/ 16 March 2019

Fictitious and irregular deals key to Steinhoff heist

The PwC report does not specifically name former chief executive Markus Jooste as party to the suspicious dealings
The PwC report does not specifically name former chief executive Markus Jooste as party to the suspicious dealings, but instead speaks of a “senior management executive” that was apparently key to their implementation. (David Harrison/M&G)

An overview of the long-awaited report by auditing firm PricewaterhouseCoopers (PwC), which has been investigating the shenanigans at retailer Steinhoff, has revealed that a range of “fictitious and/or irregular” transactions inflated the profits and assets of the group by over EU6.5-billion, or over R100-billion, between 2009 and 2017.

The summary was released in an 11-page statement on the company’s website on Friday. It does not specifically name former chief executive Markus Jooste as party to the suspicious dealings, but instead speaks of a “senior management executive” that was apparently key to their implementation.

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It said 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”. This had the effect of substantially inflating Steinhoff’s profit and asset values over an extended period

The report is the culmination of 14 months work by PwC, which was tasked with investigating the group’s books, after Jooste quit in December 2017 amid allegations of accounting irregularities.

The revelation precipitated a spectacular crash in the company’s share price, which reportedly declined by about 90%, and wiped out billions of rands of value for investors — including entities like the government employees pension fund.

The PwC investigation found “a pattern of communication” showing that the senior management executive “instructed a small number of other Steinhoff executives to execute their instructions, often with the assistance of a small number of persons not employed by the Steinhoff Group”.

READ MORE: Jooste — I did not know about accounting irregularities

The report also revealed that the fictitious or irregular transactions were entered into with third parties that were made to appear independent of the Steinhoff Group, and its executives. Instead, according to PwC, they now appear to be closely related to, or controlled by the same small group of Steinhoff executives, and select outsiders.

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Three principal corporate groups or entities were identified as being counterparties to the suspect transactions — namely the Campion or Fulcrum Group, the Talgarth Group and the TG Group.

The income generated from the suspicious transactions with these entities, as well as a number of others, amounted to over €6.5-billion or over R100-billion at current exchange rates, between 2009 and 2017.

In many cases said the report overview, the fictitious or irregular income was created at an intermediary Steinhoff Group holding company level. The money was then allocated to underperforming Steinhoff operating entities as so-called “contributions” that took many different forms and either increased income or reduced expenses in those operating entities.

The full report — which is over three thousand pages long, with a further four thousand annexure documents — will not be made public as it is “subject to legal privilege and other restrictions”.

Alongside a series of remedial actions to address the report’s findings, Steinhoff’s board has resolved to pursue “claims against certain individuals that appear responsible for the unlawful conduct identified”.

“Those claims will be multifaceted and will be pursued in the various jurisdictions where the unlawful conduct has taken place,” the company said.

This will include — in instances where third parties make a successful claim against Steinhoff — the group pursuing these individuals for “an amount equal to the amount which the Steinhoff Group is ordered to pay the third party claimants”

The company is also seeking to recover the bonuses paid to certain individuals.

The full financial impact of the findings in the PwC report is yet to be determined, the company said, but it will be reflected “to the extent possible” in restated figures for the 2015 and 2016 financial years, as well as the yet to be published financials for 2017 and 2018.

Other remedial actions will include the filling of the newly created position of chief compliance and risk officer.