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Market jumps the gun on Steinhoff summary released by PwC

By David Whitehouse
Posted on Monday, 18 March 2019 15:13

Steinhoff's former chief executive Markus Jooste faced a parliamentary panel in September. REUTERS/Mike Hutchings

Steinhoff shares rose as much as 14% in early trading on 18 March after the publication of a brief summary of PwC’s investigation into accounting irregularities at the South African retailer.

  • The PwC summary finally gives shareholders some limited transparency into the scope of the wrongdoing, which was disclosed by Steinhoff in December 2017 and led to the resignation of CEO Markus Jooste and chairman Christo Wiese.
  • It finds that executives structured and implemented transactions which had the result of “substantially inflating the profit and asset values” at Steinhoff over an extended period.

Yet the nine-page summary raises more questions than it answers. It did not say which specific transactions, among those worth a total of €6.5bn, have been identified as irregular. Steinhoff said the full PwC report runs to more than 3,000 pages and will not be made public. Investors who have been burned will wonder why not, as will South African companies finding it harder to raise capital in the wake of the scandal.

The financial impact of the irregularities has yet to be quantified: this impact will be reflected in the restated accounts for 2016, as well the as yet unpublished accounts for 2017 and 2018. Whether there is any prospect of value being salvaged from Steinhoff, then, is no clearer now than it was last week.

‘Sanitised’

Rob Rose, author of the 2018 book Steinheist, told The Money Show that the report was “short on detail”. The published summary, Rose says, has been “sanitised quite heavily to avoid any legal liability.” Investors, he added, were expecting more.

One certainty is that Steinhoff will be embroiled in a complex and expensive long-term legal process of seeking to recover money from individuals. PwC acknowledged that there are still unanswered questions in relation to the identification of counter-parties and the ultimate beneficiaries of the irregular transactions.

The long-term viability of the company is unclear until these questions are answered. “Bringing Steinhoff back from the brink is a possibility, but even the most skilfully executed financial engineering and restructuring plans will not be enough,” according to a 2018 report by researchers led by Piet Naudé, director of the University of  Stellenbosch Business School in Cape Town.

Ethical breaches

Institutional investors were completely blindsided by Steinhoff. Of 1,651 pension funds in South Africa, 948 had exposure to the company. The first warning signal that something was wrong at Steinhoff came not in South Africa, but in Germany. Authorities raided the company’s offices in Westerstede in November 2015 ahead of the company’s listing in Frankfurt.

Naudé in 2018 argued that the annual reports produced by Steinhoff between 1999 and 2015 can be classified as “best practice”. This shows the extent of the disconnect between external compliance and financial reality. Rose argues in his book that the Steinhoff affair challenges the view that “governance in South African companies is strong enough to stop these sorts of ethical breaches”.

  • None of the Steinhoff executives identified in the PwC report is still working for the company.
  • Steinhoff said that transactions involved did not include two European subsidiaries, Pepkor Europe and Poundland, or any of its African operations.

Bottom line:

Investors need to be realistic, both about how much they still don’t know about transactions carried out at Steinhoff, and about the wider robustness of South African corporate governance. Soundly run South African companies, who will find it harder to raise capital, are among the losers.

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