2857501390650 Analysis of the financial crisis at Steinhoff Abstract This report investigates and assesses financial irregularities within the Steinhoff Group

2857501390650
Analysis of the financial crisis at Steinhoff
Abstract
This report investigates and assesses financial irregularities within the Steinhoff Group. Furthermore, its purpose is to highlight risk areas or warning signs and give possible solutions and recommendations. In an attempt to lessen the impact on life, health, legal liability, assets, environmental impact on an economic scale The methodology used was primary and secondary research. The main finding indicates a need for a management change which is inevitable.

Authors: Malika Manan-207113581; Ruth Koopman-214346943; Tashlyn Hass-210072873; Garth McMaster-199093520 and Deon C Booysen-204495458 Financial Management 2941000
Analysis of the financial crisis at Steinhoff
Abstract
This report investigates and assesses financial irregularities within the Steinhoff Group. Furthermore, its purpose is to highlight risk areas or warning signs and give possible solutions and recommendations. In an attempt to lessen the impact on life, health, legal liability, assets, environmental impact on an economic scale The methodology used was primary and secondary research. The main finding indicates a need for a management change which is inevitable.

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Authors: Malika Manan-207113581; Ruth Koopman-214346943; Tashlyn Hass-210072873; Garth McMaster-199093520 and Deon C Booysen-204495458 Financial Management 2ACKNOWLEDGEMENTS
Hereby, thanking and acknowledging all who successfully contributed towards this report. Lastly, but not least, I would to like thank all the city official staff who participated in the questionnaire survey and who will remain anonymous.

TERMS OF REFERENCE
Instructions were received on 30 January 2018 from the Lecture Mr Mark Wilson Trollip at CPUT to investigate and interpret the financial crisis at Steinhoff, its effects on the South African economy and to suggest possible solutions. To be completed for submission by the week of 05 June 2018. Submission will take place electronically which is email and also one hard copy to be handed to lecturer.

TABLE OF CONTENTS
Page
Acknowledgements………………………………………………………………….i
Terms of Reference…………………………………………………………………ii
Introduction………………………………………………………………………..1;2
Methodology/Procedure……………………………………………………………3
Findings…………………………………………4;5;6;7;8;9;10;11;12;13;14;15;16
Questionnaire results and graph figure 1…………………………………………..4
Build-up leading to the Steinhoff crisis……………………………………….4;5
Causes of the Steinhoff scandal…………………………………………….5;6;7
Effects of the crisis on the South African economy…………….7;8;9;10;11;12
Suggestions to prevent this crisis from happening to other companies..12;13
Rectifications/Solutions and recommendations……………………….13;14;15
References………………………………………………………………………….16
Appendices A
Questionnaire…………………………………………………………………17;18
Appendices B
Financial statements- figure 2……………………………………………………19
Appendices C
Financial statements- figure 3……………………………………………………20
INTRODUCTION
The report is about the financial analysis or assessment of the Steinhoff Group
The purpose of this financial analysis and assessment is to highlight risk areas and to give possible solutions to mitigate impact on the economy. There are many fraudulent or white-collar crimes committed in society, as a whole.
According to white collar crime Statistics, “White collar crime might not be taken very seriously, but it should be. Every time someone gets away with one of these crimes, it gives them confidence to do it again.” Statistics, 20 May 20017
Hence this investigation is required to aid in the prevention of criminal activities from reoccurring. This is to ensure that companies (employers and employees) do not suffer the same fate as the Steinhoff Group.

They are a large multinational and dual listed company which operates its securities on the Johannesburg stock exchange in South Africa and on the Frankfurt stock exchange in Germany which is its primary listing centre.
The multibillion rand company saw its share price fluctuate to the lowest point in 2018. Leading to a massive outflow from financial markets on the dual listed stock exchanges where Steinhoff lost over 85% of their share value. This was mainly due to the accounting irregularities and poor internal control along with poor management structure.

