The PwC report says the problem is down to a series of fictious or irregular transactions carried out by some senior executives.

PwC was called in at the end of 2017 after the company, which owns Poundland in the UK, said it had identified accounting issues. The firm’s report, which runs to over 3,000 pages with over 4,000 documents in appendices, has not been published in full but Steinhoff has released an overview.  This states that a small group of Steinhoff Group former executives and other non Steinhoff executives, led by a senior management executive, structured and implemented various transactions over a number of years which had the result of substantially inflating the profit and asset values of the Steinhoff group over an extended period.

The PwC investigation found a pattern of communication which shows the senior management executive instructing a small number of other Steinhoff executives to execute those instructions, often with the assistance of a small number of persons not employed by the Steinhoff group.

It identified fictitious and/or irregular transactions with parties said to be, and made to appear to be, third party entities independent of the Steinhoff group and its executives but which now appear to be closely related to and/or have strong indications of control by the same small group of people.

Fictitious and/or irregular income was, in many cases, created at an intermediary Steinhoff group holding company level and then allocated to underperforming Steinhoff operating entities as so called ‘contributions’ that took many different forms and either increased income or reduced expenses in those operating entities.

In most cases, the operating entities received cash for the contributions from another Steinhoff group or from non Steinhoff companies (funded by Steinhoff), resulting in intercompany loans and receivables.

PwC’s report says the transactions identified as being irregular are complex, involved many entities over a number of years and were supported by documents including legal documents and other professional opinions that, in many instances, were created after the fact and backdated.

Despite the extensive investigative work done by PwC and Steinhoff, there are still a number of unanswered questions, particularly in relation to the identification of the true nature of the counter-parties or the ultimate beneficiaries to various transactions.

These matters will be the subject of further investigation in order to assist potential recoveries for the group.

Corporate entities

The PwC report identifies three principal groups of corporate entities that were counterparties to the Steinhoff group in respect of the transactions that have been investigated. Other corporate entities have also been identified together with a finding that there was a practice of using similar entity names and changing company names resulting in confusion between entities.

The three principal groups are the Campion / Fulcrum Group, the Talgarth Group, and the TG Group, although the legal and/or beneficial ownership of these groups are in some cases currently unknown to the Steinhoff Group. 

The PwC investigation identifies transactions that result in profit and asset creation involving brands, intellectual property and know-how. The entities associated with these assets include the Talgarth Group (Talgarth and Triton) and Campion/Fulcrum Group (TG Group, GT Global Trademarks and SVF SA) and Tulett Holdings.

The income from these transactions was in many instances not paid by the so-called independent entities to the Steinhoff group, resulting in loans or other receivables owed to the Steinhoff Group that had little or no economic substance and, which, as such were never settled.

The non-recoverable receivables resulting from the fictitious or irregular income were subsequently either settled in set-off arrangements or reclassified into different assets. In a number of instances, the non-recoverable receivables were set-off using intergroup payments and by the assignment of debts. This had the effect that loans were moved between entities both in the Steinhoff group and around the purportedly independent entities.

In other instances, often through purportedly independent entities, the nonrecoverable receivables were reclassified into different classes of assets, for example, cash equivalents, increases in the value of fixed properties, increases in the value of trademarks or increases in the value of acquired goodwill. These reclassifications created the impression that the non-recoverable receivable had been settled and resulted in other asset values being inflated.

A table within the report indicates €323m of false transactions in 2009, rising to around €1bn in each of 2015, 2016 and 2017.  the total is put at €6.5bn.

The full financial impact of the findings in the PwC report is still being determined by the Steinhoff group. The financial effect will be reflected to the extent possible in the restated closing balances for FY 2015 which forms part of the restated FY 2016 accounts as well as the, to be published, FY 2017 and FY 2018 accounts.

Steinhoff’s overview of PwC’s forensic investigation

Report by Pat Sweet