PwC investigation: Steinhoff artificially inflated deal value to enrich executives

Among the allegations included in PwC’s lengthy probe into the corporate scandal that is Steinhoff, in which billions in investor’s money was lost, people arrested, and the then CEO apparently killed himself, was that it made deals at inflated values.

A 7 000-page report, which Business Report obtained through a Promotion of Access to Information Act request, lays bare how fraud was perpetrated at the company, resulting in some R125 billion-worth in irregular or false accounting flowing through its books.

The document said that, not only were deals done at inflated prices but also that the processes followed was either flawed or manipulated to enrich people. This was done through what PwC called “side deals”.

Steinhoff also used acquisitions to inflate goodwill, intangibles and brands, while deals were entered into at all costs without sufficient business rationale, which made it “difficult for analysts to make year on year comparisons of financial results in the group”.

Among the deals investigated are brand names that will be familiar to South Africans, such as Tekkie Town, while others are international such as one in the UK, Poundland. Other brands such as Pepkor, Mattress Firm, and Conforama Group are also listed in the report.

PwC categorised these deals based on aspects such as those in which there were allegations, some of which were raised by Steinhoff’s auditors in 2017, Deloitte. Others were the subject of investigations, or litigation as of the time the report was compiled in 2019.

Many of these deals fell under a particular code name. Included in these was: Project Falcon, Project Kudu, and Project Poseidon.

PwC found that “due diligence procedures were often performed internally with little or no recorded oversight”. In some cases, the due the investigation process for the target company was inadequate, in that expected procedures were either not performed or were not performed in detail.

The consultancy also noted that it was not provided with evidence of any external independent financial due diligence for four deals, while no external independent valuation was performed for four deals, including Tekkie Town and Pepkor.

Special purpose vehicles (SPVs) were included in the acquisition structure without a business rationale and without the deal makers understanding of their inclusion. It said there may not have been any economic benefit to using the SPVs.

In addition, PwC said there was limited documentation available for the older acquisitions such as POCO Group and the Homestyle Group. It was told that this was due to a fire in Steinhoff’s Cape Town offices, where these documents were filed.

“There has also been an ongoing court case relating to the POCO Group acquisition that may have resulted in the POCO Group acquisition documents being refiled in another location,” said PwC at the time of its probe in 2018.

In September 2018, Steinhoff agreed to sell a 50% stake and related properties in German discount furniture chain POCO to Austrian businessman Andreas Seifert for €270.68 million (R5.2bn at the current exchange rate). This followed a Dutch court ordering Steinhoff to amend its 2016 accounts, which gave Seifert victory over a battle regarding how Steinhoff treated POCO in its books.

This wasn’t the only battle between Steinhoff and Seifert. Seifert and Steinhoff also crossed swords over the fact that Steinhoff wanted to consolidate a joint venture called Talgarth Capital, which, together with various other companies, formed the Talgarth Group.

Consolidation the joint venture, in which Steinhoff only had a 50% stake, allowed it to record income and receivables to which it was not wholly entitled. In addition, when the deal was terminated in 2015, Steinhoff should have reversed these accounting entries but didn’t.

Steinhoff’s former, deceased, and disgraced CEO, Markus Jooste, long blamed Seifert for the company’s demise, arguing that it was Seifert who instigated investigations into the company’s affairs.

BUSINESS REPORT