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Steinhoff: ‘One guy couldn’t have done it’

A number of people must have been complicit in what happened.
How a fraud of this size could have been perpetrated in a listed company is one of many tough questions that will need to be answered. Picture: Waldo Swiegers/Bloomberg

On Friday last week Steinhoff released its first, unaudited results since Markus Jooste resigned as group CEO last December. Market commentators have been unanimous in their assessment that any good news in the numbers was extremely hard to find.

There was perhaps some consolation in the fact that revenues were steady, and that the Pepkor businesses remained profitable. There was however little else.

A six month loss of R9.6 billion to the end of March this year revealed that, overall, this is not a great operation. The restated financials for the comparable period last year also revealed that Steinhoff had overstated its operating profit by more than €1 billion (R16.1 billion) in 2017.

Read: The scale of the Steinhoff deception

The extent of this fraud is so stupendous that it is now absolutely apparent that Jooste could not have engineered it on his own.

“To foment something of that size you have to have had a lot of people complicit in the whole thing,” says independent analyst Chris Gilmour. “One guy couldn’t have done it. He required a whole legion of people.”

Gilmour also believes that nobody should be excused for going along with what was happening and then later claiming that they were just doing what they were told.

“I don’t think, ever since the Nuremberg Trials, that you can say I was just following orders,” he says. “That doesn’t wash any more. There are so many mechanisms whereby, if you suspect something is wrong, you go and you talk to your compliance officer, and if that doesn’t work you take it the next level and so forth. There is a huge degree of complicity here. There has to be.”

Speaking on the Classic Business Breakfast on Monday morning, Graeme Kerner of Kerner Perspective agreed.

“It’s just so amazing that somebody could engineer this level of fraud,” he said. “And when I say somebody, there must have been more than one person involved.”

Is the model of corporate governance broken?

Ultimately it was the board and the auditors that picked up that something was wrong. However, by the time they did, the scale of the damage was already enormous.

This asks some very tough questions of the entire investment community. How could a fraud of this size have been perpetrated in a listed company, underneath the noses of so many?

“It’s going to go down as a case study of how to prevent a corporate disaster,” Kerner noted. “I’m not only pointing fingers at the auditors, or the audit committee, or the ratings agency – how did we all allow this to happen? This didn’t happen overnight.”

The reality check is that despite the extent of the fraud, the board initially fell for it. The ratings agencies fell for it. The auditors fell for it. The investment community fell for it.

The man-on-the-street investor has to look at this and wonder if the models of corporate governance under which this could have taken place are broken. However, Rob Lewenson, head of ESG Engagement (environmental, social and governance) at Old Mutual Investment Group, believes that while investor’s frustrations are understandable, the current systems of corporate governance can, and should be, effective.

“Having robust governance control systems with effective oversight in place ought to deter most fraudulent actions,” he says. “It is our key responsibility as investors to push the companies we invest in to have these systems in place to manage effectively their environmental, social and governance risks.

“Unfortunately, one cannot rely only on the law and corporate governance codes to protect the ordinary or institutional investor entirely when comes down to sophisticated fraud,” he adds. “Therefore, the only way to approach the reporting and actions by boards of companies is with a healthy dose of scepticism.”

Will Steinhoff have to sell the crown jewels?

The tragedy, of course, is that so much value has been destroyed for shareholders. This is also far from over.

“If Steinhoff survives, and that’s a very big if, it will be in a much more streamlined fashion,” says Gilmour. “It will be a much smaller operation. There is going to have to be a monumental sale of assets. They are not going to trade themselves out of €9 billion worth of debt.”

The harsh reality for shareholders is in coming to terms with which assets these could be.

“If you look through the results, the only areas that stood out as prime were Pepkor Europe and Africa,” says Gilmour. “Conforama doesn’t look good. I know there were some special circumstances, but their profits more than halved. Australia was okay, but it’s quite small. Mattress Firm is loss-making, and Steinhoff has been in the UK for some time and is still in losses there.”

His concern therefore is that there isn’t much worth selling.

