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NEWS & CURRENT AFFAIRS

The Nairobian

Saccos should strengthen internal audit to curb rising fraud cases

Opinion

By Gabin Omanga | Feb 20, 2025

**Co-operatives and MSMES Cabinet Secretary Wycliffe Oparanya during KUSCCO's 10th Sacco Leaders’ Convention at PrideInn hotel in Mombasa, on February 18, 2025.** [Kelvin Karani, Standard]

If you are a member of a Sacco (Savings and Credit Cooperative Societies) awaiting your 2024 returns on your savings, you might be in for a disheartening surprise. You might receive less than you expected. A directive from Sacco Societies Regulatory Authority (Sasra) has advised Saccos that have money invested in the Kenya Union of Savings and Credit Cooperatives (Kuscco), to make provisions for loss in their accounts.

The directive came after reports of massive fraud at Kuscco, the latest seeing arrest warrants issued and a damning PWC forensic report disclosing that a Sh13.3 billion loss was concealed using a deceased auditor’s signature.

Kuscco is the umbrella organisation for Saccos in Kenya, fostering growth of the sector and providing financial security to Saccos. It can simply be described as a Sacco for Saccos.

Three years ago, members of the 47-year-old Metropolitan National Sacco realised they were unable to make withdrawals or access any loan facilities. After several complaints and an audit, it was disclosed that about Sh15 billion had been stolen through collusion of rogue staff and board members leading to cash-flow problems.

For a long time, Saccos have played a major role in the Kenyan financial sector, offering members affordable credit and a secure savings environment. However, with the growing cases of fraud affecting this sector, its credibility now hangs in the balance and there is an urgent need to fortify internal audit functions within Saccos before the trust is irreparably eroded.

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In the last few years, cases of fraud within Saccos have been on the rise, Metropolitan and Kuscco are just examples. The frauds occur mostly through insider loans that bypass scrutiny by relevant committees or committee members colluding with management to perpetrate the theft.

While Saccos have supervisory committees that oversee the management board, the rapid growth of the sector, complexity of transactions and new products have rendered this oversight role weak. Robust internal controls and a strong internal audit function could be what is needed to save the sector.

Identify discrepancies

Internal audits are crucial in detecting and preventing fraud. Not only do they provide an independent evaluation of a financial institution’s operations, they help to identify discrepancies, inefficiencies, and potential fraud in good time.

A strong internal audit function acts as a critical oversight mechanism, ensuring that financial activities are conducted transparently and in compliance with established policies.

The Institute of Internal Auditors’ Code of Ethics and the International Professional Practices Framework are industry standards that guide and govern the practice of internal auditing. They require annual reporting of key risk issues including fraud red flags.

The recent Kuscco incident would have easily been flagged by an auditor practicing due professional care. The standards would have then required them to report it to the board as well as other stakeholders.

About three years ago, Sasra mandated Saccos to establish internal audit functions. However, implementation has been sluggish at best, leaving many cooperatives without the controls essential in fraud prevention and detection.

A lot has been blamed for this deficiency including resource limitations and an overarching focus on profit maximisation. However, in the absence of effective internal audits, Saccos become breeding grounds for corruption and financial mismanagement, exposing members to irreversible losses.

Saccos must place internal audit functions at the heart of their operations. This entails recruiting qualified auditors with the necessary tools and resources, as well as fostering a culture of continuous and rigorous financial checks. Without these measures, the integrity of the Sacco movement might be eroded irreparably.