03 November 2020
“Fraud is a worldwide phenomenon that ruins the profitability, reputability, and legitimacy of organizations where it occurs” (Rossouw, 2000), states G. J. Rossouw Business Ethics Quarterly. Rossouw also claims that fraud benefits the perpetrator financially while simultaneously causing financial harm to others (Rossouw, 2000). An excellent, recent example of fraud is the Steinhoff International Holdings N.V. case. Steinhoff is a global investment company which includes the manufacturing and retail of furniture, household goods and clothing (Steinhoff International, 2020). It was founded in 1963 by Bruno Steinhoff when he began buying low-cost furniture from East Germany and bringing it to West Germany to sell to wealthier clients (Naudé et al., 2018). The Company expanded in the 1970s to source furniture from other countries in Europe, marking the start of Steinhoff operating across national borders (Naudé et al., 2018). When apartheid ended in South Africa in the 1990s Steinhoff invested there and by 1998, Steinhoff Europe and Steinhoff Africa were consolidated, and Steinhoff International Holdings was listed on the Johannesburg Stock exchange. Steinhoff became a large furniture manufacturer quickly and gained the reputation of producing high-quality furniture at an affordable price, partly by sourcing from China (Naudé et al., 2018). By 2013, Steinhoff was in complete control of its sourcing, distribution, logistics, and retail and was operating in a diverse set of industries through its ownership of many businesses (Naudé et al., 2018). Steinhoff is headquartered in South Africa, although registered in the Netherlands, but it mostly operates in Europe (Naudé et al., 2018).
Steinhoff always had an intense culture of growth and pushed to raise substantial amounts of capital through sales. Markus Jooste, former CEO of Steinhoff, fit in perfectly to this environment. Jooste was often described as a charismatic leader (Naudé et al., 2018) known for his aggressive managing style, which no one challenged because he was good at his job (Styan, 2018). In December 2017, Jooste suddenly resigned as CEO, causing Steinhoff’s stock price to drop by more than ninety percent with a R200 billion loss in market capitalization (Mchunu, 2019). Jooste’s resignation shook the corporate governance model at Steinhoff and caused the Company to struggle with financial loss and litigation. Legal prosecution for Jooste and other former Steinhoff executives followed suit.
In 2007, warning signs arose about the finances of Steinhoff when an analyst at JPMorgan Chase & Co released a research report questioning Steinhoff’s accounts and claiming that they lacked information regarding sources of revenue with too much focus on tax breaks rather than the business itself (Styan, 2018). Steinhoff acknowledged its low tax rate and attributed it to its complex structure of operating in many countries with different tax rates (Styan, 2018). Steinhoff was questioned again in 2015 when German authorities raided Steinhoff’s properties and seized documents and data to investigate further (Styan, 2018). German authorities were suspicious of Steinhoff’s balance sheets and were investigating if sales were amplified (Styan, 2018). Regardless of these investigations, Steinhoff was listed on the Frankfurt Stock Exchange in December. Jooste acknowledged these investigations to prospective investors and assured them that their balance sheets were accurate and this behavior was normal in companies which operated across different tax jurisdictions (Styan, 2018). In September 2017, information was leaked about potentially fraudulent behavior taking place at Steinhoff (Naudé et al., 2018). Due to this information, Deloitte, Steinhoff’s auditors, denied signing off the 2017 financial statements. From September until December 2017, these claims were investigated, and Jooste was asked to provide relevant information which he travelled to collect (Naudé et al., 2018). Instead of bringing it to the meeting scheduled on 4 December, he did not show up, resigned from his position as CEO, and sent a message to senior employees at Steinhoff that he had made ‘big mistakes’ (Rossouw and Styan, 2018). On 5 December, Steinhoff’s share price dropped from R45.65 to R6 before declining further (Rossouw and Styan, 2018). Steinhoff’s board hired PricewaterhouseCoopers (PwC) to begin a forensic investigation (Rossouw and Styan, 2018).
Details of the Crime
PwC investigated for fourteen months and found that a small group of Steinhoff executives and non Steinhoff executives, under the leadership of a senior management executive, had completed transactions which inflated the profit and value of Steinhoff assets (Steinhoff International, 2020). There were groups involved which appeared to be independent of Steinhoff, but were actually related or controlled by Steinhoff (Steinhoff International, 2020). Steinhoff businesses were used to either make it seem that income had increased, or expenses had been reduced using intercompany loans (Steinhoff International, 2020).
The main perpetrator in this case is Markus Jooste, but others were also found to have known about the fraud. Jooste has been very clear since he resigned that his resignation was a result of the Steinhoff board disagreeing with his idea to fire Deloitte and release unaudited financials for 2017 and that there were no financial irregularities which he was aware of while CEO (de Villiers, 2018). In contrast, La Grange, former CFO, blamed Jooste and confirmed the allegations of inflated profits and assets (de Villiers, 2018). Investigations into the fraud are ongoing. In addition to committing fraud, Jooste is also accused of insider trading with the Financial Sector Conduct Authority in South Africa fining him R123 million for breaching the Financial Markets Act (eNCA, 2020). He sent a text message to three people in his inner circle that the share price of Steinhoff stock would soon plummet, and they acted on this information, so they are also being fined.
Due to the fraud committed by these high-level executives, especially Jooste, Steinhoff has been trying to restructure and repair its finances while undergoing approximately ninety legal proceedings against the Company (Steinhoff International Holdings N.V., 2020). In order to avoid liquidation of the Company, it has published a global settlement scheme which is currently being considered by its claimants (Steinhoff International Holdings N.V., 2020). This plan will satisfy market purchase and contractual claimants, if approved (Steinhoff International Holdings N.V., 2020).
