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PwC’s Steinhoff report suggests profit was boosted by R106bn in seven years

Former Steinhoff CEO Markus Jooste in Parliament, Cape Town, on 5 September 2018. (Photo: Gallo Images / Brenton Geach)

Following the delivery of the PricewaterhouseCoopers report into Steinhoff, the full impact of the apparent fraud is just beginning to sink in, and even for those expecting the worst, it’s gobsmacking. According to PwC, between 2009 and 2016, the company apparently created fictitious profit-boosting schemes totalling R106bn, which is just under three times the net profit of the company over that period.

Sometimes you hate twitter. Sometimes you love it. But you have to love one tweet from well-known investor Karin Richards who managed to capture PwC’s 3,000-page forensic investigation that took 14 months and over 100 auditors to compile in a single tweet.  

Steinhoff was in effect just a giant Ponzi scheme. Fictitious receivables were ‘settled’, in a merry-go-round, by increasing property valuations, trademarks & goodwill. These inflated values were then supported by intergroup rentals/royalties & orchestrated intergroup ‘payments’,” she tweeted on Sunday.

There you have it. The report can be summarised but it cannot be minimised. What’s incredible is how far back it goes. The report looks at the years 2009 to 2016, setting the start date much earlier than expected. We can see now why it was delayed; obviously, the accounting moles were just turning up more and more stuff.

The length of time covered by the report scotches one theory about the fraud; that it was a desperate attempt to bolster the company’s numbers in the run-up to its proposed listing in Germany. This was no one-off fraud; went back a least a decade, and possibly more. The sheer pressure of time to table the report might well have been the limiting factor in the period chosen.

So how did they do it? PwC explains what happened in broad terms, but the publication of more or less an executive summary of the report by the existing board of Steinhoff leaves some of the nitty-gritty a little bit hazy.

But what the report does say is that “a small group of Steinhoff Group former executives and other non-Steinhoff executives, led by a senior management executive, structured and implemented various transactions over a number of years which had the result of substantially inflating the profit and asset values of the Steinhoff Group over an extended period”.

The report found a “pattern of communication” between this small group which importantly included some people outside the organisation, who structured these “fictitious and/or irregular transactions”.

How did they do this? This part is complicated, and that is almost definitely deliberate.

In many cases, it seems what happened was that this little group would create an intermediary at Steinhoff Group holding company level for companies that were underperforming. These operating entities received cash for “contributions” from other Steinhoff Group companies, or from non-Steinhoff companies that were, it turns out, actually funded by Steinhoff, resulting in a web of inter-company loans and “receivables”.

So, reading between the lines a bit, it seems whenever one of Steinhoff’s operating companies started underperforming, a bunch of companies’ debts were effectively exported to an entity outside the group. The operating company got cash or “contributions” in return, making it look as if the main body was performing better than it actually was.

This is all classic Enron type-stuff. But there are twists because in the Enron case, special purpose vehicles were created for the singular aim of parking the debt off the books. Since Steinhoff is a retailer, not a utility, the juggling involved was immensely hard to track and was done on a different basis. In this case, land valuations were apparently manipulated and trademarks valued dubiously, among other tricks. It was all very elaborate.

PwC says “the transactions identified as being irregular are complex, involved many entities over a number of years and were supported by documents including legal documents and other professional opinions that, in many instances, were created after the fact and backdated”. In other words, there was document forging.

It actually names a bunch of suspect companies and tabulates their contributions to the dodgy schemes.  The big one was something called the Talgarth Group, which is (surprise!) registered in the British Virgin Islands, and it was through this group that €4.2-billion was channelled starting way back in 2009 or longer. The money channelled through the group began in large dollops, but just got bigger until 2016, when the amount suddenly dropped, and another company, TG Trademarks, began to get the big bucks.

So who is going to take the rap for this? The company, somewhat weakly, doesn’t actually name the person who is obviously named in the report, but it does say the boards (Steinhoff, like many other German companies, has two) “believe that the facts identified in the PwC Report raise serious allegations, against the senior executive in particular”. So, we know where this is going.

The senior executive in the cross-hairs is, of course, long-time Steinhoff CEO Markus Jooste, who is thus far using the Shaggy defence; just say it wasn’t me.  Jooste told a parliamentary subcommittee “ last year he was unaware of an accounting black hole at the global retailer before its collapse”. Well, that is not going to wash any more. Intriguingly, the report says all the people in the controlling group have left the company, bar one who is helping with the investigation, suggesting a whistle-blower is helping out.

The one group specifically exonerated is Pepkor and its associates, which will come as an enormous relief to its majority owner Christo Wiese. The industry scuttlebutt is that everyone knew Jooste was dodgy, but they revised their opinions when Wiese teamed up with Jooste and were somewhat comforted by Wiese’s oversight.

Reputationally and financially, Wiese has taken an enormous hit, but the consolation prize is that there is no evidence thus far at least that he or his group was involved in the skullduggery. But the absolution of Wiese does strengthen the foundation of Wiese’s huge R59-billion court case against Steinhoff and Jooste.

What about Steinhoff’s long-time auditors Deloitte? This is complicated. The firm was actually the one which raised the initial concerns, and it did participate in compiling the report. On the other hand, Deloitte auditors were either complicit or they got foxed by their client, neither of which is good.

Deloitte’s defence, and it has some basis in truth, will probably be that auditors are reliant on the honesty of their clients. If a client sets out to fix the books, it’s very hard for an auditor to pick that up, especially in a very large group with other auditors checking the books of the satellite entities. The counterargument will be, yes, but you saw nothing wrong in over 10 years? Really?

So what will happen now? First, there is going to be a phase two of the investigation, so obviously PwC has a sense that there is more to discover. Second, the report does allow Steinhoff to finally report its true (we hope) financials for 2017 and 2018, which is one of the big remaining unknowns. When that happens, we will discover whether the group is actually still a viable business or not, or perhaps even whether just parts of it are savable. It’s currently trading at bankruptcy levels, but even if parts of the business are savable, who knows whether it will survive the claims against it.

There is already a Hawks criminal investigation underway, and the report says the company will support that process. In addition, the report says it will “pursue claims against certain individuals that appear responsible for the unlawful conduct identified”.

And it says the group intends to seek recovery of the bonuses paid to “certain individuals”, noting that the Amsterdam Court has recently granted leave against Jooste in this respect.

Jooste, who hasn’t commented, better lawyer up, not that he hasn’t already. DM

Gallery

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