This investigation aims to identify and indicate where to avoid, reduce, accept accountability and how to diminish the impact on our economy.
Furthermore, the objective of this assessment or investigation is to determine current measures in terms of requirements, efficiencies and financial implications. Appropriate recommendations will be made to ensure utilization in relation to the principals of corporate citizenship. As well as internal control measures along with continuous and frequent auditing of financial documents and ethical frameworks.
This will place management of companies in a position to prioritise their critical vulnerabilities with ethical conduct on all spectrums.

The authors outline the steps Steinhoff should collectively undertake as a company to rectify and normalize its financial position in terms of creating liquidity. We also outline and explain the effects on the domestic economy on a micro and macro scale with particular emphasis on the international sentiment towards the crises.

Furthermore, the research will help us identify comparative roles of cooperative governance, internal control between various segments of society and the public sectors roll, as legislators and regulators. The study may be limited to the use of online research, researching of books and questionnaires.

Historically we also attempt to interpret the trend of misrepresentation of financial statements dating back to 2014 where former CEO Mark Jooste was directly involved. Lastly, we also list and explain the companies involved and affected by the Steinhoff crises.
PROCEDURE /METHODOLOGY
The financial investigation of Steinhoff crisis was conducted by means of primary and secondary research methods.

2.1. Research
Research (see bibliography for source citing) was also conducted through referencing of books and internet findings on Steinhoff crisis.
2.2. A questionnaire
A questionnaire (see Appendix A) was issued to about 40 people working at a government institution on 03 April 2018 and was returned on 15 May 2018.

FINDINGS
Questionnaire results (Appendix A)

In the graph below we look at the overall impression of society with regards to the Steinhoff Group. On a high level of excellence of about 40% believed that Steinhoff Group in the long run will recover if there is a proper change in management, saying “in with new and out with the old” was the mentality.

The data collected on the questionnaire revealed that overall participants were in favour of government interaction with the private sector, to aid in transparency and to create awareness for ethical business conduct.

The results also indicated that some were still willing to invest in shares in spite of Steinhoff’s crisis; however, there were some current ethical concerns.

BUILD-UP LEADING TO THE STEINHOF CRISIS
The Steinhoff group was a ticking time bomb that can be backtracked as far as 2014 where manipulation of financial data and collusion spiked growing concern.

The authors believe that the quote by Jan Cronje News 24, 01 March 2018 projects the brewing of the Steinhoff crisis whereby he said, “German daily the Süddeutsche Zeitung, broadcaster Norddeutscher Rundfunk, and SA site Moneyweb have reported that previously unpublished emails appear to show that former Steinhoff CEO Markus Jooste was in email contact with German Steinhoff managers about allegedly misrepresenting financial data in 2014.

Law enforcement agencies intercepted certain emails in connection with manipulation of financial data by Steinhoff and exposed the suspicious collusion within the Steinhoff group. This still did not make Steinhoff restructure its management framework or to take a more vigorous approach to internal corrective control measures.

In saying the above which really means that top managers took no action to rectify discrepancies on the financial data dating back from 2014 to 2017. This trickled down to middle level managers who could also have “pulled the plug” by becoming whistle blowers which also did not happen.
The result of negligence, weak management decisions and poor internal control from Steinhoff is the main factors to their downfall. In conclusion of this white collar crime is that regulators internationally found Steinhoff guilty of fraud and accounting irregularities. This caused a ripple effect on financial markets and portfolio investments. As a result of the recent scandal growing from post 2014 generated a resignation of former CEO Mark Jooste.
In spite of the build up to the Steinhoff crises being clearly obvious from the post 2014 allegations. Analyst, economists and auditors never picked up on the discrepancies. Only when the international regulators found to have “put cat amongst the pigeons” did they eventually lead German regulators into investigating Steinhoff. This was not easy sailing, as the multibillion rand corporation was once again in the spotlight with regards to their financial data. However, this time the agency had strong evidence that coincided with suspicious actions of the Steinhoff group which made it possible to get a verdict of accounting irregularities and unethical business practices.

“Cape Town – The accounting scandal at embattled South African retailer Steinhoff may stretch back further than previously known”, this is according to Jan Cronje, News 24 article, 01 March 2018.