“This is not a great operation,” he says. “Everything was predicated on acquisitions.”

This means it’s possible that creditors may insist that Steinhoff sells its best assets – the Pepkor businesses.

“I think lenders are going to take a long hard look and say that they are not interested in the group keeping the crown jewels,” says Gilmour. “They may want Steinhoff to sell the crown jewels so that they can actually get their money back.”

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Of course Pepkor will be sold off to the highest bidder…in my opinion, there is only one company who is willing and able to buy this business and that is Naspers. This will fit into the Tencent Google alliance through JD.com in competition to the Amazon Walmart alliance into retail shop space. As I said, my opinion only.

Naspers?…Pepkor does not fit into their model. I can also think of many others that can buy Pepkor.
What does fit into a Amazon / Naspers model is Woolied

The naspers idea has also crossed my mind….

SNH shareprice is rocking. Stocked I bought a week ago!

When I want to lose money, I donate it to the homeless … does more good.

Pepkor will probably fall back to Wiese and company. Steinhoff have negated on the Pepcor acquisition terms and therefor their current ownership of Pepcor are challenged in the courts. An asset (Pepcor) that is the subject matter of an ownership claim, cannot be sold until the matter are resolved.

Most of the rest of the assets of Steinhoff are loss making operations which were bought at over-inflated acquisition prices and which will hardly cover the debt owed to the lenders, especially in forced sale circumstances.

There are little to no hope of any recovery of investments for shareholders. Steinhoff is history. Move on.

LOL.

Banks don’t seem to think so.

Mattress firm has seen significant uptick in April and May (subsequent to year-end) and isn’t as hard to fix as some would say. They have to many units that they can simply close down and are in the process of doing.

Then, Tempur Sealy could be willing to purchase the MF from Steinhoff as some analysts have written on Seekingalpha.

Pepco Europe is doing very well and is valuable.

There is still a long way to go, but if the Steinhoff haters can safely say that there isn’t a change in sentiment then you are lying to yourself. Many on this website said Banks would not extend, the company is DEAD, there is no equity left. All these have been proven to be wrong, so pardon me for taking your gunslinger comments with a pinch of salt.

Not blindly saying this company is okay, far from it, but this company is not going to be liquidated. IF you think that absolutely no questions are going to come for Mr Wiese then you are mistaken. His prints are all over Steinhoff, even if he claims ignorance.

Quite funny how Invicta is getting a lot of questions. Guess that must be current management as well? and not Wiese himself.

So if you were on the current Board – including the newbies – would you kitchen sink the Balance Sheet or would you rather wait till December – ?
The average accountant would write off as much as possible today me thinks – anything with a tinge of a possibility of a teeny weeny write-off would become a certain full write-off – NOT SO ?

Yes!!

@robot the company is taking a very conservative approach and have publicly stated that when they are not certain of recoverability, they are writing down the entire thing. Very prudent, and ensures that not funnies come later.

Mr. Wiese echoed this on the money show last week.

This is consistent with the PWC report where the scope is basically “FIND WHAT YOU CAN and report back to us”. WHich again, is very conservative and appropriate. If this group wants to survive bondholders dont want ANY surprises anymore.

Undervalued. Extension coming on 20 July. This is retail. cost cutting is possible, getting product mixes right is not rocket science, literally.

We all read the reddit conspiracy theory on mattress firm, which was a god laugh and does tell us the extent of the company having way too many units. CLOSE DOWN UNPROFITABLE stores. NOT ROCKET SCIENCE.

Methinks, Naspers does not buy ”dubbel K, middel A”‘

Guys I’m sorry. The beauty of investing is that we can all chat and on this website and I love learning new things.

While I am not shooting down the naspers connection, please make me understand how this benefits Naspers? They are essentially a tech company. WHy would they want brick and mortar?

There are amazing companies over the world, in retail, doing innovative things. I don’t see the synergies (hate that word) or any purpose for naspers who dont know anything about “offline” retail.

It won’t benefit Naspers and neither would Naspers be interested to buy troublesome rubbish.

