Investors want answers

Steinhoff shareholders keen to know why red flags were missed

Most South Africans who invested are poorer today due to Steinhoff’s business collapse and are asking for answers from fund managers.

But they say the business was so complicated‚ with audited financial statements appearing so reasonable‚ that it was easy for investors to miss red flags pointing to the alleged multibillion-dollar fraud.

Steinhoff’s share price dropped from R46.60 at close of trading on Tuesday last week to R12.74 a week later.

The company has reported a missing R100-billion in its European operations.

Fund manager Simon Brown said South African pension holders and investors were about R160-billion poorer since the crash.

As hundreds of funds would have lost money, it was difficult to put an exact figure on the losses.

But while furious South Africans are demanding answers from investors, a number of fund managers said that until Tuesday last week the numbers looked reasonable and that fraud by its nature was subtle.

The search for answers follows parliament’s standing committee on public accounts calling yesterday for the Hawks‚ SA Revenue Service‚ SA Reserve Bank and Independent Regulatory Board of Auditors to investigate Steinhoff’s implosion and financial losses.

Not everyone is buying the investors’ explanations‚ with some Steinhoff critics questioning what they called the company executives’ loose accounting practices.

Futuregrowth chief investment officer Andrew Canter said they had stopped lending money to Steinhoff about eight years ago.

He said they had avoided Steinhoff for multiple reasons‚ which included the business’s horrendous complexity‚ involving different brands and companies across different jurisdictions in multiple currencies.

There were also never-ending acquisitions, which rendered year-on-year analysis difficult and credit ratios unreliable.

“If we can’t understand the business‚ why would we lend to it?”

Canter said Futuregrowth was wary of the way Steinhoff’s management conducted business.

He said there were enough signs which evidently some had chosen to ignore.

“From what we know today‚ Steinhoff’s management appears to have been playing fast and loose with the tax laws and accounting practices.”

However, investor Karin Richards, who has looked back at the Steinhoff cash flow and ratios investors use when scrutinising businesses, said: “There is nothing here for me that says ‘Oh my, here is a big problem’.”

She said as a former auditor she had a better idea than average on how to window-dress accounts.

“But the numbers look reasonable.”

She said many funds would have lost their first inflation base gains in three years.

Fund manager Keith McLachlan pointed out how, when the Steinhoff saga came to light, people started claiming investors should have spotted the fraud. “Everyone knew it was fraud – after the fact,” he said.

“Intuitively‚ if one ignores the complexity of the Steinhoff business‚ if it was obviously fraud‚ not only would the stock market have seen it‚ but the auditors would have picked up on it long before it even saw the light of day.

“Nothing in the Steinhoff financial statements really screamed fraud or deep obfuscation of the numbers.

“At best‚ it perhaps looked like a business that was growing a bit too fast. At worst‚ it showed a business whose fundamentals weren’t particularly great. Fraud by its very nature is subtle.”

Wits governance expert Alex van den Heever said the question that needed to be asked was why some investment and equity loan companies saw the red flags but others did not.

“That some firms didn’t pull their funds despite other companies’ concerns points to a bit of an ‘old boys club’ operation, with people just accepting the word of others in the industry,” he said.

Brown said the financial industry needed introspection.

“Should we not at least as an industry that looks after people’s pensions have some introspection how we got this wrong?

“There are a lot of people saying I can’t see fraud‚ but I can’t see a quality business.

“Yet‚ we put R400-billion in pension money into this business.”

The R400-billion is when the business was R95 a share some time last year.

Financial analyst Stuart Theobald agreed that the numbers had appeared reasonable, but said people trusted Steinhoff main shareholder Cobus Wiese.

“People had committed faith in his abilities to manage complexity and stay on the right side of the law‚ while sometimes going close to the line,” he said.

Meanwhile, the Department of Trade and Industry and the Companies and Intellectual Property Commission plan to investigate allegations of non-compliance by Steinhoff with the Companies Act and its regulations.

The department said yesterday it had noted with concern allegations of governance failures and financial irregularities‚ which led to the resignation of Steinhoff chief executive Markus Jooste.

“The department will further suggest that the Independent Regulatory Board for Auditors also consider the role of auditors.” – TimesLive, BusinessLIVE

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