A Look into the Accounting Fraud Case at Steinhoff International

Kew, J. (2020, July 6). [Steinhoff International Holdings Logo Breaking in the Middle] [Illustration] News 24.

Unfortunately, it’s not surprising anymore to see companies resort to fraud to keep their businesses alive. With cases such as Theranos, Mozido, Satya Computer, and many more, a lot of these fraud incidents involve accounting aspects. According to S. Nickolas & M. Reeves (2021), an accounting fraud can be described as the intentional false notices of financial statements to usually make the financial state of the company appear in better condition. A specific example of investigation is the Steinhoff International Holdings N.V. and the alleged accounting fraud that they committed in 2017. Companies like Steinhoff which have gone on the road of dishonesty with the public and their customers eventually face the disastrous reveal of their affairs to the public. This leads them to lose their customers' trust and lose their profitability for the long run, if the necessary precautions are not taken.

Germany-based company Steinhoff Int. was established by Bruno Steinhoff in 1964. It mostly deals with furniture and other household goods. The company started when Bruno Steinhoff sourced furniture from communist Europe and sold it in Western Europe. In 2011, Conforama, one of the largest home furniture retailing companies in Europe, Europe's second largest retailer of home furnishings, was acquired by Steinhoff Int. with over 200 stores in France, Spain, Switzerland, Portugal, Luxembourg, Italy, and Croatia, spending $1.2 billion for the acquisition. In August 2016, Steinhoff announced its plan to purchase the US-based Mattress Firm for $3.8 billion. In 2017, there was a scandal stating that company’s former CEO Markus Jooste has resigned from the company after the company’s confessions on its accounting irregularities. In October 2018, Mattress Firm filed for bankruptcy but emerged from Chapter 11 bankruptcy two months later after financial restructuring. To explain further, Chapter 11 bankruptcy is a code of bankruptcy named after the U.S. Bankruptcy Code 11, suggesting that the company is allowed to run their businesses while they restructure their loans and debts (Dollarhide, Brock, & Rathburn, 2021). In 2019, Price Waterhouse Coopers (PwC) has investigated the case and accused the company for overstating profits by $7.4 billion.

AFP. (2019, March 19). [Ex-Steinhoff International Executives in court] [Photograph]. Jacaranda Fm.

The arguments about Steinhoff’s primary exaggeration on their accounts first started in December 2017, years before PwC decide to investigate the case. This shocking news disappointed their investors who has supported the company since its start-up days, up to their growth of becoming a multinational retailer giant in the European furniture retailing industry. But PwC has explained that the firm has applied to fraud by recording irregular and non-true entries on their accounts which was at total of 6.5 billion euros during the years 2009 and 2017. How did this happen? The suspicions only started to rise in previous years from the occurring scandal because the company was continuously claiming ailing business; yet after these acquisitions, this business started to increase their profits and improve their situation. According to CNBC Africa, what many observers are concerned about is the highly confusing acquisitions, as well as the company's ability to buy distressed companies and (almost immediately) achieve better profitability once these companies are integrated into the group.

An inquiry that has been reported in March 2019 solicited by Steinhoff states that "a compact group of Steinhoff Group former executives and other non-Steinhoff executives, supported by a senior management executive, planned and applied various transactions over a number of years. Consequently, these actions inflated the profit and asset values of the Steinhoff Group." Steinhoff managers and accountants have seemingly got involved with a few transactions—some of them being false claims—with supposed non-involved third-parties, and attempted to make their profits and assets falsely appear much more in their accounts. According to the company’s annual report on 2017, after the fraud incident, the company has started to deal with liquidity problems as the share prices went to fall by 90%. They also had to deal with the withdrawal of undrawn facilities, closure of bank accounts, and the termination of the cash pooling arrangements between the European group subsidiaries. These incidents resulted in liquidity constraints and these constraints had a huge impact on the company, as the company started to sell its non-core businesses to gain liquidity, to sustain its operations, and to improve their look on the public eye by providing progress updates to the South African Parliament.

Du Toit, E. (2017, December 11). [Steinhoff International’s Stellenbosch offices] [Photograph] News 24.

After this incident, the company was charged of $3.6 million fine by the South Africa’s financial regulator. Additionally, since the company’s ordinary shares had immediately fell by 90% and drained by 66%, the company, as a speculation, repurchased 70.6 millions of ordinary shares representing 1.7% of its issued share capital to rise their prices and improve the constraints of liquidity. At the present time, according to Bloomberg News, Steinhoff has managed to stay afloat and settled vital deals with lenders which has provided the opportunity for the company to skip principal and interest debts equal to approximately 9 billion euros until December 2021. However, several outstanding legal claims endanger its ability to continue.

