, 2018. The award consists of Sh31.1 million as his share of profit from Ernst & Young, Sh6.98 million in capital contribution and Sh5 million in damages for unlawful removal. Mr Gathungu had sued for Sh450 million. He relied on a similar dispute – that of Richard Ndung’u, a former partner of professional services firm KPMG, whom the high court awarded Sh380 million. Part of Mr Ndung’u’s award was Sh50 million in general damages.
But the court held that in Mr Gathungu’s case, there was some questionable behaviour hence the lower award.
“However, based on my findings that the plaintiff (Mr Gathungu) is not entirely blameless for the position he and the defendant are in, I find that an award of Sh50,000,000.00 would not be reasonable. If there is any compensation due to the plaintiff then it can only be in respect to his unprocedural termination as a partner in the defendant,” the court ruled.
Ernst & Young has been allowed to recover Sh148 million from Mr Gathungu. That figure consists of $1.053 million (Sh135.8 million), ZAR850,001 (Sh6.56 million) and Sh5.69 million. The consultancy told the court that the Intergovernmental Authority on Development (IGAD) sought to trigger a $564,000 (Sh72.69 million) guarantee issued by Ernst & Young which had been contracted as a consultant in a drought resilience project in Somalia backed by the World Bank, Africa Development Bank (AfDB) and DFID, among other institutions.
Ernst & Young also had to pay $447,398 (Sh57.6 million) to its Indian sister group in relation to a forensic review when the World Bank started an audit of the Somalia happenings.
The ZAR850,000 to be recovered from Mr Gathungu was paid to Ernst & Young South Africa, which investigated fraud, corruption and irregularity allegations in the Somalia project.
On June 26, last year the World Bank announced that it had banned Ernst & Young Kenya for 30 months in what was described as part of a settlement agreement with the Nairobi-headquartered consultancy.
The ban was on account of Ernst & Young Kenya’s failure to reveal conflict of interest in awarding of four contracts under the Somalia drought resistance project and payment of irregular allowances construed to be bribes.
Ernst & Young Kenya was hired to offer consultancy services as part of the Somalia Core Economic Institutions and Opportunities programme and the Second Public Financial Management Capacity Strengthening Project. Mr Gathungu was one of the top brass leading Ernst & Young in Somalia.
Court papers show he had secret and unethical communication with a Somalia government official. The Somali official allegedly provided Mr Gathungu with confidential information on discussions between IGAD and the AfDB on recruitment of experts.
IGAD was implementing the Drought Resilience and Sustainable Livelihoods programme, for which Ernst & Young Kenya was a consultant. The official allegedly advised Mr Gathungu on the proposed project price.
A whistleblower letter dated March 10, 2018 was sent to Mr Gathungu when he was operating from Somalia. The court papers say Mr Gathungu failed to escalate the whistleblower letter.
The whistleblower then sent the letter to other Ernst & Young partners. Ernst & Young Kenya’s CEO wrote to Mr Gathungu on October 22, 2018 raising the allegations of unethical conduct.
Mr Gathungu responded on October 28, 2018 but Ernst & Young Kenya held that the response was unsatisfactory, hence terminated his partnership immediately. That decision is what the High Court termed as unlawful.
The Ernst & Young Kenya’s partnership agreement provided for a three-month notification of termination.
On his failure to escalate the whistleblower letter, Mr Gathungu said there were connectivity challenges in Somalia.
But the court held that he was able to send and receive emails, hence could not use poor connectivity as a defence.
“In any case, the plaintiff admitted in his testimony that he was able to receive emails while in Somalia meaning poor connectivity as the reason for not notifying his partners immediately of the whistleblower emails is not credible,” the court ruled.
One of the firms Ernst & Young subcontracted, and which led to the World Bank ban, was Horn Economic & Financial Institute (HEFI). A forensic audit found that HEFI was subcontracted as part of the alleged arrangement with the Somali government official and Mr Gathungu.
The whistleblower letter alleged corruption on the part of HEFI and Ernst & Young staff.
Ernst & Young Kenya’s project manager, the court papers indicate, at one point objected to paying HEFI, as the subcontractor had not provided required resources in the first four months.
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