Steinhoff may be ‘the tip of the iceberg’

The Steinhoff case raises important questions about our financial system as a whole – and the possible consequences if other companies were subjected to the same level of scrutiny, says James-Brent Styan, author of a new book on the Steinhoff saga.

Steinhoff en die Stellenbosse Boys, launched earlier in July, traces the history of Steinhoff and includes interviews with insiders as well as glimpses into confidential documents.

Addressing the Press Club in Cape Town on Monday, Styan – a trained accountant, former journalist and current communications officer in the Western Cape Provincial Government – suggested the company’s collapse might be part of a systemic problem, meaning even major issues can be easily obscured.

Styan said there had been “obvious red flags” ahead of Steinhoff’s collapse, but that “hardly anyone stood up and said ‘There is a problem here'”.

However, he added, even eight months later it was not entirely clear what had gone wrong at Steinhoff, and the facts were likely to still take some time to emerge.

This, he said, was an indicator that it was necessary to question the level of “trust we have in the financial system as a whole”.

This was a global problem, he said, with “real repercussions”.

Warning signs

Styan completed the book in three months, and noted that it was not intended to be a “forensic audit”.

“I don’t want to take over the work that’s to come,” he said.


However, his research did raise several red flags that he believes should have the public questioning the trust with which they invest – and how any problems will be managed.

One warning sign Styan noted was the effective tax rate paid by Steinhoff. Corporate Income Tax in South Africa is payable at a rate of 28%, but according to Styan, for several years, Steinhoff was paying an effective tax rate of 8% to 12% and “nobody asked any questions”.

This did not necessarily point to illegal activity, Styan said, but this in itself raised the question of what was possible to do legally. “Maybe it’s all legal – that will still come out,” he said.

However, he added, he did include a chapter on tax avoidance in the book, which had elicited angry responses from a number of corporates. (Tax avoidance, unlike tax evasion, is the legal exploitation of the tax system to reduce tax liabilities, though in ways not intended by government. It may involve transactions specifically contrived for a tax advantage.)

A second red flag, said Styan, was a 2015 raid on the Steinhoff offices in Germany in connection with tax investigations, which came ahead of the company’s Frankfurt Stock Exchange (FSE) listing.

A probe for possible accounting fraud is ongoing.

A third red flag was the purchase of Mattress Firm in 2016, said Styan.

Steinhoff purchased Mattress Firm at $64 a share in 2016, when it had been trading at $29 a share.

This prompted Fraser Perring, a former British social worker who founded Viceroy Research, to begin conducting research into Steinhoff’s financials, which was made public in 2017.

According to Perring, “Either the market was undervaluing it by 100%, or Steinhoff was overpaying by 100. And if it’s too good to be true, something is up.”

READ MORE: Focus shifts to Steinhoff’s ex-chair Christo Wiese

A fourth red flag – though this does is not always a danger sign in isolation – was “jumping around so you can’t compare” between focus areas, said Styan.

“If one day you are selling shoes, and the next day you are selling more shoes, it is clear there is growth. But if one day you are selling shoes, and the next day you are selling something else, monitoring becomes more difficult,” he said.

Diversification in itself is not a problem, he said, but in context of other warning signs, a little too much can signal obfuscation.

Limited power

A further question raised by the Steinhoff debacle is how far we expect non-executive directors to go to detect problems in their companies, Styan said.

This question is not intended to absolve wrongdoing, he added.

In Steinhoff’s case, he said, the board had a two-tier structure: a management board and supervisory board. The management board reported back to the supervisory board, which raises the question of disclosure, as well as reach.

If reputable firms deliver signed-off reports indicating no evidence of wrongdoing to non-executive board members, this raises queries around involvement, disclosure, and what constitutes due diligence for boards and investors, Styan said.

Capacity

Lastly, said Styan, the Steinhoff case – and other large investigations like VBS Mutual Bank – raises questions of capacity to investigate and prosecute financial crimes.

SARS has been tightening the screws on tax dodgers, while cases like VBS and Steinhoff have thrown the spotlight on large-scale financial crime.

Styan believes Steinhoff’s tumble did not occur in isolation.

“How much of our financial system is a deck of cards that can come tumbling down at any minute?” Styan asked.

Should a major clean-up ensue, he argued, it was unclear whether there would be capacity to follow through.

In addition to the “multitude” of investigations – financial and otherwise – facing the Hawks, Styan argued that state prosecutors would face a “huge imbalance” of capacity against billionaires with large legal teams and a wide range of resources at their disposal. — Fin 24

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Marelise van der Merwe
Marelise Van Der Merwe
Marelise van der Merwe and Daily Maverick grew up together, so her past life increasingly resembles a speck in the rearview mirror. She vaguely recalls writing, editing, teaching and researching, before joining the Daily Maverick team as Production Editor. She spent a few years keeping vampire hours in order to bring you each shiny new edition (you're welcome) before venturing into the daylight to write features. She still blinks in the sunlight.
Advertising

SANDF inquiry clears soldiers of the death of Collins Khosa

The board of inquiry also found that it was Khosa and his brother-in-law Thabiso Muvhango who caused the altercation with the defence force members

Inside Facebook’s big bet on Africa

New undersea cables will massively increase bandwidth to the continent

No back to school for teachers just yet

Last week the basic education minister was adamant that teachers will return to school on May 25, but some provinces say not all Covid-19 measures are in place to prevent its spread

Lockdown relief scheme payouts to employees tops R14-billion

Now employers and employees can apply to the Unemployment Insurance Fund for relief scheme payments
Advertising

Press Releases

Road to recovery for the tourism sector: The South African perspective

The best-case scenario is that South Africa's tourism sector’s recovery will only begin in earnest towards the end of this year

What Africa can learn from Cuba in combating the Covid-19 pandemic

Africa should abandon the neoliberal path to be able to deal with Covid-19 and other health system challenges likely to emerge in future

Coexisting with Covid-19: Saving lives and the economy in India

A staggered exit from the lockdown accompanied by stepped-up testing to cover every district is necessary for India right now

Covid-19: Eased lockdown and rule of law Webinar

If you are arrested and fined in lockdown, you do get a criminal record if you pay the admission of guilt fine

Covid-19 and Frontline Workers

Who is caring for the healthcare workers? 'Working together is how we are going to get through this. It’s not just a marathon, it’s a relay'.

PPS webinar Part 2: Small business, big risk

The risks that businesses face and how they can be dealt with are something all business owners should be well acquainted with

Call for applications for the position of GCRO executive director

The Gauteng City-Region Observatory is seeking to appoint a high-calibre researcher and manager to be the executive director and to lead it

DriveRisk stays safe with high-tech thermal camera solution

Itec Evolve installed the screening device within a few days to help the driver behaviour company become compliant with health and safety regulations