Imagine you owned a spaza shop, and then bought another one, and another one, and another one. And before you knew it, you were running a huge business spread across not just SA and Africa but the world.
Everything had moved so fast you hadn’t been able to apply the appropriate accounting and governance policies to your business empire. But some of your close friends are helping out. And what the heck, it’s your business and you — and a few of the close friends — should be able to dip into it to do whatever deals they please, their way.
The important thing is to always look sophisticated. So don’t wear shorts and takkies; and pay whatever is necessary to have teams of lawyers, merchant bankers and auditors traipsing around with you.
So much for make-believe; meanwhile over at Steinhoff it’s impossible, after painstakingly trawling through 300-plus pages of its recently released 2017 annual report, not to wonder: how could this have happened? And in plain sight? What happened to accounting rules and governance policies? This is a company that ticked all the King 4 governance boxes; just like Oakbay.
If you don’t have the time to trawl through the document, resurrect the Viceroy report that appeared, seemingly out of nowhere, within hours of the fateful "accounting irregularities" announcement on December 5 2017. It provides a usefully precise summary of the key events alluded to in the 2017 report. Or better still, try Rob Rose’s much more readable Steinheist.
However, despite the challenges, you should try to make your way through the 2017 Steinhoff annual report. As you do, download a copy of the 2016 Steinhoff annual report. The 2016 report, with all its lovely pictures, now has as much gravitas as an issue of that much-loved UK comic The Beano. Of course, the warning stamped on each page that this report "can no longer be relied upon" doesn’t help.
The 2017 Steinhoff report must be one of the toughest, if not the toughest, piece of work global audit firm Deloitte has ever done. Not only has it involved hundreds of thousands of hours of work but the Deloitte partners must know that almost every page contains ammunition for a legal action by someone who has suffered from the considerable value destruction that was Steinhoff. The report highlights the fact that there’s little or no point going after the Dutch-listed entity — its liabilities exceed its assets. So Deloitte itself becomes the obvious target.
Few will have the option being pursued by former chair Christo Wiese and investor GT Ferreira, which is to lodge a claim against Steinhoff SA. Wiese is looking to the SA entity to make good on the value of the Pepkor shares he sold to Steinhoff while it was still very much an SA company.
Despite realising it was providing ammunition for future legal actions, Deloitte must have known it had no choice but to do a remarkably thorough piece of work. There are too many people looking too closely. The 2017 annual report is a remarkably thorough piece of work — despite being pockmarked with reminders that much of it is guesswork or, as they say in the auditing profession, much of its valuations are based on "critical judgments and estimates".
Not everyone is impressed by the detail of the work involved. Armand Kersten, head of relations at shareholder association VEB/European Investors, tells Investors Monthly that the auditors’ report is, in his experience, without precedent. "The auditor is clear in saying he can’t give an opinion or assurance on the information in the rest of the annual report," said Kersten.
"In one case regarding Kika-Leiner, he wasn’t even granted access to the financial records by the recent purchaser. One wonders how the company could produce any figures about these assets."
Kersten’s organisation was the first to lodge a class action against Steinhoff — all the way back in February 2018. It promptly followed that up with legal action against Deloitte.
In a press statement at the time VEB said: "Deloitte, (by) incorrectly providing an unqualified auditor’s report on Steinhoff’s financial statements for 2016, seriously failed to fulfil its duties as laid down by law for auditors. Due to the misleading financial statements with Deloitte’s unqualified auditor’s report, Steinhoff investors have incurred losses in the amount of billions of euros."
Back then VEB said it was highly doubtful that Deloitte had sufficient insight to be able to assess the valuation of Steinhoff’s property, acquired companies and related goodwill, among other items. "In addition," said VEB, "it is unclear how the auditor could have approved Steinhoff’s cash position as disclosed in the financial statements." Deloitte seems to have come to the same conclusion — 17 months later.
Throughout the 2017 report reference is made to problematic transactions and valuations dating back a disturbing number of years. Eventually, on page 322 of the 343-page 2017 report, Deloitte makes the killer statement: "We have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the consolidated and separate financial statements."
This is the open-ended conclusion, after 17 months and goodness knows how many millions of euros of fees later.
More than 27 pages of the 2017 annual report are devoted to "restatements", which deal with "adjustments" to provisional amounts previously recognised, "corrections" of prior period errors and "changes" in reportable segment information.
And then there are the "critical judgments", which are littered throughout the section that deals with affiliated party transactions. Essentially it seems Steinhoff management was unable to determine the true nature of the relationship between various related parties and so Deloitte did what any one of us would do — guessed.
Kersten tells IM he has never seen so many disclaimers in a set of accounts. What is particularly disturbing, says Kersten, is how long the fraud has been going on. Not only were accounts not qualified, "Deloitte never gave a hint previously that it was unable to get information from the company".
Then there’s the matter of related party transactions. The tainted 2016 annual report makes cursory and largely benign reference to related parties but provides nothing like the gripping detail contained in the 2017 report.
Forgetting about Deloitte and the actual related parties, did none of the legal advisers or bankers involved in these transactions wonder about disclosure? Sadly, for those who believe in the rather corny concept of justice, the Dutch code that governs related party transactions relies on self-regulation, which in Steinhoff’s world means no regulation.
The list of legal claims in note 22 to the financial statements includes the names of high-profile South Africans who you’d think should have known better. The total claims by South Africans, including the Tekkie Town founders, Wiese, Ferreira, Jaap du Toit, Enrico Greyling and Lancaster 101, is more than R50bn. In most cases these claimants say they were induced to take up Steinhoff shares on the basis of the misrepresentation of the true value of those shares.
Tekkie Town founders traded their business for Steinhoff shares, Wiese swapped PSG shares and Shoprite shares for Steinhoff shares, Ferreira, Du Toit and Greyling swapped PSG shares for Steinhoff shares.
It seems Thys du Toit (no relation to Jaap) somehow managed to reverse his PSG-Steinhoff swap some time after December 5 2017.
Perhaps the biggest shocker in this staggering report is the seeming ease with which CEO Markus Jooste was able to not only award himself generous bonuses, but pay them out.
It’s not what you’d expect from one of the largest listed retail groups in the world, which pays out generous fees to independent directors and a fleet of advisers; more like what you might imagine happens at your local spaza.
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