In this case, I don’t believe only one guy is implicated but it is possible. Look at what’s happening in the world…it’s taken only one guy – Donald Trump – to create the global chaos and insecurity that we currently are witnessing! The same guy who, co incidentally has a reputation for gambling with other peoples money then walking away scot free and leaving creditors with the mess by going bankrupt. And living the highlife on the stolen money. Sound familiar? It only takes one guy….

Of course there had to be a gang running this. Or one crook and twenty fools.

As to governance, it is broken and there will be many more Steinhoffs:

1. Investors have abdicated to fund managers that almost universally consist of mba lawyer finance types that have never run a real business but yet think they can analyze a global retail credit business. Go look at the teams at any SA fund manager and find me anybody with scars and calluses from actual industry. Obviously they missed this.

2. The board was and still is made up of old buddies and relations that, like the fund managers, has little experience in retail and credit. Sanlam’s only relevant history was that it lent Jooste privately a hundred million to round trip properties back to Steinhoff at 700 million profit A DECADE AGO, and then lent him privately another R800 million. And the former CEO of Sanlam is on the board. I suspect there will be a lot of renewed interest in all companies with boards stuffed with friends and family. There are many!

Correction to my first comment
Tencent will probably buy Pepkor. It would be too obvious if it was Naspers!
Time will tell. Lol.

If Pepkor is sold the crown jewels will, in my opinion, be bought back at a steal by the very people who sold it to Steinhoff. Or by their friends. It is called Liquidation syndication and it is rife in South Africa. People are always so focused at the time of the fall but the real dirty dealings happen thereafter when the liquidators or business rescuers step in. At this stage there is little to no publicity and it all happens quietly. Names change and assets move.

Ben la Grange; financial director at age 42 was put there for a very specific reason: to keep quiet.

Without proper accounting practices, you can keep any scale of lie alive.

However, auditors are there to ensure that the accounting is proper. No?
Unless you imply the auditors allowed it to happen.

Few people understand the role of Auditors. Auditors allow bugger all to happen. Their duties are very simple, to report on whether or not the Annual Financial Statements “are fairly presented” not that they are 99.9% correct. The only weapon in their armoury is the ‘qualified report’ but auditors are loathe to use this and it is a last resort.

It is the “Fairly present” that causes headaches – just how fair is fair? Well it depends on a number of factors such as materiality, complexity of the industries that the group operates, good governance etc.

Blame IFRS, International Financial Reporting Standards, if you must, as they impose reporting standards that are onerous to comply with and at the same can be so ambiguous that interpretation can be manipulated by management who always chooses the interpretation that will maximize bonus.

Take Imperial as an example. Brian Joffe imposed a very strict code of ethics and values. Imperial is as diverse as Steinhoff, perhaps even more so, but Imperial’s results always pass scrutiny with correct financial presentation. Steinhoff’s financials have always been iffy and their Sens announcements a joke. Any decent accountant would have been wary of the past 3 years reorting.

Analysts allowed this to happen by keeping their big mouths shut and not passing on their concerns. The problem is that Steinhoff was almost too big to be criticised. Now Naspers creates an even bigger problem … if something were to go wrong in the scale of Steinhoff, the JSE would be decimated.

At last! Somebody awoken to the fact that these types of fraud could only have happened where a collective was involved. There is no such thing as “these things just happen because of one person”. I’m also still the lost voice in the forest regarding First Strut as well. Jeff could never have pulled that one off by himself either… Is a certain professional institute still the guardians of the public interest? Sorry about this last observation, just had to push the knife a little bit deeper. Not that it’s going to have any effect, though.

The ECB loans are modern money laundering. Requirements include positive auditors reporting. This loans are fresh printed money, put in circulation by exchanges. This game require men, all playing together, in a temporary, save the planet, massive fraud. Clever others, Viceroy, connected the dots.

