Steinheist. Rob Rose
29 November 2017
For the first time since the rumours started, Christo Wiese’s blood ran cold. Until then, he’d largely written it off, the scurrilous talk of fraud, the endless drivel. That day, it all changed. It was Wednesday – almost a week before Steinhoff International, a company that had been moulded into the swaggering bullyboy of international retail by its bulldog chief executive, Markus Jooste, would announce its CEO was resigning amid an investigation.
At Wiese’s office in Parow, a beige industrial region of Cape Town marked by car-washes, food trucks and formless, characterless warehouses owned by the likes of Pepsi, the atmosphere was chilling quickly, in contrast to the languid early summer heat outside. Years before, Wiese, one of Africa’s three wealthiest men, had picked the unfashionable Parow as the head office for his clothing chain, Pep. It was a statement, as much as anything, of how in a business that sells T-shirts for as little as R44 and shoes for R79, Wiese wasn’t willing to pay a cent more for the sort of unnecessary high-rises of many of his peers. Back in 2016, a profile of Wiese reported Shoprite’s former boss Whitey Basson as describing him as “stingy”. “He’ll give me the nicest bottle of champagne as a present, and I’ll open it up, and I’ll see he forgot to take out the message. It’s a bottle from Lord So-and-so. He’s a re-gifter.”1 Basson, one of Wiese’s good friends, would rib him about it often. But it was a cultural thing about not wasting cash, Wiese would say. “If you’ve got a Persian carpet, don’t put it on the floor of your shop, because your customer will know that he is paying for it.” (It was, of course, totally different at Steinhoff, which was happy to blow a rumoured R60m to R80m on entertaining clients at the 2015 rugby World Cup in England.)
Wiese, with his gravelly, forthright manner, could also be intimidating. If your facts were slightly woolly, he’d cut right through your story in a heartbeat. This is perhaps why the bespectacled lawyers and twitchy accountants sitting in the boardroom of the third floor of the Pep HQ that summer’s day were so visibly tense, shifting uncomfortably, as they considered how to break the awful news to him.
Joining Wiese in that boardroom that day was Dr Steve Booysen, the 55-year-old former accounting lecturer who, until a few years before, had been the CEO of South Africa’s largest commercial bank, Absa. Booysen, irredeemably unpretentious, was the banker who you sensed would always rather have been sitting on the stoep of his farm with a glass of pinotage. He was rapier smart, too, and had been one of the central architects of South Africa’s biggest deal at that stage, the 2005 purchase of Absa by British bank Barclays. Now he was chair of Steinhoff’s audit committee – a curse that would soon assume the level of a technicolour horror movie.
Also in the room was Dr Karsten Randt, a specialist in criminal law as it related to tax, who’d also once been a lecturer at the University of Osnabrück on the subject but who was now a partner at the German law firm Flick Gocke Schaumburg (FGS). For months, Randt’s company had been investigating claims that Steinhoff, and Jooste, might have broken the law, as police in the German town of Oldenburg believed. In three reports, FGS had found nothing wrong. It repeatedly said there were no sham transactions, as some believed, thereby entirely vindicating Jooste.
So, Wiese started the meeting: I believe you have a few things you need to discuss with me. I just want to make it clear, this discussion must be very frank and open. Don’t pull punches because we are now only days away from finalising Steinhoff’s year-end accounts. We can’t pussyfoot around now. What’s the problem?
Then, one of the auditors from Deloitte, one of the “big four” audit firms, which had been hired by Steinhoff to reassure the public that the accounts they published were accurate, stood up. Thank you for that, he said in his thick Dutch accent. (Since Steinhoff had shifted its headquarters to Amsterdam a few years ago, the Dutch were everywhere in the company.) Then he dropped a bombshell: we have reason to believe that Steinhoff’s management have been defrauding the company for years. The balance sheet is highly inflated, and revenue has been significantly overstated.
The enormity of the words hit Wiese as if a wave of icy water had rolled up out of nowhere, and smacked into him.
He took a minute, then replied: Well, this comes as a huge shock, obviously. Why are you saying this? What do you know?
The Deloitte auditor handed him a document containing a list of Steinhoff’s assets – about five items. These are the assets in terms of which we have concerns about their validity and the recoverability, he said. Or, to be blunt, Deloitte didn’t believe that the accounts they’d been given by Jooste’s executive team represented anything like the truth. We’re only willing to sign the accounts on two conditions: firstly, we need all the cash flow and accounting audit trails (and all the supporting documents), and secondly, we want Steinhoff to commission a forensic investigation.
Though the list that Deloitte gave to Wiese was short, it was indisputably weighty: the total value of those questionable assets was no less than €6bn. Wiese stared at it. Firstly, Deloitte had red-flagged a bunch of properties that Steinhoff wanted to value at €1.2bn – properties it had acquired about five years before, when it bought the Austrian low-end supermarket chain Kika-Leiner for €452m.
Secondly, Deloitte was worried about several mist-encircled deals that had been taking place in Europe between Steinhoff and various obscure overseas companies, like Talgarth Capital (which was registered in the secretive tax haven of the British Virgin Islands). For one thing, these companies seemed to be run by people close to Jooste, yet the auditors and the board had never been told these were related parties – which would have required greater scrutiny.
Thirdly, the draft accounts included a $600m profit from a deal in the US, which Steinhoff’s American albatross, Mattress Firm, had supposedly done with mattress company Serta Simmons. Jooste had claimed the deal had been finalised, and the $600m should be included in Steinhoff’s revenue for the year – but the auditors doubted this. For one thing, they didn’t have a shred of documentary evidence for this.
Also, Deloitte was worried about a line in Steinhoff’s accounts in which Jooste had stated its cash and cash equivalents at a ludicrously high amount. The auditors worried that this cash number was being manipulated. (In Steinhoff’s 2016 audited results, the only item that didn’t have an explanatory note was its “cash and cash equivalents”.)
The auditors asked Wiese: Do you trust Markus?
Are you kidding? he replied. Let me tell you the history, said Wiese. I did a R62bn deal with him based on just a handshake in 2014. We agreed that Steinhoff would take over my company Pepkor, and we shook on it. You don’t do a R62bn deal based only on a handshake unless you trust someone entirely.
Wiese stared at the list again. He was sceptical of the auditors’ conclusion. Hang on a minute, he said. On the issue of the cash, explain to me what the problem is here. Cash is cash. Surely, you just ask the bank what’s in the bank account, and you’ll know how much cash Steinhoff has?
Well, yes, said Deloitte, but cash equivalents are something else entirely. This is because in Germany there is the concept of a wechsel, which is pretty much the equivalent of an IOU – a written debt obligation. The thing about a wechsel is, if you have such a promise from somebody who owes you money, you can claim it as a cash equivalent asset in your accounts. In other words, it makes it seem like you have more money, based on a promise.
This point was critical. In general, investors and the public need to know how much cash a company has as a buffer in case disaster strikes. And for analysts, the flow of cash is often the most fundamental element of a company’s accounts. After all, cash (which would include cash equivalents) is meant to be the one figure that even the smartest financial whizz can’t cheat. So, if you can manipulate this number in the accounts to create the illusion of money in the bank, it’s a masterstroke of a real conman.
But Wiese was just as dubious about Deloitte’s other conclusions. On the properties, he said, surely that’s just as easily resolved? Either those Kika-Leiner properties are worth €400m, or they’re worth €1.2bn. How hard can it be to resolve that? And those properties, he pointed out, had been externally valued by an outside valuer. He told them how,