Therefore, the authors believe that it is clear that the Steinhoff Crises was brewing for a while and it took a short period for the “pin to drop” post the 2014 allegations. Although, Steinhoff had taken the necessary actions by approaching (PWC) Price Waterhouse Cooper an external auditing firm to conduct an independent investigation into their financial statements and accounting irregularities. However, it was therefore not enough to prevent the already robust evidence of poor internal control and accounting fraud to be exonerated.

CAUSES OF THE STEINHOFF’S SCANDAL
Management insight
The number one cause of this enormous scandal of Steinhoff starts in their management body. There were too many holes in their management department. The author’s interpretation is that Steinhoff operated globally with two management bodies, consisting of the board of directors and the supervisory board. Furthermore, the authors believe it was the management that led to its corporate scandal. If management fails to do the right thing the ‘boat will sink’. It looks like the management control was based on a hierarchy system, whereby only a certain amount of people makes decisions which are not in line with protocol
Steinhoff’s board structure followed the two-tier system and this in the authors view is where the problem started. This structure ensures that the supervisory board is independent from the executive who sits on the management board. Steinhoff the management board consist of four top executives and the supervisory board consist of nine non-executive directors. It appears that Steinhoff’s decision to opt for the two tier structure led to or contributed to this scandal. One of the biggest holes in the Steinhoff structure is the fact that the management board didn’t always keep the supervisory board in the loop, combined with Steinhoff’s corporate culture.
In saying this, the authors believe that shareholders were misled by management. What was good about the one-tier system is that executive directors and non-executive’s directors sat together on a single board. This means a continues flow of communication between executives and non-executives exist. The executives can ask a question with the entire board present. This unified board was criticized for its propensity to compromise the independence of the non-executive directors. The initiation of the two-tier system expresses to have more order into the management board as the subject to oversight by the supervisory board, and also the supervisory board must give answers to the shareholders. It is certain that the management board knows much more about the business than the supervisory board. This is how operational challenges develop without the board noticing it by then it’s too late.

The authors questions whether the two-tier system gave the CEO too much leeway to take decisions that in the end led to the near collapse of the company. This might as well be the case, as people were surprised that the company grew so quickly. Years ago John Argenti came up with a model for factors leading to corporate failure. One of them was expanding too fast and the other was high levels of loan borrowing. Steinhoff seems like they suffered from both factors. The supervisory board failed to raise the red flag, when it came to large transactions. This highlights that the supervisory board failed to fulfil its oversight role when it decided not to make public Steinhoff’s 1-billion-dollar deal. Even if the supervisory board didn’t legally have to make it public knowledge, ethically it should have made the disclosure. The functioning of the audit and risk committee didn’t help the situation either. The committee structure had two weaknesses. The author’s questions how three of the supervisory board have been expected to carry out the real responsibility of the standing committee. The second flaw or weakness was that audit and risk were wrapped up in one committee. This is the norm under the two-tier governance structure. South Africa’s corporate governance structure might have helped to address both these problems. The author believes that the King 1V governance should have been implemented.

In conclusion about the holes in management, this Steinhoff case really highlights weaknesses in the governance structure the company had chosen to operate under. Steinhoff scandal points out major gaps in stopping unethical corporate behaviour.

THE EFFECTS OF THIS CRISIS ON THE SOUTH AFRICAN ECONOMY
Micro and Macro effects on the economy
Bear in mind that most of South Africans invest their money in order to be able to live comfortably when they one day retire. Investing in secure funds is what every person would desire for their investment, knowing that the riskier you go the better your capital growth and vice versa.

The Steinhoff saga is a financial destruction for the South African economy and its civil and private citizens. Companies such as Ford Asset Management, PIC and Coronation Fund Managers are some of the largest investors in Steinhoff. PIC administrates our pension funds. Poor or the less fortunate members of the public who can hardly afford to contribute towards a pension will suffer from this loss contrary to what these companies are actually implying. This means that the ordinary man on the streets, loosing as little as a R1000 makes a huge impact on the pocket especially if you cannot afford it.
Ford Asset Management invests millions into Steinhoff and is one of the largest shareholders, is the most exposed, after PIC, Coronation Fund Managers, Liberty, Sanlam, Old Mutual and Allan Gray.

