Warning signs of the next Steinhoff
While the full extent of the fraud remains unknown, Markus Jooste and his band of crooks at Steinhoff used accounting practices to dupe shareholders and bondholders by falsely inflating profits that were simply transactions within the Steinhoff Group, and inflating asset values.
Using this method, the group on paper looked as if it possessed inherent value, and the directors to keep their Ponzi scheme going kept issuing equity or bonds to ensure they remained cash flush. The billions lost represent the largest corporate scandal to engulf South Africa.
Steinhoff is, however, seemingly not an isolated case. Choppies, a low-cost retailer in the food services market, listed on the JSE and which had great success in neighbouring Botswana, brought their model to us targeting rural and mining towns and establishing approximately 88 stores by 2017.
The model seemed successful with the entity reporting a profit by 2017 and a 42% year on year increase in turnover in the highly competitive South African market. However, things have quickly unravelled since then.
Choppies has not been able to publish its results for the financial year ended 2018 and this has seen its share price plunge almost 80%, destroying shareholder value in the company. It has further been rocked by the departure of its chief financial officer.
Analysts have indicated that they may have issues with the way Choppies has accounted for its stock.
Tongaat-Hulett, a JSE-listed entity in the agriculture and agro-processing sector, is also in the spotlight having indicated that “certain practices have come to light following the ongoing strategic and financial review of the company”. Its share price has dropped to a 25-year low.
And massive pharmaceutical giant Aspen is also under scrutiny given the high levels of debt that the company has taken on, which has also seen its share price adversely affected.
There is no evidence at this stage to suggest that fraud has occurred at Choppies, Tongaat-Hulett or Aspen. However, the fact that there is a trend of challenges at companies listed on the JSE is disturbing.
In a country that is battling with low economic growth but also with endemic corruption, where we desperately need investment, this is not a good advertisement for South Africa.
At the heart of these issues seem to be accounting scandals. Accounting and financial reporting has massively evolved over the last 20 years with the International Accounting Standards Board (IASB) undertaking sweeping reforms to create accounting frameworks that provide accurate reporting for stakeholders.
This, however, comes with its own complexities as companies have used these frameworks for nefarious purposes to hide fraudulent practices.
Many accountants and auditors who work in practice would not have studied these new frameworks except through Continued Professional Development, which is not always the best measure of understanding and application. Newly qualified accountants who may have thorough knowledge of frameworks lack the guidance to implement these in a realistic environment.
South Africa needs to guard against ongoing corporate scandals if it wishes to attract the investment that it currently needs to stimulate growth.
There urgently needs to be a forum established of investors, regulators, auditors and accountants to address these challenges and to usher in policy that protects shareholders and the country.
We should not wait for the next Steinhoff – clearly the warning signs are there for everyone to see.
Carrim is chief executive of the National Youth Development Agency