Analysis of the case
This case has had a massive effect on South Africans. The Public Investment Cooperation (PIC), Africa’s largest pension fund, manages the assets of South Africa’s Government Employees Pension Fund (GEPF) (Mdluli, 2019). At the end of November 2017, before Steinhoff’s stock crashed, GEPF held 428 million shares in Steinhoff which had a market value of R24.1 billion (Mdluli, 2019). When Steinhoff shares crashed, the GEPF lost an estimated amount of R20 billion and has filed a class action lawsuit against Steinhoff to reclaim around R17 billion of these funds (Mdluli, 2019). This left many South Africans without pension funds that they had been working for. Also, this case is taking a long time to finish which is showing investors that businessmen in South Africa are able to act in an unethical manner and are not held accountable immediately (Mdluli, 2019).
The major issue with this case, and potentially why fraud occurred in the first place, is because of the Steinhoff’s two-tier board system. The first tier is the Supervisory Board which the second tier, the Management Board, reports and answers to (Rossouw and Styan, 2018). The Management Board included three executive managers: Markus Jooste, CEO, Parrie van der Merme, COO, and Ben la Grange, CFO (Rossouw and Styan, 2018). The problem with this system is that there are not enough checks and balances in place to make sure that the Management Board is reporting everything to the Supervisory Board. This system gave too much power to the Management Board which presented the opportunity for these executives to commit fraud.
Jooste became successful at a young age and had the type of personality where he always wanted more (Styan, 2018). Motivated by his greed, he had the opportunity to commit fraud because he was a trustworthy member of the Company, had knowledge of how the Company worked, and had access to the assets of the Company, which are common indicators of fraud (Rossouw, 2000). Although Jooste did apologize for his actions, he did so in a casual message to a small group of people when he resigned which clearly shows that he did not feel all that guilty for what he had done, another indicator of fraud (Rossouw, 2000). Jooste should never have been given so much power and there should have been more checks and balances in the governance of Steinhoff so that Jooste never had the opportunity to make poor decisions. Jooste was further encouraged to commit fraud with the fast-paced culture of the Company being heavily focused on success.
Another issue that Steinhoff has with its governance is how complicated it is. In 2016, Steinhoff was selling its goods in more than thirty-two countries under forty different brands (Naudé et al., 2018). This complex structure lends itself to fraud because of the different laws and people involved in order for the Company to run. Even when it came to Steinhoff’s taxes, using the lowest tax price they could was immoral, but it was not illegal because the Company operated in different countries. In order to fix this structure, Steinhoff needs to focus its operations in fewer countries so that fraud is detected earlier if it were to unfortunately ever happen again.
What happened to Steinhoff is an unfortunate example of the negative aspects of rapid growth and success coupled with individual greed. In this case, fraud was difficult to detect and, once it was detected, there was nothing to be done to counteract the negative outcomes. Large corporations can do so much good for society by helping the economy and providing products and services which people need, but they also need to be held accountable and have checks and balances in place so they do not spiral out of control by focusing purely on success and profits.
- de Villiers, J., 2018. Jooste Vs La Grange Vs Wiese: Who Is Telling The Truth About Steinhoff?. [online] Business Insider SA. Available at: https://www.businessinsider.co.za/heres-how-steinhoffs-three-main-players-differ-on-what-caused-its-meltdown-2018-9 [Accessed 3 November 2020].
- eNCA, 2020. Former Steinhoff CEO’s R123-Million Sms. Available at: https://www.youtube.com/watch?v=PVVyhRfBkVg [Accessed 3 November 2020].
- Forbes. 2020. Steinhoff International. [online] Available at: https://www.forbes.com/companies/steinhoff-international/?sh=a1ecd5756727 [Accessed 3 November 2020].
- Mchunu, S., 2019. Markus Jooste Squares Up To Steinhoff Group. [online] IOL. Available at: https://www.iol.co.za/business-report/companies/markus-jooste-squares-up-to-steinhoff-group-28713630 [Accessed 3 November 2020].
- Mdluli, M., 2019. Slow Progress On Steinhoff Sends Negative Message To Investors About SA. [online] news24.com. Available at: https://www.news24.com/fin24/opinion/slow-progress-on-steinhoff-sends-negative-message-to-investors-about-sa-20190209-2 [Accessed 3 November 2020].
- Naudé, P., Hamilton, B., Ungerer, M., Malan, D. and de Klerk, M., 2018. Business Perspectives On The Steinhoff Saga. University of Stellenbosch Business School.
- Rossouw, G., 2000. Defining and Understanding Fraud: A South African Case Study. Business Ethics Quarterly, 10(4), pp.885-895.
- Rossouw, J. and Styan, J., 2018. Steinhoff Collapse: a failure of Corporate Governance. International Review of Applied Economics, 33(1), pp.163-170.
- Steinhoff International, 2020. Overview Of Forensic Investigation. [online] Steinhoff International. Available at:https://www.steinhoffinternational.com/downloads/2019/overview-of-forensic-investigation.pdf [Accessed 3 November 2020].
- Steinhoff International Holdings N.V., 2020. Universe Settlement Press Release. [online] Available at: https://www.steinhoffinternational.com/downloads/2020/litigation_claims/Universe_Settlement_Press_Release_2020.pdf [Accessed 3 November 2020].
- Styan, J., 2018. Steinhoff Inside SA’s Biggest Corporate Crash. LAPA Uitgewers.
- van Tilburg, L., 2019. Parliament Keen To See Jooste In Orange Overalls As 8 Execs Implicated In Steinhoff Fraud. [online] BizNews. Available at: https://www.biznews.com/global-citizen/2019/03/19/steinhoff-jooste-8-execs-fraud-parliament [Accessed 3 November 2020].