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Wiese faces his Waterloo moment

International accounting standards are littered with subjective evaluations.

Steinhoff has been hung drawn and quartered, without any firm evidence of guilt.

There are many serious allegations flying around, all feeding off each other: fraud, tax evasion, emerging skeletons, accounting fraud, financial fraud, pyramid scheme, predatory consumer loan providers, even Stellenbosch Mafia. All in all, many detractors are also suffering from a heavy bout of Schadenfreude. The scene is one of tall poppies being chopped and trampled into the ground.

In August 2017 Manager Magazin reported on an investigation into possible accounting fraud by German prosecutors. In September, Fraudenwalt, a German online publication, published an explosive article titled “Always new fraudsters”. Fraudenwalt alleges that the group is built on quicksand “as vulnerable to collapse as cabinets and drawers made of cheap chipboard”. Referring to the “Stellenbosch Mafia”, the publication avers that “The Godfather and his executor are often on the verge of legality”.

The report further alleges that tax avoidance is being investigated in three different countries, and there are further speculations of alleged accounting fraud. Even though proven tax avoidance may lead to further taxes or penalties being paid, it is not illegal. Tax avoidance based on loopholes in the law, or arbitraging differences in domestic tax laws, will escape scot-free. Tax evasion on the other hand, is a criminal offence. I do therefore hope that the tax investigators get around to finalising their investigations – and then we can all opine on the outcome. Similarly with the alleged accounting fraud.

Steinhoff is involved in a dispute with a former joint venture partner, which is still subject to legal hearings in Amsterdam and Germany. Could the disgruntled former joint venture partner perhaps have sparked off Fraudanwalt’s article? Hell hath no fury like a partner scorned?

Another popular accusation is: “This is another Enron”. Not really. Enron was a trader, selling contracts in anything ranging from energy to weather. It was easy to cook the books, and to convert debt into sales via complex partnership arrangements. Apart from a few gas pipes, there was not much substance. Enron also created an online electronic trading platform to facilitate its online trades. It commenced building a high-speed broadband telecom network at the height of the dotcom bubble. Worst of all, it booked future profits before they were earned. Their liabilities dwarfed their assets. When Enron was close to bankruptcy, the directors started offloading shares. Various directors of Enron, including Jeffrey Skilling, Andrew Fastow and Michael Kopper, went to jail.

Steinhoff may have a lot of debt, and more liabilities may crawl out the woodwork, but it owns real businesses. Furthermore, the directors have the most to lose financially. Nevertheless, Steinhoff may have overextended itself, and it may have moved liabilities off balance sheet. Moving liabilities off balance sheet through ever more sophisticated techniques ahead of the clumsy accounting standards forever playing catch-up, is a game that many corporates are involved in. And they can usually manage to just squeeze this within the allowable boundaries of the applicable accounting standards. Or, by using some new-fangled financial instrument that no one comprehends. This would place us in the same moral dilemma as aggressive tax planning, technically a particular transaction may fall within the law, but it may not be in the spirit of the law or regulation.

There have also been allegations in regard to the relationship with JD Consumer Finance business (JDFS). Steinhoff sold JDFS to an independent third party during the 2016 financial year. This transaction was even approved by the Competition Tribunal in March 2016.

In growing its business to the second largest furniture empire behind Ikea, Steinhoff pursued an aggressive acquisition campaign in the US, UK and Australia. Acquisitions included Poundland in the UK, Mattress Firm in the US, Fantastic Holdings in Australia, and Tekkie Town in South Africa. Creating value through acquiring businesses is not uncommon, and it is not surprising if those businesses improve under new direction, centralised services, and greater purchasing power. But, it can also result in cash flow problems, and this may lead to innovative finance solutions. I remember the days when the acquisition cost of a trademark was tax deductible – this allowed the portion of the purchase price of a business attributable to the trade mark to be deductible. These transactions were challenged on various grounds, sometimes successfully, other times not. Even though some transactions were perceived to be tax aggressive, did they constitute fraud? Definitely not. When laws and regulations are subject to interpretation, and the exercise of judgement, one must expect a range of outcomes.

