Steinhoff Leaks Part 1: ‘Some big mistakes’

This is the first in a series of articles that follow from a joint investigation by Moneyweb and journalists Jan Strozyk and Benedikt Strunz from Germany’s Norddeutscher Rundfunk (NDR) – a public broadcaster and publisher based in Germany’s northern city of Hamburg.

The leaked documents and e-mails we have obtained appear to show how Steinhoff CEO Markus Jooste and current and former colleagues Dirk Schreiber and Siegmar Schmidt seem to have conspired to manipulate the company’s accounts as far back as 2014 and possibly even further. – WT

The e-mails were exchanged between the three individuals over the period 17-22 August 2014, just as Steinhoff was preparing its accounts for the financial year ending June. At the time, Markus Jooste was CEO of the group, Dirk Schreiber was, until December 2017, the CFO of Steinhoff Europe, and Siegmar Schmidt, who previously occupied the same role as Schreiber, had already left the company to found Genesis Investment Holdings, one of the companies fingered in the Viceroy report as having been enriched at Steinhoff shareholders’ expense.

E-mails

The e-mails begin with a note from Schreiber to Jooste on August 17, 2014 attaching ostensibly a pro forma balance sheet and profit & loss account for the European division (Moneyweb did not have sight of the documents attached) for the year ending June.

Jooste takes a few days to review these documents and writes back to Schreiber informing him that he has decided to impair JD’s book (the SA furniture retailer, JD Group) by R3.6 billion and, as a result, this has “put [his] consolidated results out of balance”.

To remedy this, Jooste proposes paying Genesis (controlled by Schmidt and unrelated to Steinhoff) a hefty commission of €130 million for negotiating the sale of the JD Consumer Finance Book to BNP Paribas. That is some commission –  about R1.9 billion based on euro-rand exchange rates at the time, amounting to 27% of the purchase price. In turn, Genesis would then pay Steinhoff €100 million to boost profits in line with guidance, as can be seen from the excerpt below:

Excerpt of Markus Jooste e-mail to Dirk Schreiber, August 2014

Schreiber writes back on the same day and points out that he still has a gain of €82 million from a previous transaction or “old item” with Genesis that dates back to financial year 2011/12, which he could not get rid of through a contra transaction and for which he has no document or security. He asks Jooste to cover the “old item” with a letter of confirmation or guarantee otherwise the link between Steinhoff and Genesis would be “dangerous under IFRS 10”.

Jooste replies saying that he is oblivious to the fact there was an amount accrued from Genesis of €82 million from prior years and suggests rather paying the commission of €130 million to, and then booking income of €100 million from another obscure entity called Talgarth.

Talgarth Capital Limited is a company registered in the British Virgin Islands and was not mentioned in the Viceroy report or in the 2014 Steinhoff Annual Report, and appears to be another entity controlled by Schmidt.

Jooste then rather tellingly refers to the “cleaning up” for next year. Presumably, this refers to the preparation of the company for the listing in Frankfurt which eventually happened in December 2015.

Excerpt of Markus Jooste e-mail to Dirk Schreiber, August 2014:

Jooste then fires off a missive to Siegmar Schmidt, at this time already an ex-employee of the group, asking him to provide Schreiber with his “support and guidance” again.

Schmidt comes back to him in a matter of minutes and in a rather bizarre exchange, the company outsider tells the Group’s CEO that one of his divisional CFOs is “fighting with CT [understood to be some sort of accounting consultant to the company] to get everything through the books. But your additional entries without any proper documentation will not be accepted by CT.”

Schmidt then alludes to “old balances” that have been moved from Steinhoff to another vehicle called Triton-KLS. He finishes off with, “You will remember all the balances we pushed up in the last years.”

Copy of e-mail sent by Siegmar Schmidt to Markus Jooste, August 2014:

Jooste responds to Schmidt barely an hour later, saying: “Of course we will make sure that all the balances clean out and you know that I will not let Triton sit with any problem of ours!” He then adds: “You can understand that we need a strong base behind us to do all the entries we plan to do to clean up the past. If we stop now short, my concern is that the rest is then more difficult.”

