Steinhoff’s accounting system presented a perfect opportunity for its former CEO Markus Jooste and his close-knit cabal to manipulate the group’s books, particularly those of its vast European operations, to inflate earnings through late journals.
This modus operandi ramped up until 2017 when the fraud was uncovered. The PwC report on Steinhoff malfeasance — to date SA’s biggest corporate fraud scandal — shows the group’s erstwhile European finance chief Dirk Schreiber played a key role in the multiyear fraudulent scheme and Jooste pulling the strings.
A German court sentenced Schreiber in 2023 to jail for three-and-a-half years. Jooste took his life on the eve of his arrest in SA last year.
The PwC findings, which have already exposed the board’s lack of oversight in Steinhoff’s acquisition frenzy in the years leading up to its collapse, paint a picture of an accounting system that was a perfect playground for financial trickery. It allowed Jooste and his associates to exploit glaring design flaws to inflate and hide the company’s true financial state.
PwC identified design deficiencies in and around the European consolidation in that “journals can be deleted and changed after having been posted”.
The PwC report was kept secret since 2019 until the Supreme Court of Appeal recently ordered its release to media houses which demanded its release. The report shows the late journals, or accounting adjustments from Europe operations, some made up of fictitious transactions, were at the heart of deception and fraud.
For example, the Steinhoff Group in 2015 reported €1.2bn in profit before taxes. But as the PwC report shows, the real profit was €860m if late journals of €360m are discounted.
PwC noted late journals of €460m in the 2016 financial year and €760m the next year.
The 2017 late journals raised the suspicion of the company’s auditors Deloitte, who in their presentation to the group’s then audit committee chair, raised concern about the “significant” impact of late transactions (accounting adjustments) in the group’s consolidated profit.
Less than two weeks later, Jooste resigned, unleashing a Pandora’s box that saw Steinhoff’s market capitalisation plunge more than R230bn in a matter of days.
One of the 2017 transactions PwC zoomed in on was the $162m “reimbursement” by Steinhoff Europe to Mattress Firm (MFRM) to accelerate the latter’s restructuring.
MFRM used the windfall to reduce expenses on the income statement. Evidence suggests that the reimbursement agreement was signed by Jooste and Stéhan Grobler on behalf of Steinhoff Europe.
Erstwhile Steinhoff group CFO Ben la Grange told PwC that the $162m payment to MFRM, which was then a subsidiary of the group, was done on the understanding he got from Jooste that Steinhoff would get $200m paid to it by Advent — an American global private equity firm focused on buyouts of companies in Western and Central Europe, North America, Latin America and Asia.
However, no such agreement was in place between Steinhoff and Advent, and no $200m flowed to Steinhoff.
The number of year-end journals ramped up over the years leading up to Steinhoff’s implosion in December 2017.
However, the $200m was recorded against other income in the group’s books — thus inflating Steinhoff’s earnings by $200m and creating the impression that MFRM was profitable when it was not.
“The entry that was processed was based on the verbal instruction of Mr Jooste to Mr Schreiber and the written instruction of Mr Schreiber to the bookkeepers in November 2017. This entry was subsequently deleted in December 2017,” PwC said in its report.
“There were no entries processed in MFRM.
“MFRM and Advent are unaware of and were not party to this attempt to inflate earnings. Mr La Grange and Mr Schreiber have both informed us that they operated solely on Mr Jooste’s instructions regarding this attempt to inflate earnings.”
Steinhoff bought MRFM without conducting a due diligence investigation. Had Jooste and his cabal bothered to conduct due diligence on MFRM, they would have uncovered that the company impaired billions of rand due to its onerous lease agreements with US landlords.
The number of year-end journals ramped up over the years leading up to Steinhoff’s implosion in December 2017. The number of journals recorded at year-end increased from 65 during the 2013 financial year to 404 in the 2017 financial year.
“Late journals were used to inflate the financial results of the Steinhoff Europe group upon consolidation. The identified transactions do not have any business substance and as such result in the AFS [annual finance statements] not fairly presenting the financial position of the entity,” PwC found.
“Mr La Grange and Mr Schreiber have both informed us that they operated solely on Mr Jooste’s instructions regarding these attempts to inflate earnings. It should be expected of the group CFO and European CFO that as officers of the company, they would apply their minds to instructions received, even if from the group CEO, and question/refuse to post or have entries posted that do not have economic/business substance.”
La Grange is serving a five-year prison term after admitting to having participated in the looting of Steinhoff.
Another deal PwC flagged was the €642m “sale” of rights by GT Global Trademarks to an outfit called Tullet. This transaction too was a lie, but recorded in Steinhoff’s books as income. “The sale by GT Global Trademarks, of the right to use trademarks in certain territories, to Tulett was done on the instruction of Mr Jooste.
“We have found no evidence to indicate there was substance to this transaction. The transaction as recorded would have increased Steinhoff’s earnings for the year,” PwC said.
All in all, PwC has found that irregular transactions, with eight companies not tied to the Steinhoff group, took place from 2009 to 2017 and amounted to an astounding $7.3bn.
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