It is likely that more people are involved in the fraudulent actions, but the real issue is when and who amongst those who had wool pulled over their eyes or slept on duty, despite their immaculate corporate and commercial CVs, will have the guts to acknowledge their incompetence in this regard, get over the humility hurdle and take the first step to recovery by acknowledging failure. Once one of the revered directors gets over this hurdle, it will become much easier and faster to identify the issues in its clinical truth and value and execute the salvage operation. Its human nature though to just lie low and try to slip out of the room unseen. There were comments, and low profile acknowledgements, but still no outright acknowledgement of stupidity, but that takes guts which is not plentiful in our society.

Talk about a broken record. Filling the white noise when MW is unable to find anything new.

This is irresponsible. You guys are rewriting the same article with nothing of substance the last few weeks.

I’m all for finding the truth but this is poor, stale reporting. Focus on the dodgy deals. That is exciting as a reader and is real. This is fluff to pass the time.

If I was advising these guys – which I am not – I would suggest to get to NPA asap and spill the beans – – – exec and non-exec directors and senior management and even Dr W himself may be in trouble and need to protect themselves.

As for MJ – my info remains he is busy negotiating a deal with NPA and will then tell all – – – I believe NPA is very interested to file charges against Chairman and non-exec directors who knew/ought to have known about the irregular deals

As usual – SA is a haven for criminals – whether you live in a shack or in Clifton.

…..or living in the criminal paradise known as Australia!

I hope you are right. I personally know someone who filed charges a few years back against a very well known member of this board and to date the Hawks have not investigated. The charges had documents from the company involved showing clear fraudulent actions. The Western Cape and Australia are awash with our very best and most experienced fraudsters / con men. State Capture is nothing compared to what these men do. In fact, many of them are involved in State Capture as they are forced to pay people to look the other way.

Who’s buying now? is it the same who sold before in a not illegal modus operandi, whatever that was sold before can now be bought back on a hugely cheaper price.

Steinhoff Mantra?

‘’My rackets are on strictly American lines and they’re going to stay that way’’
Al Capone (1899-1947)

Below all my views:
I take a very dim view of both the internal and external auditors.
The ‘’Audit Committee ‘’ will get their day in court to explain their gross negligence and incompetence!
Nobody would swap his life earnings and empire for Steinhoff share- knowing that they have been a ‘’fraud’’ for many moons, hence my view that Christo Wiese wasn’t aware of what was going on! Most of these things that I think happened at Steinhoff could not have been done without collusion of some sort!
• They could have falsely increased the depreciation time length for their property, plant and equipment on the balance sheets.
• They could have kept huge debts off balance sheets.
• They could have inflated assets by billions of US
• They could have underreported line costs by capitalizing rather than expensing and inflated revenues with fake accounting entries.
• Billions could have been stolen by inflating Steinhoff’s income for many moons
• They could have siphoned money through unapproved loans and fraudulent stock sales. Money could have been smuggled out of Steinhoff disguised as executive bonuses or benefits.
• They could have employed questionable accounting practices, including large loans made to counterparties and individuals that were then forgiven.
• They could have inflated profits by billions of US$ to meet stockholder expectations.
• They could have told underlings to make up numbers and transactions dating back more than 10/15 years.
• What happened: $5 billion in earnings were misstated.
• They could have intentionally misstated and understated earnings on the books.
• They could have committed massive accounting fraud of billions of US$, along with bid-rigging and stock price manipulation.
• They could have booked loans as revenue.
• They could have hid billions of US $ and EUR in loans disguised as sales.
• They could have sold toxic assets to corporates and banks with the understanding that they would be bought back eventually.
• They could have tricked investors out of billions of US$ through a Ponzi scheme, by paying investors returns out of other investors rather than from profits.
• They could have falsified revenues, margins and cash balances to the tune of billions of US$.

In other news….Steinhoff shares up with 45% since this morning…..I guess bad news is still better than no news.

Share price up because there’s a deal on the go. My bet is that Naspers/Tencent are sniffing around for cheap pickings like a Pepkor and Tekkie Town to add to the African retail shopping stable now that they’ve got the online shopping buttoned up with Takealot. And whats happening with Brait and Net1 – somethings on the boil there too….

End of comments.

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