What transpired?

Steinhoff published its annual financial statements for the year ending June 2014 on September 9, duly signed off by auditors Deloitte & Touche.

But instead of impairing the JD Consumer Finance business as was indicated in the e-mails, Steinhoff notified the market that it had received an offer from BNP to buy the business on the last day of the financial year – June 30, 2014.

Based on this offer, the company treated the business as a discontinued operation in the income statement, and as a held-for-sale item on the balance sheet when it published its accounts. The purchase price realised by Steinhoff for JD Consumer Finance fell from R6.7 billion as mentioned in the e-mails to R4.7 billion as announced to the market, a difference of about R2 billion. It is unclear why this is so.

The gross profit margin for the entire group remained at 35% for financial year 2014, exactly in line with 2013. Interest income from “Loans” and “Other” sources rose by €530 million (approximately R7.4 billion) over 2013.

“While the European market for household goods remained stable compared to the previous year, revenue attributable to the group’s international retail activities increased by 4% to €5.2 billion (FY13: €5.0 billion). Operating profit improved by 22% to €325 million (FY13: €266 million), due mostly to continuing focus on cost savings and gross margin improvement through group procurement initiatives.” – CEO’s Review,  2014 Steinhoff Annual Report.

Response

Markus Jooste’s lawyer confirmed that his client would not be responding to questions sent to him by Moneyweb.

Siegmar Schmidt declined to respond.

Moneyweb received the following response from Dirk Schreiber’s lawyer: “Dear Mr Strozyk, this indicates that Mr Schreiber has asked us to answer your e-mail of 22.02.2018. Proper authorization is ensured by lawyer.

“The issues raised by your questions are the subject of a comprehensive review of the decisions that PwC independently made on behalf of Steinhoff International Limited. These investigations are ongoing and will take some time. In addition, other renowned consultants are tasked to clarify the facts.

“Although many details of the issues in your question are inaccurate, our client is unfortunately currently unable to answer the questions you have asked because of the ongoing clarifications.”

Statement from Steinhoff

“In December 2015, Steinhoff published an announcement, confirming an investigation by the public prosecution office in Oldenburg regarding the balance sheet treatment of certain transactions. As you will be aware, PwC is conducting an investigation into potential accounting irregularities at Steinhoff as announced in December 2017. They have been given unrestricted access to the Group and its companies.

We have furnished PwC with copies of the e-mails that you sent to ensure that the subject matter thereof forms part of the investigation. We reiterate that Steinhoff is determined to ascertain the true and correct facts and to uncover all information required to take action against any individuals that may have been involved. Beyond that, we cannot comment in detail on the issues raised until we have the results of the PwC investigation. As material information becomes available, we may publish updates on the news services of the Frankfurt and Johannesburg stock exchanges.

• After the events of 6 December 2017, Mr Jooste resigned from his position as CEO and Mr Schreiber was removed from his position as the European CFO.
• Schreiber remains for the moment with the group in the position as administrative managing director of various companies and he is rendering his full cooperation with the group and the investigation.
• Siegmar Schmidt is not currently a director of any Steinhoff companies, and has not been a director for some years.”

Analysis

At the very least, the wide-ranging discussion around how to get the books to balance and reach a pre-determined outcome, get transactions past consultants, make things acceptable to auditors and ensure above all that the company delivers on its guidance reveals just how free-wheeling Jooste was in the preparation of the company’s financial statements.

These exchanges also seem to indicate how many aspects of the group’s accounting, going back to periods far longer than those under investigation, were extensively engineered: How can losses be offset? How much should the income from investments or joint ventures be? Where should profits come from – this vehicle or that one? How do we deal with outstanding balances from transactions done years ago? These all seemed to have flown in the face of conventional accounting principles.

But what really needs to be probed, is where were the people that were supposed to be safeguarding, checking and probing these books? Starting with Group CFO, Ben la Grange, who didn’t appear to be a concern in these exchanges. Then too the auditors, Deloitte, where did its oversight begin and end? And finally, the board. How did it come to be that one man could treat a large multi-national like it was his personal ledger?

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