Is Steinhoff on the verge of bankruptcy? All is not lost. Steinhoff has received expressions of interest in certain non-core assets that will release a minimum of €1bn of liquidity. Furthermore, Steinhoff Africa Retail Limited (Star) has committed to the refinancing its long-term liabilities due to the company. Steinhoff will be meeting with its bankers on December 19.

Notwithstanding underlying fundamentals, a share is worth what buyers think it is worth. If buyers are clamouring to buy a share, the share price will rise. On the other hand, at the hint of a scandal, or a tax investigation, investors become nervous and start selling. Even in this market, there are those who want to make a profit out of the misfortune of some, and “short” the share. This means they sell a parcel of borrowed shares at the current price, hoping to purchase the shares at a lower price at a future date. This in itself places a downward pressure on the share. The contrary argument is that short transactions provide much needed liquidity to the market. The JSE may yet have its hands full in investigating trades around this time. Did a large investor, too impatient to wait for the share to recover, short the share?

The accounting world is forever changing, with accounting standards becoming more voluminous, tortuous and indecipherable. And countries follow various different accounting conventions.

South Africa, the United Kingdom and Europe follow International Financial Reporting Standards, previously International Accounting Standards, which are littered with subjective evaluations and judgments. For example, a fair value accounting adjustment of short-term securities, may result in an upward or downward adjustment to income. Income can also include other accounting adjustments, such as a deferred tax asset adjustment, whereby a tax loss is morphed into an asset at the current tax rate (with an equal increase in income). Ascertaining a related party relationship is a minefield, and the applicable statement advises that “attention is directed to the substance of the relationship and not merely the legal form”, and any “economic dependence” should be considered. The statement on investments in associations and joint ventures refers to “significant influence”, impossible to define. It is not surprising that tax investigators and prosecutors resort to bullying tactics and threats of prosecutions.

Perhaps this is the time for a rethink of how financial statements can be improved to protect investors. Current financial statements are not fool proof. An auditor cannot possibly be expected to detect a cleverly hidden complex fraudulent financial transaction, which may be routed through 50 entities that are tax residents in 50 different jurisdictions, and perhaps incorporated in other jurisdictions, in a split second. The auditors will only see one leg of the transaction. Only the relevant tax authority will be privy to the “real” taxable income, but many complex tax and financial arrangements are not identified. Perhaps it is time to introduce legislation that requires listed companies to obtain an all clear by a certified financial analyst.

Rotating auditors is on the cards, but a large group should use different auditors to audit subsidiaries, and perhaps two firms of auditors should sign off the consolidated financial statements. Details of any qualified report given to subsidiaries should also be disclosed. All of this will add to the costs of an audit, but this is outweighed by the losses suffered by investors.

Time will perhaps provide the answer as to whether Steinhoff is guilty of building up a shadow empire of off balance sheet companies, fraudulently overstating income, and hiding liabilities. Or, whether a gullible market has been fed misinformation? Neither outcome will assist investors who have lost a lot of money. The key lesson for investors remains that of diversification.

If Markus Jooste had been quietly offloading his shares, I too would be baying for his blood. But he is heavily invested in the group, as are the other directors. Jooste has decided to take it on the chin and step down. I don’t read anything else in that other than it is time for Die Ou Ballie with plenty of fight left in his veins to take charge. My money is on Christo Wiese. I therefore took a decision which I may in time either celebrate, or heavily regret. I purchased more shares in Steinhoff.

Disclosure: The author purchased further shares in Steinhoff on the December 8 2017.

COMMENTS   27

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“My money is on Christo Wiese. I therefore took a decision which I may in time either celebrate, or heavily regret. I purchased more shares in Steinhoff”.

I too purchased some share in Steinhoff… with an open mind though.

“An auditor cannot possibly be expected to detect a cleverly hidden complex fraudulent financial transaction, which may be routed through 50 entities that are tax residents in 50 different jurisdictions, and perhaps incorporated in other jurisdictions, in a split second.”

