There has been a lot of sound and fury over the "accounting scandals" which have pockmarked the JSE over the past year. The most recent, adding to a list headed by Steinhoff and EOH, is sugar company Tongaat Hulett.
In yet another dismal admission of investment deceit, Tongaat said on Friday that a forensic investigation had "revealed certain past practices which are of significant concern … [which] have resulted in financial statements that did not reflect Tongaat Hulett’s underlying business performance accurately".
If that sounds soft and sugary, suggestive of perhaps just a missing graph in the glitzy presentation, it’s far, far worse than that. Try this on for size: Tongaat, with more than 40,000 employees, will now have to reduce its equity by, at least, between R3.5bn and R4.5bn — more than 29% of its R12bn in equity in its most recent set of audited accounts. Oh, and those accounts "should not be relied upon" any longer.
Those words are almost a carbon copy of the sombre statement that emerged from De Wagenweg Office Park in Stellenbosch in December 2017, when Steinhoff said new details had emerged of "accounting irregularities" and CEO Markus Jooste had "tendered his resignation with immediate effect".
Over at EOH, Microsoft cut ties with the once soaring tech company in February, over shady goings-on with state contracts that smelt rather like a foreign corrupt practices disaster waiting to happen. As new CEO Stephen van Coller put it, it was possible that EOH was just "a little bit representative of the population" during a rather corrupt decade in SA’s history.
There’s another common thread — Steinhoff and Tongaat Hulett had Deloitte as their auditors
So what is the golden thread linking these train wrecks? It’s not the industry: there’s little in common between furniture retail, sugar production and IT.
Well, one thing those companies had in common was that they were all run by a dominant Godfather figure. At Tongaat, CEO Peter Staude has been the one common presence since he joined in 1978. He became CEO 17 years ago, in 2002.
"Peter had been with the group for 40 years," says one of the company insiders, "and he was intellectually brilliant. If you asked any question, he had the numbers at his fingertips, so he could speak with authority and conviction about every corner of Tongaat."
It wasn’t dissimilar at Steinhoff. Jooste had been there from the start, when he first took over at GommaGomma in Ga-Rankuwa in 1988, and then merged it with Bruno Steinhoff’s German furniture maker a decade later. It now seems clear that Jooste commanded an inner circle which helped him create "fictitious transactions" of R106bn, according to PwC.
At EOH, it was Asher Bohbot who founded the company in 1998 and ran it for 19 years. Though Bohbot wasn’t himself implicated in the more sordid EOH contracts, it happened on his watch.
In all three of these cases, one man, to all intents and purposes, called the shots. And it’s especially risky if you have a dominant, long-serving CEO able to lean on the CFO.
(Oh, and there’s another common thread — Steinhoff and Tongaat Hulett had Deloitte as their auditors. It’ll be interesting to see how that plays out.)
In the case of Tongaat, the motivation for what happened is unclear. At this point, it’s uncertain if corners were cut simply so that Tongaat could show an upward momentum and justify bonuses for executives, or whether there was more to it.
"There were certainly errors of judgment, but it seems that whenever someone, like the auditors, raised questions, they were met with convincing answers from Peter or Murray [Munro, the former CFO]," says the Tongaat insider.
At Tongaat, it seems the problem was that land sales were wrongly accounted for, sugar-cane plantations may have been overvalued, and operating expenses were capitalised rather than accounted for as an expense.
How, then, do you reconcile a situation where a CEO has been there forever, but a nonexecutive director meant to oversee him inevitably has far less experience? This is by necessity, since any nonexecutive who has been at a company longer than nine years wouldn’t qualify to be an "independent" director, under the King 4 governance rules.
Well, first of all, nonexecutive directors have to be more assertive and vigilant. They must have the courage to confront their CEOs when they need to do so. And they need to understand the essence of the businesses better: flipping through a board pack in the Slow Lounge won’t cut it any more.
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