Perhaps the most audacious swindle that Jooste appears to have pulled off was convincing his directors that he was part of a massive “buying group” that swung rebates for the company. Jooste would tell everyone that he was jetting off overseas to go and meet the other retailers who were part of this “TG Buying Group”.
As the story goes, they’d meet somewhere exotic in Europe, form a consensus bargaining position, then engage in brutal mouth-to-mouth combat with suppliers that would last for hours. In the end, Jooste said, they’d get “rebates” and “bonuses” that would ultimately benefit Steinhoff’s profit numbers. “He would tell us how there was blood on the floor after these negotiations. He talks of how they wrestled all night, and how hard it was,” one Steinhoff director recalls.
Only these “buying groups”, in all likelihood, never even existed. In the end, it was all just a sophisticated scheme to fiddle the accounts. By claiming “rebates, bonuses and marketing contributions” from this murky, poorly defined “buying group”, Steinhoff could reduce its “cost of sales”. In other words, the arrangement would lower Steinhoff’s expenses, and make its profit look much better. It was also, of course, convenient cover for any money that Jooste wanted to circulate through Steinhoff via those offbalance sheet vehicles run by Siegmar Schmidt and others in Europe.
“It would never have been easy for anyone, including the auditors, to trace this flow of money. Often cash would move through about three or four European companies, before it would re-emerge in Steinhoff’s books,” says a source close to the forensic investigation.
The question, of course, became how to present this in Steinhoff’s accounts without the auditors realising what was happening. Deloitte, it turns out, wasn’t so easy to dupe. In Steinhoff’s 2016 annual report, Deloitte had flagged “vendor allowances”, supposedly paid to Steinhoff as a member of the “buying group”, as a “key audit matter”. The auditors said that Steinhoff received various “vendor allowances”, including “buying group bonuses, rebates and marketing contributions”, which helped reduce Steinhoff’s cost of sales.
The problem, as you’ll have realised, is that often accounting is more art than science. In some cases, accounting rules give a lot of scope to a company’s top brass to insert their own “judgement calls” about certain values.
The value of property, for example, is often dictated by what a company’s CEO says, rather than by the accounting rules. This is all fine, until you encounter someone intent on cooking the books.
In the case of the “buying group”, Deloitte warned in its 2016 audit report that “significant management judgment is required to estimate the value of the significant vendor allowance receivable”. In other words, Deloitte had to rely quite heavily on Jooste’s word for where these “rebates” came from.
The auditors tried to do more: they said they had tested “management’s controls around the completeness and accuracy of the contractual arrangements in the accounting system” and “challenged management’s assumptions used in determining the unrealized vendor allowances through discussions with management”. They’d also taken “samples” of the contracts in respect of the buying group and “confirmed the related positions and terms with the vendors”.
But just because there was a contract doesn’t mean it was real. One person close to the forensic investigation says they have since discovered that if an auditor wanted a contract, it would magically appear, having apparently been created in Germany or in Stellenbosch. “If you, as an auditor, wanted a document – no problem. It would appear. Whatever you wanted, you could get it,” he says. “But just because it appeared doesn’t mean it was legitimate.”
In a development that would have washed over the heads of most of his audience, Steinhoff’s former finance czar, Ben la Grange, alluded to how the “buying group” would operate when he testified in Parliament in August 2018.
“We were all led to believe there’s an external buying group – it would take volumes of product, and someone would negotiate with suppliers to give additional rebates,” he said. But, according to La Grange, it turned out that this buying group was “non-existent”. “It looks like it was funded by loans from Steinhoff. It made a loan to the buying group and it then paid money to Steinhoff.”
La Grange, in particular, must be irked by this “buying group”. In August 2018, his contract with Steinhoff was suspended when investigators from PwC apparently came across a “fake buying group”. And among the contracts and invoices used to justify this move was an invoice that La Grange had sent to the buying group, from Steinhoff’s African arm.