Sanlam reported that the returns on their investments are limited to R175m after tax, thanks to equity hedges. There Steinhoff exposure accounted for 1, 1% of portfolios on 01 December, which means that the share price would reduce annual returns by 1%. 1% to a shareholder does not seem as much as it will to the actual investor. 1% to the actual investor could be equivalent to his monthly salary.

Investec reported that its loans to Steinhoff represented less than 0, 25% of its total R464, 8bn credit exposure and would not expect to suffer losses on these credit exposures.

Allan Gray has not owned Steinhoff on behalf of its clients. Their philosophy is to protect your investment, so when they analysed the cheap stock and underperformance of the share price back in October, it became questionable and they were not going to take any risk as they were not compensated for it. Evaluation and managing risk is of outmost importance to their investment process.

Steinhoff’s allocation in Ford Portfolio’s was invested only in South African equity funds (5-6% of the fund). Its mandate permits investments only in JSE- listed companies.

2-2, 5% was allocated in Global balanced fund, which is suitable for retirement fund portfolios. The Ford flexible fund of funds exposure to Steinhoff was limited to 0, 8%.

The PIC/GEPF investment loss recorded was 0, 6% of the total GEPF portfolio. The entire GEPF equity portfolio produced a value of roughly R140bn and had performed better than the equity level.

So, as you can see the percentages are not that bad, but the money value of those percentages are huge. Steinhoff was one of the 15 largest companies on the JSE and it held a range of unit trusts and ETF portfolio’s. It was held in 341 funds and was the 5th most widely held share in the South African portfolios.

When we analyze the Steinhoff scandal, we have to consider the huge impact the international corporation has on our country as a whole. According to the authors source Steinhoff has been operating within South Africa for twenty years. In the twenty years a few trusted South African retail and furniture brands have been associated with the corporation.

During this period a number of enterprises has been established, long term relationships between various stakeholders has been formed and a sense of trust is also gained by employees, customers as well as the market as a whole. Steinhoff has been listed on the JSE for a number of years and due to its strong international reputation and expeditious growth rate, Steinhoff has also gained the trust of numerous South African investors.
South Africans have invested their pension funds within Steinhoff shares and if we look at the recent humongous decline on the stock market it is a devastating loss to the elderly who is ready to retire or even young entrepreneurs who may have invested their savings. We are well aware that these investments can be risky depending on a lot of factors but when considering Steinhoff holdings. The author makes reference to Steinhoff’s historic sound reputation, which is highly unlikely for the ordinary man to anticipate this financial crisis.
The authors dissect the vast crisis to get a clear indication on how it affects us all as South Africans. Firstly, it is a global crisis which also affects the Frankfurt, Germany market. International investors will run a loss as the value drops on the stock market. However, the authors also believe it will have a greater detrimental effect on our country. This is due to its head courters that are based here, as well as all the enterprises established in South Africa. In terms of our country it will affect all regional and national economies.

This huge scandal will definitely have a negative effect on our regional and national income as it highly impacts the output. The national output is the total amount of everything a country produces in a given period of time. All that’s manufactured and sold generates an identical amount of revenue.

The author’s investigation reveals that the financial loss of the corporation will also have a fatalistic effect on our economy which will lead to a recession. One of the consequences for such a great market loss is retrenchment which leads to unemployment. This will rapidly increase the South African unemployment rate and considering the current economic status of South Africa it will also increase the cost of living, increase our inflation rate and decrease any signs of economic growth.

By analyzing this, it is a clear indication that the Steinhoff crisis will have a ripple effect with regards to our economy. Each and every stakeholder will feel the reduction in some way, whether it is job loss or loss of investment. The increase of unemployment, increased cost of living as well as the increased inflation rate, one can predict a spike in pollution, poverty and our country’s crime rate.

