Ann Crotty re­views the an­nual re­port

How could an in­ter­na­tional group get away with this? And what kind of au­di­tors could let it all hap­pen, asks

Financial Mail - Investors Monthly - - Front Page - Ann Crotty

Imag­ine you owned a spaza shop, and then bought an­other one, and an­other one, and an­other one. And be­fore you knew it, you were run­ning a huge busi­ness spread across not just SA and Africa but the world.

Ev­ery­thing had moved so fast you hadn’t been able to ap­ply the ap­pro­pri­ate ac­count­ing and gov­er­nance poli­cies to your busi­ness em­pire. But some of your close friends are help­ing out. And what the heck, it’s your busi­ness and you — and a few of the close friends — should be able to dip into it to do what­ever deals they please, their way.

The im­por­tant thing is to al­ways look so­phis­ti­cated. So don’t wear shorts and takkies; and pay what­ever is nec­es­sary to have teams of lawyers, mer­chant bankers and au­di­tors traips­ing around with you.

So much for make-be­lieve; mean­while over at Stein­hoff it’s im­pos­si­ble, af­ter painstak­ingly trawl­ing through 300-plus pages of its re­cently released 2017 an­nual re­port, not to won­der: how could this have hap­pened? And in plain sight? What hap­pened to ac­count­ing rules and gov­er­nance poli­cies? This is a com­pany that ticked all the King 4 gov­er­nance boxes; just like Oak­bay.

If you don’t have the time to trawl through the doc­u­ment, res­ur­rect the Viceroy re­port that ap­peared, seemingly out of

nowhere, within hours of the fate­ful “ac­count­ing ir­reg­u­lar­i­ties” an­nounce­ment on De­cem­ber 5 2017. It pro­vides a use­fully pre­cise sum­mary of the key events al­luded to in the 2017 re­port. Or bet­ter still, try Rob Rose’s much more read­able Stein­heist .

How­ever, de­spite the chal­lenges, you should try to make your way through the 2017 Stein­hoff an­nual re­port. As you do, down­load a copy of the 2016 Stein­hoff an­nual re­port. The 2016 re­port, with all its lovely pic­tures, now has as much grav­i­tas as an is­sue of that much-loved UK comic The Beano. Of course, the warn­ing stamped on each page that this re­port “can no longer be re­lied upon” doesn’t help.

The 2017 Stein­hoff re­port must be one of the tough­est, if not the tough­est, piece of work global au­dit firm Deloitte has ever done. Not only has it in­volved hun­dreds of thou­sands of hours of work but the Deloitte part­ners must know that al­most every page con­tains am­mu­ni­tion for a le­gal ac­tion by some­one who has suf­fered from the con­sid­er­able value de­struc­tion that was Stein­hoff. The re­port high­lights the fact that there’s lit­tle or no point go­ing af­ter the Dutch-listed en­tity — its li­a­bil­i­ties ex­ceed its as­sets. So Deloitte it­self be­comes the ob­vi­ous tar­get.

Few will have the op­tion be­ing pur­sued by for­mer chair Christo Wiese and in­vestor GT Fer­reira, which is to lodge a claim against Stein­hoff SA. Wiese is look­ing to the SA en­tity to make good on the value of the Pep­kor shares he sold to Stein­hoff while it was still very much an SA com­pany.

De­spite re­al­is­ing it was pro­vid­ing am­mu­ni­tion for fu­ture le­gal ac­tions, Deloitte must have known it had no choice but to do a re­mark­ably thor­ough piece of work. There are too many peo­ple look­ing too closely. The 2017 an­nual re­port is a re­mark­ably thor­ough piece of work — de­spite be­ing pock­marked with re­minders that much of it is guess­work or, as they say in the au­dit­ing pro­fes­sion, much of its val­u­a­tions are based on “crit­i­cal judg­ments and es­ti­mates”.

Not ev­ery­one is im­pressed by the de­tail of the work in­volved. Ar­mand Ker­sten, head of re­la­tions at share­holder as­so­ci­a­tion VEB/Euro­pean In­vestors, tells In­vestors Monthly that the au­di­tors’ re­port is, in his ex­pe­ri­ence,

with­out prece­dent. “The au­di­tor is clear in say­ing he can’t give an opin­ion or as­sur­ance on the in­for­ma­tion in the rest of the an­nual re­port,” said Ker­sten.

“In one case re­gard­ing KikaLeiner, he wasn’t even granted ac­cess to the fi­nan­cial records by the re­cent pur­chaser. One won­ders how the com­pany could produce any fig­ures about these as­sets.”

Ker­sten’s or­gan­i­sa­tion was the first to lodge a class ac­tion against Stein­hoff — all the way back in Fe­bru­ary 2018. It promptly fol­lowed that up with le­gal ac­tion against Deloitte.