Fair enough. How come they signed off on the statements a year before but now suddenly there is a problem? What changed from the previous book year to now?

The Germans investigated………….is that the change.

At last a balanced article focusing on the facts or really the lack of them.

A letdown is this statement “Perhaps it is time to introduce legislation that requires listed companies to obtain an all clear by a certified financial analyst.”

Just another layer of costs and building up a single certification into a silver bullet. Have we really not learned via the failure of the CA(SA) that there is no single solution.

More rules and regulations and laws; do not forget the “law” of diminishing marginal returns of utility.

If these laws and criminalisation of everything that socialists dislike, actually worked there would be no crime in the USA.

A bit of jail time for the CA’s involved, if guilty of illegal activity, may change some minds about how much effort should be spent understanding their company’s financial situation.

I agree with you – as they cannot even pick up the most visible and open fraudulent transactions!

Mr Wiese, in my humble opinion, lost the credibility he had as businessman and will never recover once a proper procedure is followed to show up his and his board’s failings

Please read the article. It’s currently all based on rumours, speculation and opinions (like yours). Let’s wait for the FACTS and deal with/base responses on those.

Not so experienced – Barbara Curson, the writer of this article expertly covered the current known and declared facts about Steinhoff and then expertly expressed the current facts and dilemma about auditing standards, corporate flirting with the interpretation of tax laws, etc. Read the article! No speculation, rumours or propaganda were promoted. A professional and unbiased article from the other angle.

Mr Wiese, in my humble opinion, lost all credibility when he failed to declare moving 600k Pounds cash out of UK to Luxemburg. What was the origin of the cash? Why did he need to move cash rather than a bank transfer? How did he get it back from UK authorites?
Many questions remain.

Why does it matter? No one question you or me when we take our R500 with us.
Wiese successfully challenged the UK authorities and his millions were returned to him. No criminal charges were instituted. It’s over and done. There’s nothing left to answer. To him that is small chance like R500 to the average person. It matters no more.

It wasn’t illegal to bring the money into the UK, but it was highly likely that it was illegal to take it OUT of SA, given that it’s equally likely that he’d used up his annual R10m limit – or else he wouldn’t have bothered moving it in cash. My guess is that he paid someone off in Treasury/SARB/SARS to make the problem go away. Which points to his integrity…

Barbara brilliantly discusses the other side of the mint and thereby bringing a balanced reporting to the fore.
I like it and I like the balls.

The point about the 600k is that it is illegal to move more than $10000 across a border. He would have known that. If you tried thatt with say $15000, you would have lost it. There are rules for the rich and connected and there are rules for us little people.
But mainly that event reveals the character of the person concerned.
The motives interest me.

A very balanced article. I do think however, that there are just some fundamental structural weaknesses in the system and one of them is “the auditors”. The fact is competition in that space is very tough and any Big 4 firm will fall over their feet to get the audit of top 40 listed company. If the auditors become too difficult and ask too many questions, they will simply be replaced with other auditors. In the meantime, you have all those fat cat partners at the top who wants to cash in all they can before retirement, so the pressure to generate fees is never-ending. That is part of the reason why KPMG got itself into hot water. They took on clients which they should never have but they wanted the fees.

Good article…. Panic set in and people dumped the share because of all the speculation. No facts have come out, but the sheer rate that new articles were being published was insane, with new angles being published every hour or so, with absolutely no fact, just more and more speculation.
The comparisons to Enron and the likes were just irresponsible and added to the panic. As much as we can blame the directors and the auditors and the likes, the media needs to take responsibility for creating this frenzy that sparks panic amongst investors. Many of the writers are the same who not so long ago were singing praises for Steinhoff.

It might not be another Enron in that it is/was a ‘real’ business. It certainly looks like another Tyco or Danon if you want to use date-appropriate analogies. Your investment is gone however you paint it

Babara methinks you have been paid to write this article.