If we examine unemployment alone, there are obvious signs that it may affect South African citizens socially as well. The lack of employment can drive individuals to committing crime out of desperation and the increased crime rate can cause deterioration of the neighborhoods we live in. Our country is currently experiencing an elevation of crime in terms of theft, fraud, murder as well as human trafficking. Generally, with the increase in the poverty and crime rate people tend to resort to drug abuse.

We have to look at all aspects of a household in order to fully understand the devastating impact it may cause. We can also assume an increase in the divorce rate as families will be experiencing financial pressures. Another obstructive factor is the increase of homelessness, our citizens who are already living by means of the minimum wages will be unable to prove for their households and that can increase homelessness all over South Africa.

The Government would be forced to intervene as the poverty rate will spike causing the entire country to rely on the Government intervention. The government may look at other areas to make budget cuts this may influence our education system, our healthcare system and also the government employees. We have to be realistic in terms of how far the government can assist and this may definitely lead to an increase in our tax rate.

All these pressures can affect the mental well-being of the average worker that means that more people will need to be admitted to mental institutions or have some sort of psychological or psychiatric evaluations.
As the crime increases international scale tourist will reluctantly consider South Africa as a holiday destination which will also cause a decrease in the economy. Our prisons will reach its full capacity which will give rise to more crime and result in an unsafe environment. Our local health care system may be compromised as well due to more people being injured and falling prey to diseases and illnesses. The lack of income from our economy to assist the local healthcare system will lead to an expansion of the death rate.
By the simple scrutiny of the vast footprint the Steinhoff scandal can have on our country, it is evident that this crisis can cause a major recession and downfall of our country. The middle to high class citizens will possibly consider immigrating to safer more stable countries across the world, leaving the lower class citizens to suffer under these harsh conditions.

It will take a great deal of debt and time to try to restore a country after all these negative effects. Depletion of our natural resources can also be expected in terms of crime rate and unemployment rate.
Our country is still developing, as we compare it to the rest of the world, there are some of these issues mentioned which we have been struggling with for years. Therefore, the Steinhoff crisis will cause us as a nation, a major setback. Our new president has instilled a sense of hope for all South Africans, as we were well aware of the corruption that took place previously in parliament. There are a number of challenges for our government to work through besides this scandal.

One of the turning points for Steinhoff which may boost our economic status is an enhancement in the management of the corporation. On concluding Steinhoff needs a team of educated proactive individuals who can diligently work at the correction of those “accounting irregularities” as well as the effective management moving forward.

SUGGESTIONS TO PREVENT THIS CRISIS FROM HAPPENING TO OTHER COMPANIES
It is therefore clear that the lack of transparency and discloser from the Steinhoff Group caused a major public outcry impacting the public relations in the masses.

Companies within South Africa and across the world should adhere to legislation and maintain ethical standards with regards to general accounting principles and practices.

In relating to the above, companies must disclose all financial data to the general public and not miss lead investors.
The authors propose that companies should invest its time in improving its policies as well as continuous checks of its financial statements and its financial position. On a macro level, companies should have various stages of verification through the auditors from both internal and external view point.
All private sector companies should work and participate more with government agencies and departments to ensure co -operation in all aspects. The private sector can learn much from certain government entities such as the treasury department where fiscal transparency and public finances which are highly disclosed to the general public by means of mass media such as the advertising of the national budget statement for the fiscal outlook and the medium term budget policy statement.

The author’s suggestions are to change the whole management executives. Meaning staying with the one-tier system where everyone is present and informed also concerning questions can be asked and answered immediately. Someone needs to ensure all committee members are actively involved in responsibilities and not just 5 members. This is to change the management style completely. Executive directors should inform the supervisory board of changes or investments. Strengthen your weaknesses and decrease risks. Proper investigation should be done to bring more clarity on the irregularities that just appear “out of the blue”.