In a press state­ment at the time VEB said: “Deloitte, (by) in­cor­rectly pro­vid­ing an un­qual­i­fied au­di­tor’s re­port on Stein­hoff’s fi­nan­cial state­ments for 2016, se­ri­ously failed to ful­fil its du­ties as laid down by law for au­di­tors. Due to the mis­lead­ing fi­nan­cial state­ments with Deloitte’s un­qual­i­fied au­di­tor’s re­port, Stein­hoff in­vestors have in­curred losses in the amount of bil­lions of eu­ros.”

Back then VEB said it was highly doubt­ful that Deloitte had suf­fi­cient in­sight to be able to as­sess the val­u­a­tion of Stein­hoff’s prop­erty, ac­quired com­pa­nies and re­lated good­will, among other items. “In ad­di­tion,” said VEB, “it is un­clear how the au­di­tor could have ap­proved Stein­hoff’s cash po­si­tion as dis­closed in the fi­nan­cial state­ments.” Deloitte seems to have come to the same con­clu­sion — 17 months later.

Through­out the 2017 re­port ref­er­ence is made to prob­lem­atic trans­ac­tions and val­u­a­tions dat­ing back a dis­turb­ing num­ber of years. Even­tu­ally, on page 322 of the 343-page 2017 re­port, Deloitte makes the killer state­ment: “We have not been able to ob­tain suf­fi­cient ap­pro­pri­ate au­dit ev­i­dence to pro­vide a ba­sis for an au­dit opin­ion on the con­sol­i­dated and sep­a­rate fi­nan­cial state­ments.”

This is the open-ended con­clu­sion, af­ter 17 months and good­ness knows how many mil­lions of eu­ros of fees later.

More than 27 pages of the 2017 an­nual re­port are de­voted to “re­state­ments”, which deal with “ad­just­ments” to pro­vi­sional amounts pre­vi­ously recog­nised, “correction­s” of prior pe­riod er­rors and “changes” in re­portable seg­ment in­for­ma­tion.

And then there are the “crit­i­cal judg­ments”, which are lit­tered through­out the sec­tion that deals with af­fil­i­ated party trans­ac­tions. Es­sen­tially it seems Stein­hoff man­age­ment was un­able to de­ter­mine the true na­ture of the re­la­tion­ship be­tween var­i­ous re­lated par­ties and so Deloitte did what any one of us would do — guessed.

Ker­sten tells IM he has never seen so many dis­claimers in a set of ac­counts. What is par­tic­u­larly dis­turb­ing, says Ker­sten, is how long the fraud has been go­ing on. Not only were ac­counts not qual­i­fied, “Deloitte never gave a hint pre­vi­ously that it was un­able to get in­for­ma­tion from the com­pany”.

Then there’s the mat­ter of re­lated party trans­ac­tions. The tainted 2016 an­nual re­port makes cur­sory and largely be­nign ref­er­ence to re­lated par­ties but pro­vides noth­ing like the grip­ping de­tail con­tained in the 2017 re­port.

For­get­ting about Deloitte and the ac­tual re­lated par­ties, did none of the le­gal ad­vis­ers or bankers in­volved in these trans­ac­tions won­der about dis­clo­sure? Sadly, for those who be­lieve in the rather corny con­cept of jus­tice, the Dutch code that gov­erns re­lated party trans­ac­tions re­lies on self-reg­u­la­tion, which in Stein­hoff’s world means no reg­u­la­tion.

The list of le­gal claims in note 22 to the fi­nan­cial state­ments in­cludes the names of high-pro­file South Africans who you’d think should have known bet­ter. The to­tal claims by South Africans, in­clud­ing the Tekkie Town founders, Wiese, Fer­reira, Jaap du Toit, En­rico Greyling and Lan­cas­ter 101, is more than R50bn. In most cases these claimants say they were in­duced to take up Stein­hoff shares on the ba­sis of the mis­rep­re­sen­ta­tion of the true value of those shares.

Tekkie Town founders traded their busi­ness for Stein­hoff shares, Wiese swapped PSG shares and Sho­prite shares for Stein­hoff shares, Fer­reira, Du Toit and Greyling swapped PSG shares for Stein­hoff shares.

It seems Thys du Toit (no re­la­tion to Jaap) some­how man­aged to re­verse his PS­G­Stein­hoff swap some time af­ter De­cem­ber 5 2017.

Per­haps the big­gest shocker in this stag­ger­ing re­port is the seem­ing ease with which CEO Markus Jooste was able to not only award him­self gen­er­ous bonuses, but pay them out.

It’s not what you’d ex­pect from one of the largest listed re­tail groups in the world, which pays out gen­er­ous fees to in­de­pen­dent di­rec­tors and a fleet of ad­vis­ers; more like what you might imag­ine hap­pens at your lo­cal spaza.

Pic­ture: iSTOCK

Cap­tion hard against pic as there is space.

Pic­ture: 123RF — DWAYNE SE­NIOR/BLOOMBERG

Pic­ture: ESA ALEXAN­DER

Markus Jooste

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