What had happened, according to those close to La Grange, was that on a plane trip back to South Africa, Markus Jooste had told him he needed an invoice to give to the “buying group”. La Grange played it by the book:
OK, fine, but give me the contract. Jooste then produced a contract to justify this. La Grange then said: OK, now I need to see the cash that we got as a rebate. Again, Jooste made this happen. He managed to get one of his off-balance sheet companies – such as Talgarth – to hand over enough cash to make it believable. Satisfied, La Grange then gave him the invoice.
Nonetheless, the PwC investigators weren’t impressed. How could he not have seen through this? they asked. Perhaps. But, then, how come nobody saw through any of it?
* * *
When Ben La Grange finally appeared in Parliament in August 2018, he cut an impressive figure. Unlike the stubble-shaded, open-collared hipster in all the photographs prior to Steinhoff’s crash, La Grange appeared clean-shaven in a pinstriped suit and a blue-checked tie, speaking crisply with wide eyes. He talked of how he was “deeply saddened” by what had happened, but protested repeatedly that he’d been duped by Jooste, who hid information from him.
“There were certain relationships between him and third parties [that] were not disclosed to the company or me. Had I known that relationship was one whereby he controlled those parties, I would have accounted for it differently.” In other words, those “off-balance sheet” companies like Campion were hardly independent third parties.
“I thought it involved valid third parties. Now it seems these parties were in fact related to the previous CEO or, rather, were influenced by the previous CEO.”
The members of Parliament present oozed frustration. After all, if you can’t pin accounting shenanigans on the company’s financial supremo, who can you pin them on? Yet, at each turn, La Grange had a slick answer – even if not always an entirely compelling one. How was it that you missed this whole thing? he was asked. Were you too gullible? How is it after the Manager Magazin came out that you can still claim you were taken by surprise?
At the very least, surely the German police raid in 2015 worried you? “I got a lot of comfort from my verbal engagement with [Jooste],” said La Grange. “I also got comfort from the fact that even though [he] was being investigated, the reporting [by] the specialists was not going via [Jooste] but through the board.” In other words, La Grange bought Jooste’s spin, that it was all some giant conspiracy theory cooked up by the Austrian evil genius, Andreas Seifert. His answers “were plausible”, La Grange said.
Instead, La Grange skilfully shifted the focus to the auditors. He argued that had there been one set of auditors handling all of Steinhoff’s companies throughout the world, the outcome would have been a different story. As it was, Commerzial Treuhand (CT) audited the European companies, while Deloitte audited the overall holding company. Deloitte’s duty was to review CT’s working papers, however, and dig deeper if there was anything that didn’t make sense.
One parliamentarian asked La Grange why he then hadn’t suggested letting one auditor handle the entire thing.
“It was raised,” said La Grange – but Jooste shot it down. “We had an internal meeting with the head of the audit committee [Steve Booysen] and [Jooste] convinced [us] that in certain places, we should retain these small firms because of the language barriers and the relationships they had with the staff internally,” La Grange said.
So why did you step down if you weren’t responsible? he was asked.
“People were so angry at Steinhoff – if they were to see my face, they would want to hit it,” he said. La Grange testified that the con appeared to have begun years before. “So, this false profit was in the [accounts] way, way, way back. If you grow this profit every year, no person, no auditor, no analyst will, just by looking at the numbers, tell you here’s something that changes this year, [that this is] false income.
Remarkably, the parliamentarians bought his testimony as if it was a quaintly gift-wrapped parcel of soil that could be spirited into gold. None of them asked him what responsibility he himself took for signing off the Mickey Mouse financial statements since 2013.
Yunus Carrim, the veteran ANC politician who chaired the session, said La Grange provided the “best response we’ve got from Steinhoff as a whole”. He’d learnt more from La Grange in ten minutes than he’d got in months from Steinhoff, he said. La Grange, contrary to all expectations, skipped out of Parliament smelling of roses.
* This extract was taken from Steinheist. Markus Jooste, Steinhoff and SA’s biggest corporate fraud by Rob Rose, published by Tafelberg.