They have been sailing hard at the wind. And it’s difficult to say where the line between tax avoidance and evasion is. But so have their few peers of the same segment, too. XXXLutz is not different in it’s wheeling and dealing. Seems only that Mr Andreas Seifert had a personal grudge with the boys and found a weak spot in their armor. He got them by the balls with his well timed court case that stalls the financial statements. It is only sad to see that the terrified shareholder who jumped ship will lose out.

PS: And I would like to know who are the people behind Viceroy Research

The Germans have been investigating fraud at Steinhoff since they listed in Frankfort. They have not come to a conclusion or as far as I know, a progress report. What is taking them so long?
To me the deal with Matrass House, was ill considered. They were paying nearly double the current market value of the business at the time. I think this was the start of their troubles, to buy a non performing business and think they could make it work, being outsiders from RSA or Germany, Netherlands or UK. In addition their dealings with the business in Switserland which were not declared, seem dubious to say the least.

To author: but then there is THAT letter by Jooste…

oh and the fact that the big transactions that laundered the tainted debtor books were made through companies owned by Wiese and former steinhoff executives. Laundered? When you take a R100 debtor book that is maybe likely to return R80, sell it for R100 by way of a loan to a shell, record the sale as an investment on which you book excessive investment income, then the shell cleans up the debtor book, probably offsetting such losses against its owners other taxable income streams and then later buy back the now cleaned up book; it is called a laundry.

You did not need an advanced degree to spot something was wrong : the cashflow never supported the reported earnings.

With the admission that the author recently bought shares, is this article truly impartial? Time will tell the full story, but as a former employee (I resigned in 2015)there were a lot of secrets and non disclosed relationships in the business. I never felt at ease.
My worry is that the people who can least afford to loose money are buying shares expecting them to return to €6 value and not realising there may not be much left after the profitable parts are sold to meet bank commitments.

I wish everyone would read this article before commenting.
The media, as with everything, is fueling this issue with articles published by the hour without solid evidence.
The public need to stop just believing everything they read on these websites that would publish anything for a few hits

Steinhoff has major similarities to Tyco which revolves around the lack of compliance with ethics. The major ethics issues in Tyco’s case were as follows:

Unethical Leadership
Unethical business practice and collusion of subordinates
Unethical auditing practice on Tyco’s business

Unethical Leadership. Jooste and Kozlowski are the main actors. Kozlowski was the main recipient of the money stolen from Tyco and in addition, he was the main influential person who persuaded other top-ranking Tyco officers and lower ranking employees to get involved and to keep silent to cover up for Kozlowski’s illegal activities. This case shows that extensive involvement of Kozlowski and other leaders in unethical and illegal activity brought Tyco down.

Unethical Business Practice of Subordinates. The complications in Tyco’s case involved people other than Kozlowski. Kozlowski recruited the support of other high-ranking officers in the organization – Jooste used a network of ex executives to perpetrate the fraud. The CEO, WIESE was in cahoots all the way with Jooste.

The arrogance of the pair was that they thought that they would be able to keep on fiddling the books forever more. Unfortunately for them they were found out.

Incompetent and unethical Auditing Practice. The auditing firm Pricewaterhouse Coopers responsible for checking the financial reports of Tyco failed to identify Kozlowski’s illegal financial transactions, just like Deloitte with Steinhoff. These practices became more difficult to stop because of absent constraining influence from the auditing firm. Neither PWC or Deloitte spotted the errors perhaps because they did not do proper audits or proper analysis. The fact remains that 2015 and 2016 AFS are going to be restated for SNH.

If it had not been for the legal action taken against SNH by the Dutch and German authorities, this would have gone undetected for another year at least.

So, today, 4 January 2018, we know that the Annual Financial Statements for 2015 and 2016 have been withdrawn and will be replaced and 2017 will not be forthcoming any time soon. 6

Steinhoff very cleverly went and bought back its own shares, knowing full well that it had a cash flow crunch that was about to get worse … hoping to throw the dogs off the scent of fraud.

So far two esteemed financial journalists have landed with egg on their faces, Barbara Curson and Alec Hogg. Hogg has made a remarkable turn around and disposed of all his SNH shareholding but Curson and bought more … beggars belief.

You be the judge!

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