The case of the Steinhoff International Holdings N.V. is an example of the many cases of accounting fraud. The company used dishonest and illegal ways to maintain their businesses and falsely led their investors and customers to believe that the company was more profitable than it actually was. However, this situation caused even more damage to the company, causing them to lose the trust of their investors and customers, and eventually, having much more problems to fix for the following years.

References

CNBC Africa. (2018, June 28). Inside the Steinhoff saga, one of the biggest cases of corporate fraud in South African business history. CNBC Africa. http://www.cnbcafrica.com/2018/steinhoff-rise-fall/.

Dollarhide, M., Brock, T., & Rathburn, P. (2021, September 5). What Is Chapter 11 Bankruptcy? Investopedia. https://www.investopedia.com/terms/c/chapter11.asp.

England, A. (February 2016). Home Retail bid fits Steinhoff's bold strategy for expansion. Financial Times. https://www.ft.com/content/511e83b2-da34-11e5-a72f-1e7744c66818.

Kew, J. & Wild, F. (2019, September 12). Steinhoff Gets $3.6 Million Fine Following Accounts Scandal . Bloomberg Business. https://www.bloomberg.com/news/articles/2019-09-12/steinhoff-to-get-record-3-6-million-fine-even-after-discount.

Motsoeneng, T. (2018, June 29). Steinhoff takes $12 billion write down after accounting scandal. Reuters U.K. https://uk.reuters.com/article/us-steinhoff-intln-results/steinhoff-takes-12-billion-writedown-after-accounting-scandal-idUKKBN1JP2CP.

Motsoeneng, T. & Rumney, E. (n.d.). PwC Investigation Finds $7.4 Billion Accounting Fraud at Steinhoff, Company Says. Reuters Business News. https://www.reuters.com/article/us-steinhoff-intln-accounts/pwc-investigation-finds-74-billion-accounting-fraud-at-steinhoff-company-says-idUSKCN1QW2C2.

Nickolas, S. & Reeves, M. (2021, January 8). What Is Accounting Fraud? Investopedia. https://www.investopedia.com/ask/answers/032715/what-accounting-fraud.asp.

Primeaux, E. (January-February 2020). 5 Most Scandalous Fraud Cases in 2019. Fraud Magazine https://www.fraud-magazine.com/recap-article19.aspx?id=4295009428.

Pulsinelli, O. (2018, November 21). Mattress Firm emerges from Chapter 11 bankruptcy after less than 2 months. Houston Business Journal. https://www.bizjournals.com/houston/news/2018/11/21/mattress-firm-emerges-from-chapter-11-bankruptcy.html.

Reuters, B. A. (2016, November 12). Steinhoff returns to German roots. IOL. https://www.iol.co.za/business-report/companies/steinhoff-returns-to-german-roots-1956804T.

Reuters. (2016, August 8). South Africa's Steinhoff to Buy Mattress Firm for $3.8 Billion. Fortune. https://fortune.com/2016/08/08/steinhoff-south-africa-mattress-firm-acquire/.

Steinhoff International Holdings N.V. management Board. (2019). Steinhoff Annual Report for 2017. Steinhoff. http://www.steinhoffinternational.com/annual-reports-2017.php

Tiffany, K. & McCarty, D. (2018, October 5). Steinhoff's Mattress Firm Goes Bankrupt, Shuts Some Stores. Bloomberg Business. https://www.bloomberg.com/news/articles/2018-10-05/steinhoff-s-mattress-firm-files-for-bankruptcy-in-the-u-s

Image Resources

• AFP. (2019, March 19). [Ex Steinhoff International Executives in court] [Photograph] Jacaranda Fm. https://www.jacarandafm.com/news/news/jooste-named-pwcs-steinhoff-report/

• Du Toit, E. (2017, December 11). [Steinhoff International’s Stellenbosch offices] [Photograph] News 24. https://www.news24.com/citypress/voices/could-steinhoff-derail-sas-mild-economic-upswing-20171211

• Kew, J. (2020, July 6). [Steinhoff International Holdings Logo Breaking in the Middle] [Illustration] News 24. https://www.news24.com/fin24/companies/steinhoff-surges-on-signs-it-can-settle-11-billion-in-claims-20200706