3.6 RECTIFICATIONS/SOLUTIONS AND RECOMMENDATIONS
1)Steinhoff needs liquidity for its legal fees and to keep everything ticking in a business sense. By restructuring with new members who have scarce, critical skill and striking a balance by making sure that employees and investors do not leave due to high risk. Steinhoff will have to compare their business processes and performance metrics to the industry bests and best practices of other companies, and then benchmark the remuneration packages against other European retail boards.
2)Management and supervisory boards are required, inter alia, to make extraordinary time commitments in an attempt to solve the problems at the company. They should be readily available for un-schedule, ad-hoc meetings and deal with stakeholders (regulators, investors and shareholders).

3)Sell off assets to improve its liquidity position. Steinhoff wants to sell 29.5 million PSG Konsult Ltd (1998-2018) shares which were trading at R246.99 on Monday, 22 January 2018. This would raise R7.2 billion, reducing its indirect interest in PSG to zero.

4)Sell non-core assets worth R160 billion, for example selling the 2006 Gulfstream G550 private jet estimated at $25 million or the opulent farm Val de Vie valued at R10.5 million situated in Franschhoek.
5)Subsidiary company Steinhoff Africa Retail Limited (STAR) will refinance its long-term liabilities due to the company, achieving an additional €2 billion of liquidity. This would strengthen the company’s balance sheet and provide some comfort to stakeholders. Steinhoff should reassure stakeholders of its ability to fund existing operations and to reduce its debt.
6)The option to sell a 17% stake in French online retailer Showroom Prive and another high-end store in Vienna for a combined total of €139 million is available and is seen as non-core assets.

Recommendations
As a corporate citizen in the South African economy, Steinhoff had to adhere to what is defined as corporate citizenship. As Perch (2012:141-171) defines it, “companies should consider the interests of society by taking responsibility for the impact of their business activities on customers, suppliers, employees, shareholders, communities and other stakeholders”.

She further elaborates that, “this obligation is seen to extend beyond the statutory obligation to comply with legislation”, and she also envisages that, “organizations voluntarily take further steps to improve the quality-of-life of employees, their families, including the local communities as well as society as a whole”.

The four principles of corporate citizenship indicate that,
“1) Organizations should minimize the harm that results from their business activities”, which for example would involve the impact of the Steinhoff debacle on the normal South African employee with a pension fund. 2) “Organizations should maximize benefit”, this must include all stakeholders and not only the company’s shareholders. “Investing resources into activities, for example corporate social responsibility programs such as education, health and economic development”, this will socially uplift communities to be inspired and at the end of the day make them economic independent. 3) “Organizations should be accountable and responsive to key stakeholders”, in this regard will be the public who are investors, thus shareholders of Steinhoff. Steinhoff should be as transparent as possible to their shareholders in an attempt to unravel the root cause of the alleged accounting irregularities. 4) “Support strong financial results”, this includes that the responsibility of the company to return a profit to its shareholders must be part of its obligation to society.

By Explanation of the right to Equality in the Consumer Market and Protection against Discriminatory Market Practices nature, financial reports focus on a particular point in time to comply with the requirements of triple bottom line reporting, which focuses on a current view and a forward thinking view of the company’s environmental and ethical practices. Steinhoff is recommended to adhere to the corporate governance guidelines outlined in the King III Report which involves;
Shareholder approval of remuneration policies
Evaluation of director’s performance by independent service providers
Governance in business rescue proceedings
The use of alternative dispute resolution which favors mediation and conciliation above arbitration
As well as certain public sector departments such as the energy department and public enterprise department should also learn from their mistakes and private sectors errors such as mismanagement of funds and corruption, state capture and the lack of transparency within that department.

The authors believe the that greater government intervention and co-operation by means of partnerships between both business, government and labour may prevent another financial crisis from arising, also people with in companies must be whistle blowers of any signs of corruption. Regulators should also play a greater part by means of intervention and quicker responses to any potential corruption in terms of white collar crimes.

Lobbying in the public and private should be watched by regulators when it comes to finances and transparency.

In conclusion management staff and leaders of both private and public sector entities should be transparent undertake their portfolios with ethical standards lead by example and have strict policies in place for any contravention. Finally, government should also develop ways to fine certain companies who contravene certain laws and legislation of the country.