Page 57 - The Economist20171214

The Economist December 16th 2017 Business 57
2 of S&P 500 companies have been audited Steinhoff’s biggest shareholder is
by the same firm foroverten years, accord- Christo Wiese, one of South Africa’s rich-
ing to Audit Analytics, a data provider. est men. One money manager wonders
Such cosiness jeopardises objectivity. how Mr Wiese could have been unaware
How this should be addressed, if at all, of accounting problems. But there are also
is unclear. Mr Doty reckons independence questions over the level of due diligence
ofauditorsmustbethepriority;ifthatisas- performed by some large financial firms.
sured, a lackofcompetition, in itself, is less Steinhoff was a top-15 stock by market val-
worrisome. In any case, the PCAOB has lit- ue on the Johannesburg Stock Exchange
tle scope to act, since the House of Repre- (JSE); many fund managers had it in their
sentatives voted in 2013 to ban mandatory portfolio. Investec, a bank, has warned
auditor rotation. In contrast, European reg- thatitcould lose up to 3% ofitsannual post-
ulators now require firms that have used tax profit, from trading in Steinhoff-linked
the same auditor for ten years to put their derivatives. Deloitte, Steinhoff’s auditor, is
contract out to tender. Nevertheless, the also under scrutiny over the scandal, al-
fourremain dominant. though the audit regulatory body has said
That concentration worries some. it may not have been in the wrong.
What happens if another scandal were to The biggest damage could be suffered
sink one of the firms, turning the Big Four by South African pensioners. The Govern-
intotheTitanicThree?Europeanregulators ment Employees Pension Fund (GEPF),
are now monitoring risks to audit firms; in with more than 1m members, is one of
Britain, audit-firm boards must include in- Steinhoff’s biggest shareholders, with a
dependentnon-executivedirectors.Steven stake ofaround 10%. The GEPFsaid itsstake
Harris, an outgoing PCAOB board member in Steinhoffamounted to 1% oftotal assets,
who helped to draft Sarbanes-Oxley, Steinhoff goes on special offer making the collapse in the share price “sig-
would like to see similarrules in America. nificant but manageable”.
That seems unlikely, because of a new gest corporate scandal that South Africa The South African parliament’s public-
risk to audit quality: a possible relaxation has ever seen. The company has said it is accounts committee is less phlegmatic: it
of American policy. Many bosses hope for reviewingthe “validityand recoverability” has called for Steinhoff to be investigated
looserrules. Thatwould fitwith the Trump of€6bn in non-South African assets. by an elite police unit called the Hawks.
administration’s deregulation agenda. Al- Steinhoff traces its roots to West Ger- The JSEand South Africa’scorporate and fi-
though Sarbanes-Oxley has not ranked many, where it found a niche sourcing nancial regulators have all said they will
highly on the list of rule books to be cheap furniture from the communist-ruled investigate whether Steinhoff breached
burned, Mr Doty’s successor, William east. The company merged with a South regulations. German investigators, mean-
Duhnke, a former Republican Senate aide, African firm in 1998 and is based in Stellen- while, have been lookingatthe company’s
is thought to favour deregulation. Two of bosch, near Cape Town—a Winelands accounting practices since shortly before
the fourothernew board members are for- town that is home to some of the wealthi- its listingin Frankfurt in December2015.
mer Big Four auditors. Reassuringly, the est Afrikaner businessmen. It recently pur- Steinhoff’s share price has recovered
SEC’s chair, Jay Clayton, has said he is not sued a debt-fuelled expansion, buying fur- slightly, but is expected to be volatile until
looking for radical change. He would be niture and homeware chains, from more is known about the firm’s liquidity
wise to consider how much progress has Conforama in France and Mattress Firm in position and the nature of the accounting
been made since the dark days of Enron America to Poundland in Britain, becom- “irregularities”. Steinhoff has appointed
and WorldCom before consigning audit ingEurope’ssecond-largestfurniture retail- Moelis& Company, an investmentbank, to
regulation to the flames. 7 er after IKEA. It has 130,000 employees at advise on talks with lenders, and Alix-
12,000 outlets in over30 countries. Partners, a consultancy, to help with “li-
Between June 2014 and September2016 quidity management and operational
South Africa’s Steinhoff Steinhoff expanded its assets by145% as its measures”. An annual meeting with lend-
acquisition spree intensified. This splurge ers in London has been postponed to De-
Broken furniture added to its financial complexity and cember 19th. “We’re all in the dark,” says
might have helped it to hide bad news. A David Shapiro ofSasfin Securities. “Specu-
recent report by Viceroy Research, which lating whether there is value or not—
hunts for stocks to sell short, or bet against, there’s no point, it’s too early.” 7
accuses Steinhoff of using off-balance-
JOHANNESBURG sheet vehicles to inflate profits and mask
An accounting scandal sends a losses. Viceroy’s analysts concluded that In for a penny, in for a pound
high-flying retail chain plummeting
these vehicles were controlled by asso- Steinhoff International share price
HE scale is staggering, even by the stan- ciates and former executives of Steinhoff, South African rand Mattress
Tdards of scandal-worn South Africa. and that they engaged in transactions with Acquisitions Pepkor Firm Poundland
100
Steinhoff, a retailer that is one of the coun- Steinhoffthat the firm failed to disclose.
try’s best-known companies, admitted to They also allege that Steinhoff made 80
“accounting irregularities” on December loans to these entities, allowing it to book
6th when it was due to publish year-end fi- interest revenue that was never likely to be 60
nancial statements. Its chief executive, translated into cash. This, they argue, went 40
Markus Jooste, resigned, and the firm an- hand in hand with “round-tripping”, in
nounced an internal investigation byPwC. which large blocks of business were 20
Within days Steinhoff had lost €10.7bn moved off the books and only the profit-
($12.7bn) in market value as its share price able bits were then brought back on. The 2013 14 15 16 17 0
fell by more than 80% (see chart). Much is firm has not commented in detail on the Source: Thomson Reuters
unclear, but it is shaping up to be the big- analysis, though it has denied impropriety.