The Steinhoff case raises important questions about our financial system as a whole – and the possible consequences if other companies were subjected to the same level of scrutiny, says James-Brent Styan, author of a new book on the Steinhoff saga.
Steinhoff en die Stellenbosse Boys, launched earlier in July, traces the history of Steinhoff and includes interviews with insiders as well as glimpses into confidential documents.
Addressing the Press Club in Cape Town on Monday, Styan – a trained accountant, former journalist and current communications officer in the Western Cape Provincial Government – suggested the company’s collapse might be part of a systemic problem, meaning even major issues can be easily obscured.
Styan said there had been “obvious red flags” ahead of Steinhoff’s collapse, but that “hardly anyone stood up and said ‘There is a problem here’”.
However, he added, even eight months later it was not entirely clear what had gone wrong at Steinhoff, and the facts were likely to still take some time to emerge.
This, he said, was an indicator that it was necessary to question the level of “trust we have in the financial system as a whole”.
This was a global problem, he said, with “real repercussions”.
Styan completed the book in three months, and noted that it was not intended to be a “forensic audit”.
“I don’t want to take over the work that’s to come,” he said.
However, his research did raise several red flags that he believes should have the public questioning the trust with which they invest – and how any problems will be managed.
One warning sign Styan noted was the effective tax rate paid by Steinhoff. Corporate Income Tax in South Africa is payable at a rate of 28%, but according to Styan, for several years, Steinhoff was paying an effective tax rate of 8% to 12% and “nobody asked any questions”.
This did not necessarily point to illegal activity, Styan said, but this in itself raised the question of what was possible to do legally. “Maybe it’s all legal – that will still come out,” he said.
However, he added, he did include a chapter on tax avoidance in the book, which had elicited angry responses from a number of corporates. (Tax avoidance, unlike tax evasion, is the legal exploitation of the tax system to reduce tax liabilities, though in ways not intended by government. It may involve transactions specifically contrived for a tax advantage.)
A second red flag, said Styan, was a 2015 raid on the Steinhoff offices in Germany in connection with tax investigations, which came ahead of the company’s Frankfurt Stock Exchange (FSE) listing.
A probe for possible accounting fraud is ongoing.
A third red flag was the purchase of Mattress Firm in 2016, said Styan.
Steinhoff purchased Mattress Firm at $64 a share in 2016, when it had been trading at $29 a share.
This prompted Fraser Perring, a former British social worker who founded Viceroy Research, to begin conducting research into Steinhoff’s financials, which was made public in 2017.
According to Perring, “Either the market was undervaluing it by 100%, or Steinhoff was overpaying by 100. And if it’s too good to be true, something is up.”
A fourth red flag – though this does is not always a danger sign in isolation – was “jumping around so you can’t compare” between focus areas, said Styan.
“If one day you are selling shoes, and the next day you are selling more shoes, it is clear there is growth. But if one day you are selling shoes, and the next day you are selling something else, monitoring becomes more difficult,” he said.
Diversification in itself is not a problem, he said, but in context of other warning signs, a little too much can signal obfuscation.
A further question raised by the Steinhoff debacle is how far we expect non-executive directors to go to detect problems in their companies, Styan said.
This question is not intended to absolve wrongdoing, he added.
In Steinhoff’s case, he said, the board had a two-tier structure: a management board and supervisory board. The management board reported back to the supervisory board, which raises the question of disclosure, as well as reach.
If reputable firms deliver signed-off reports indicating no evidence of wrongdoing to non-executive board members, this raises queries around involvement, disclosure, and what constitutes due diligence for boards and investors, Styan said.
Lastly, said Styan, the Steinhoff case – and other large investigations like VBS Mutual Bank – raises questions of capacity to investigate and prosecute financial crimes.
SARS has been tightening the screws on tax dodgers, while cases like VBS and Steinhoff have thrown the spotlight on large-scale financial crime.
Styan believes Steinhoff’s tumble did not occur in isolation.
“How much of our financial system is a deck of cards that can come tumbling down at any minute?” Styan asked.
Should a major clean-up ensue, he argued, it was unclear whether there would be capacity to follow through.
In addition to the “multitude” of investigations – financial and otherwise – facing the Hawks, Styan argued that state prosecutors would face a “huge imbalance” of capacity against billionaires with large legal teams and a wide range of resources at their disposal.