On Friday night, the first taster of the long-awaited PricewaterhouseCoopers report was released.
In possibly the largest corporate crash – and fraud – in South Africa's history, Steinhoff investors have lost R200 billion since December 2017. PwC has been busy with a forensic investigation into what went wrong at the company. More than 100 auditors worked on the report.
The full report of more than three thousand pages, with four thousand documents as annexures, has been released to Steinhoff executives.
Earlier this week former Steinhoff director Johan van Zyl said he has already read the report, which confirmed to him that those implicated should be sent to jail.
On Friday, Steinhoff released a ten-page overview on the report. It doesn’t want to release more for now, as it says that it is still deciding how to take legal action against former Steinhoff execs (former CEO Markus Jooste is the only exec mentioned by name in the report) and their associates. It is also still working on a strategy to claim money back from these parties.
But here’s what has been confirmed in the limited release:
Steinhoff did many transactions with companies that were supposed to be independent third parties – but secretly had strong links to Jooste.
These deals made Steinhoff look much more valuable and profitable than it really was.
Many of deals involved companies buying things from Steinhoff, like trademarks. The prices of these deals may have been inflated, and on top of that, Steinhoff gave these companies massive loans to buy its own assets.
Steinhoff listed undertakings from these companies that it will pay back these debts as so-called “cash equivalents” on its books, which made it look like a much bigger company than it really was.
Its financial statements featured elaborate tricks to show what these cash equivalents were supposedly worth, the PwC report says.
These fake loans would also be moved between different Steinhoff units and other “independent” companies. And often when they were moved around, they were magically reclassified as something else, which would further artificially pumped up Steinhoff’s value.
The report estimates that the dealings with these companies which had close links to Jooste were valued at more than €6.5 billionin Steinhoff’s accounts.
This means that Steinhoff's accounts were – at least – overstated by this amount.
The report says these groups were mainly involved in the fraud:
Campion was formed five years ago by two close associates of Jooste: the former head of finance of Steinhoff in Europe, Siegmar Schmidt, and George Alan Evans, who reportedly ran an investment company for Jooste.
Campion and its subsidiary Fulcrum would go on to buy various companies from Steinhoff at inflated prices, apparently using loans from Steinhoff to do the deals. These loans, and the income from the deals, would be listed in Steinhoff’s statements. This would boost Steinhoff’s value.
This company, which is registered in the British Virgin Islands, has been doing suspect deals with Steinhoff for at least a decade. According to the PwC report, these transactions have been valued at €4.2 billion in Steinhoff’s books.
In his book, Steinheist: Markus Jooste, Steinhoff and SA's biggest corporate fraud, Rob Rose chronicles how Jooste told Steinhoff directors that he was part of this “buying group” which was supposed to negotiate rebates and bonuses from suppliers on behalf of the larger Steinhoff group of companies.
But Rose writes that this “buying group” in all likelihood never existed.
“In the end, it was all just a sophisticated scheme to fiddle the accounts.”
Steinhoff would list various “rebates” and other “bonuses” secured by the TG Group in its accounts. Whether these were actually secured from suppliers remain unclear. But these entries in its financial statements did help to bolster Steinhoff’s profitability.
The report identified more than €1 billion in fictitious or irregular transactions with TG Group in the four years to 2017.
The reports find that “fictitious and/or irregular income” was created on the Steinhoff books that was then allocated to underperforming Steinhoff units. These were called “contributions”, and helped to make these companies look better.
These contributions were paid in cash by other Steinhoff companies, which created the impression that they weren’t fake.
Pepkor or other South African companies didn’t receive such contributions, the report states.
The report says Steinhoff execs used suspect property valuations to bump up the rents that one Steinhoff company would pay another Steinhoff company. It also inflated royalties that Steinhoff companies paid to each other or to the so-called independent companies.
Steinhoff’s suspect deals were supported by legal documents that were backdated to before transactions, the report found.
The PwC investigation found a "pattern of communication": the senior management executive would instruct a small number of other Steinhoff executives to execute instructions, often with the assistance of a small number of persons not employed by the Steinhoff Group.
PwC has interviewed or submitted questions to twenty two current and former directors and officers.
“Mr Markus Jooste, the former CEO, and certain other individuals have not yet made themselves available for an interview with PwC and discussions are ongoing regarding the basis on which any such interviews may take place,” says Steinhoff.
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