The Nairobi Stock Exchange acts a market where excess funds can be channeled to companies that need these resources. To facilitate the trade, brokerage firms have been incorporated to aid both the buyers and sellers of shares in making important investment decisions. The investment banks provide crucial information and advice to the investors on when to buy or sell shares and the type of company shares to trade in. The investment banks also act as a depository institution where investors can open accounts and deposit money for trading.
Recently, reports about financial scandals at brokerage firms have been reported in media. Two brokerage firms Nyaga Stock Brokers and Ngenye Kariuki Stock Brokers were involved in malpractices that included trading in clients shares without prior consent from the investors. A common trait between the two brokerage firms was that they both operated with negative operating incomes and very weak balance sheets. These events have shaken investor confidence and led to question the integrity and honesty of brokerage firms.
To restore investor confidence in the brokerage firms and the Nairobi Stock Exchange, there is need for the brokerage firms to report and disclose their financial information to their investors. These will provide much needed information to investors in choosing which brokerage firm to solicit services. In addition, the brokerage firms should also adopt good governance through implementation of regulations in corporate governance. In other more developed stock markets, financial reporting and disclosure by brokerage firms is a mandatory practice that is governed by laws and regulations.
In developed markets, it has been established that the majority of cases of corporate fraud by brokerage firms are undertaken through non-disclosure of financial information. Preventive measures have been put in place to prevent non-disclosure of financial information from becoming a major avenue of theft of investors’ assets. Loopholes of embezzlement and looting have been identified and amended in the existing laws and regulations by the relevant institutions in government and the private sector.
Good governance includes full disclosure of information regarding a company’s policies, structures, and financial practices, as an important assurance to investors that the company is well governed. Consequently, non-disclosure of financial information by brokerage firms has to be discouraged through initiatives that provide an incentive to brokerage firms that adhere to codes and regulations that prevent non-disclosure of financial information from becoming a major avenue of embezzlement and fraud.
Financial reporting and disclosure by companies in Kenya depends on certain factors such as legal provisions incorporated in the various statutes, stock exchange requirements for listing and trading, disclosure standards as stipulated by professional accounting bodies such as the Institute of Certified Public Accountants of Kenya (ICPAK), and recommendations of codes of best practice in corporate governance by institutions such as Centre for Corporate Governance. At the Nairobi Stock Exchange (NSE), the NSE acts as the regulator of stock brokerage firms that intend to transact business at the bourse.
Brokerage firms have to adhere to rules and guidelines as stipulated by the regulator. The Capital Markets Authority (CMA) also assists in formulating rules that govern the different players at the bourse. Close supervision on the brokerage firms is maintained to ensure fair play and market fundamentals. Both the NSE and the CMA have the mandate to protect investors from exploitation. Brokerage firms have been able to identify loopholes in the existing regulations due to lack of corporate governance principles in the bourse rules and regulations.