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Financial Mail - - FEATURES -

would re­quire far more scru­tiny from au­di­tors.

Stein­hoff would then charge in­ter­est on that loan, which it would recog­nise in the in­come state­ment as rev­enue. But for all in­tents and pur­poses, it was a fic­ti­tious debtor: that main debt would never be re­paid. In­ge­niously, through some fancy foot­work us­ing “guar­an­tees” in Europe, that debt would then be clas­si­fied as “cash and cash equiv­a­lents” in Stein­hoff’s books.

This is im­por­tant, since one ob­vi­ous red flag for ac­count­ing fraud is when a com­pany’s op­er­at­ing cash flow doesn’t match the profit it re­ports in its books. Masked as “cash equiv­a­lents”, these loans didn’t arouse sus­pi­cions. So in 2016, for ex­am­ple, there was no ma­jor dis­crep­ancy be­tween Stein­hoff’s op­er­at­ing profit of €1.8bn and its op­er­at­ing cash flow that year of €2.03bn.

But that grow­ing bal­ance of fic­ti­tious “cash and cash equiv­a­lents” needed to be hid­den some­where. So, Stein­hoff would then typ­i­cally do an­other deal that would ef­fec­tively al­low it to re­clas­sify that debt into an “in­tan­gi­ble as­set” on its bal­ance sheet.

The bot­tom line: Stein­hoff’s rev­enue was ar­ti­fi­cially in­flated, and so were its as­sets.

One in­sider says that at this point, it doesn’t seem the main goal was for the fraud­sters to steal money per­son­ally. “Pri­mar­ily, it was about man­u­fac­tur­ing a false pic­ture of Stein­hoff’s per­for­mance and earn­ings to per­pet­u­ate this story about the phe­nom­e­nal growth. Of course, some of those may have made some money per­son­ally in the process, but it seems the goal was to in­flate Stein­hoff’s num­bers.”

Other in­sid­ers doubt this, be­liev­ing the per­pe­tra­tors must have made money along the way. The PWC in­ves­ti­ga­tion, which is only likely to be fin­ished by the end of the year, will pro­vide the fi­nal verdict.

In De­cem­ber, an in­de­pen­dent com­mit­tee was set up con­sist­ing of Sonn, au­dit com­mit­tee chair Steve Booy­sen and San­lam chair Jo­han van Zyl (who re­signed be­fore the AGM). They spoke daily, often work­ing 20-hour days to de­ter­mine how deep the cancer went.

For con­text, con­sider that the board had met only four times the pre­vi­ous year; yet be­tween De­cem­ber and Fe­bru­ary, Sonn’s com­mit­tee had 20 for­mal meet­ings. In those three months, Stein­hoff’s board com­mit­tees met no less than 63 times.

“It re­ally has re­quired ev­ery­thing I have — all my skill, all my prepa­ra­tion, ev­ery­thing I have learnt,” says Sonn to­day. “But it has been a peak ex­pe­ri­ence too, as there hasn’t been much time to re­flect on what was hap­pen­ing. It was just about fight­ing this fire, then mov­ing to the next one.”

It wasn’t that Sonn didn’t have the ex­pe­ri­ence. Be­sides Mer­rill Lynch, she’d had stints at San­lam In­vest­ments, been CEO of Le­gae Se­cu­ri­ties, and been on nu­mer­ous other boards, in­clud­ing fi­nan­cial ser­vices firm Pre­scient, con­struc­tion firm Esor and the Nel­son Man­dela Foun­da­tion.

It’s just that it was un­charted ter­ri­tory: no­body in SA had chaired a com­pany of com­pa­ra­ble size at the cen­tre of the coun­try’s largest cor­po­rate fraud.

While she’d joined Stein­hoff in 2013, her fa­ther, aca­demic and anti-apartheid ac­tivist, Franklin Sonn, had been on the board for years. He’d been the SA am­bas­sador to the US but when he re­tired, Jooste asked him to be a nonex­ec­u­tive direc­tor. When Franklin Sonn re­tired, one of the names he pro­posed to take his place was that of his daugh­ter. “I was keen, re­ally in­ter­ested in how large SA cor­po­rates worked,” she says.

She could never have fore­seen the burn­ing build­ing that would be Stein­hoff five years later.

“There’s so much go­ing on that we’re all just bat­ting ev­ery day. I know that, as chair, even­tu­ally all de­ci­sions will come past my desk. But it’s a hec­tic en­vi­ron­ment, where the sim­ple mat­ter of trust be­tween col­leagues is bro­ken. A lot of work must be done to fix that,” she says.

Of course, there had been plenty of warn­ing signs prior to De­cem­ber’s crash.

As Al­lan Gray port­fo­lio man­ager Leonard Krüger wrote last week: “Nu­mer­ous warn­ing signs and in­ex­pli­ca­ble ac­tions flagged Stein­hoff as a high-risk and be­low-av­er­age prospec­tive in­vest­ment” be­fore its crash.

This in­cluded a sharp rise in the num­ber of shares is­sued by Stein­hoff to buy com­pa­nies, which was ac­com­pa­nied by a spike in debt and in­tan­gi­ble as­sets.

“Im­por­tant share­holder met­rics, like re­turn on eq­uity [ROE] and growth in earn­ings per share were unin­spir­ing. ROE de­clined from 20% in 2007 to only 9% in 2017 and earn­ings grew by only 17% in eu­ros, or 1.6% per year.”

In 2007, Jp­mor­gan an­a­lyst Sean Holmes pub­lished a 56-page re­port, ad­vis­ing in­vestors to steer clear. He spoke of Stein­hoff’s “pat­tern of ag­gres­sive ac­count­ing treat­ment”, its “un­nerv­ingly” poor dis­clo­sure, a “dis­turb­ing” spate of ac­qui­si­tions to “pa­per over the cracks” and an “un­usual em­pha­sis” on min­imis­ing its taxes.

Then in 2009, Craig But­ters, who co­man­ages Pru­den­tial’s Div­i­dend Max­imiser and Core Value funds, met with Wiese to warn him that Stein­hoff’s suc­cess story was not all it was cracked up to be. Up to 40% of its earn­ings were of poor qual­ity, he said.

The prob­lem is that Stein­hoff’s sur­vival, at this point, is not guar­an­teed.

At the mo­ment, it has €10.4bn (R156bn) in debt, and a mar­ket value of just R8.4bn. Bankers who were re­laxed a year ago when Stein­hoff’s value was around R300bn are bit­ing their nails over a debt-to-eq­uity ra­tio that would break a thou­sand covenants.

For the year to Septem­ber 2016 (its last au­dited num­bers), Stein­hoff paid €215m in in­ter­est and other fi­nance charges, at a time when it re­ported af­ter­tax profit of €2.1bn. But those fi­nan­cials now all carry a stamp say­ing “in­for­ma­tion can no longer be re­lied upon”.

But this equa­tion will change rad­i­cally in the next set of fi­nan­cial re­sults, partly

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