Sixteen months after its former CEO Markus Jooste resigned, Stellenbosch-headquartered global retailer Steinhoff [JSE:SNH] published an 11-page overview of a forensic report by PricewaterhouseCoopers into the company’s financials.
The overview was published on Friday afternoon after the close of local markets.
The PwC investigation was requested by Steinhoff in December 2017 in the wake of Jooste’s abrupt resignation and the precipitous plunge in the multinational’s share price after auditors flagged irregularities in its accounts.
Steinhoff has previously said it would not be making the original report public as it contains confidential information. The report, according to Steinhoff, is comprised of 3000 pages and contains some 4000 documents as annexes.
Here are five things you need to know about the report:
1. Inflated profits
The overview states that a “small group” of former Steinhoff executives inflated the profit and asset values of the Steinhoff group for years.
The PwC probe found that an unnamed “senior management executive” instructed a small number of other executives to execute instructions, often with the assistance of a “small number of persons not employed by the Steinhoff Group”.
Steinhoff said none of the executives identified in the PwC report are currently employed by the group. One unnamed executive mentioned in the report is, however, “co-operating to assist the ongoing investigations and related matters”.
2. Fraud may amount to over R100bn
According to the overview, the small clique of executives used “fictitious and/or irregular transactions” to inflate the group’s profits and assets by about 6.5bn euros between the 2009 and 2017 financial years. This translates to R106bn at current exchange rates.
3. Third party companies were involved in the fraud
According to Steinhoff, PwC said that three nominally third party companies were used in the decade-long fraud to inflate Steinhoff’s assets and profits. It named them as the Campion or Fulcrum Group; the Talgarth Group and the TG Group.
“Other corporate entities have also been identified together with a finding that there was a practice of using similar entity names and changing company names, resulting in confusion between entities,” stated the overview.
Of the three, the Talgarth Group was responsible for 4.16bn of the estimated 6.5bn euros in inflated profits and assets in the decade under review.
Steinhoff said that, despite the investigation lasting over a year, the legal and beneficial ownership of these groups were, in some cases, “currently unknown to Steinhoff”.
4. Implicated executives will be asked to respond, while board wants to “pursue claims”
Steinhoff said that, as a next step, former Steinhoff executives and other non Steinhoff individuals identified in the PwC report will be invited to comment on its findings.
It added it had resolved to pursue claims against certain individuals, but did not say who they were. “Those claims will be multifaceted and will be pursued in the various jurisdictions where the unlawful conduct has taken place,” said Steinhoff.
“There are prerequisites in certain jurisdictions which require that the individuals be given an opportunity to address the allegations made against them prior to the institution of proceedings against them. This is in process.”
5. Investigations aren’t over yet
Steinhoff said that the PwC investigation covers what it calls phase 1, or a “period of detailed investigation”. This investigation will allow the conglomerate to publish its financial statements for the 2017 and 2018 financial years.
But Steinhoff says it also envisages a second phase of investigation which will cover subjects that, while they are not be material to Steinhoff’s financial statements, “may be significant for other reasons and will require further investigation, conclusion and resolution”.
Former Steinhoff CEO Markus Jooste testifies before Parliament in September 2018.
Several questions that still remain:
1. Who has been implicated?
The overview of the PwC report did not provide any names. It is not known who the “small group of Steinhoff Group former executives and other non Steinhoff executives, led by a senior management executive” are. The overview does say, however, that no current Steinhoff executives have been implicated in the report.
2. Will more of the PwC report be made public?
Steinhoff has said that the PwC report and other related is subject to legal privilege and confidential. But it seems to have kept open the possibility that more information could be released, saying that it “does not currently intend to publish the report”.
3. Will Jooste give evidence to PwC
PwC, in its report, interviewed numerous current and former executives, but the group’s former CEO Markus Jooste did not make himself “available for an interview”. Steinhoff said discussions were ongoing regarding the basis on which any such interview may take place.
4. How will markets react?
The overview of the PwC report was published after markets closed on Friday, meaning it has not yet impacted on its share price. The multinational’s stock has been trading at under R4 a share since March 2018 and mostly below R2 since October. Steinhoff is now down more than 90% from where it was trading in November 2017 – the month before its decline – and even under its listing price.