Steve Booysen, head of the Steinhoff Group’s audit committee, received the news he feared most at 09:45 on Monday 4 December 2017. It came in the form of an SMS from Markus Jooste, Steinhoff’s CEO. Booysen would later explain to parliament that he suspected something was wrong as early as September 2017.The text message confirmed his greatest fear: there was indeed something wrong with Steinhoff ’s books. At best, it was accounting irregularities; at worst, it was fraud. Booysen, formerly Absa’s group chief executive, was a member of Steinhoff ’s supervisory board. He and the audit committee had met with the auditors that day to finalise the statements. They called Jooste to come and explain. Surely there was a good explanation for the suspicious transactions and strange accounting entries? Surely Jooste could provide answers?But Jooste never arrived. Over the course of the day he sent text messages to Booysen. It is not known what exactly was in the messages, but it confirmed that the nightmare was real and that there was no way out. The bomb exploded.That evening at 19:45, a German lawyer went to the board chairperson, Christo Wiese, and said that Jooste was tendering his resignation. In later interviews Wiese said the resignation was totally unexpected. Jooste also sent a letter to Steinhoff’s employees via email that evening. In the letter, he acknowledged that he had made “big mistakes”.This is the complete letter, translated from Afrikaans:Hi there,Firstly I would like to apologise for all the bad publicity I caused the Steinhoff company the last couple of months. Now I have caused the company further damage by not being able to finalise the year-end audited numbers. I made some big mistakes and have now caused financial loss to many innocent people. It is time for me to move on and accept the consequences of my behaviour like a man.Sorry that I have disappointed all of you and I never meant to cause any of you any harm. Please continue to live the Steinhoff dream and I must make it very clear that none of Danie (Van der Merwe, COO), Ben (la Grange, CFO), Stehan (Grobler, executive Group Treasury and Financing) and Mariza (Nel, Corporate Services, IT and HR) had anything to do with any of my mistakes.I enjoyed working with you and wish you all the best for the future,Best regardsMarkusHe phoned Jooste the next morning, Tuesday 5 December, Wiese said in a radio interview with Bruce Whitfield in April 2018: “I said whatever happened, happened, but could he please come in and help the Steinhoff people to get the accounts sorted out. He (Jooste) undertook to do so. But I was maybe naive. Clearly, he got other legal advice. He did not show up and until today I have not heard from him again.”Steinhoff’s two boardsSteinhoff essentially has two boards. The group follows the Dutch corporate governance code, and has a supervisory board and an executive board. As far as can be determined, Steinhoff is the only company in South Africa with this unique structure.Professor Owen Skae, the director of Rhodes University’s business school, says the idea is that the executive board must report to the supervisory board, which in turn is accountable to the shareholders:“The two-tier structure is preferred in large parts of Western Europe, but countries such as America, England and South Africa prefer the single-board model.”The advantage of a single board is that all directors sit together, with two or three executive directors directly involved in the company’s operations. The rest of the board usually consists of non-executive directors, of whom most are independent. “On such a single board the flow of information is just better, and the executive directors who are involved in the company can be questioned with the entire board present. It also means more rapid decision making,” says Skae.The disadvantage of a single board is that the independence of the board members is more easily compromised, which in turn weakens their oversight role. However, the risk with a two-tier board system is the possibility that the executive board does not report properly to the supervisory board and in essence hijacks the company. By 2016, Steinhoff ’s executive board consisted of three members: Markus Jooste (CEO), Ben la Grange (CFO) and Danie van der Merwe (COO). None of the three served on the supervisory board.In 2016, the members of the supervisory board were: Christo Wiese (chairperson), Steve Booysen (head of the audit committee), Claas Daun, Thierry Guibert, Len Konar (deputy chairperson), Bruno Steinhoff, Angela Krüger-Steinhoff, Theunie Lategan, Heather Sonn, Johan van Zyl and Jacob Wiese (Christo Wiese’s son). The board members each earn about €100 000 per annum (about R1,4 million), with the chairperson receiving three times as much.“There were four board meetings per year, which usually lasted about three hours,” said an informed source. Members also received additional compensation for each board committee they served on. For example, the chairperson of the remuneration committee earned an additional €30 000 (±R420 000) per annum.MondayMonday 4 December was the date the final annual financial statements of the Steinhoff Group for the 2017 financial year had to be signed off by the auditors. Two days later, on Wednesday, the group’s annual results had to be announced and distributed around the world. The financial notices had been issued on SENS months before, and a listed company does not dare miss such an important date. This would harm investor confidence. However, Steinhoff ’s long-time auditors, Deloitte, were taking their time. In the past Deloitte had never taken so long to finalise the statements. But, when the auditors didn’t receive the information they asked for, they refused to sign off Steinhoff ’s statements on the Monday.In terms of regulations, Steinhoff had to issue a SENS statement to inform the market about the 2017 results and the associated auditing process. In the statement, the supervisory board confirmed that the group’s consolidated statements would be issued on 6 December 2017 as promised, but as unaudited statements – essentially, statements prepared by Steinhoff ’s own bookkeepers but not verified by an audit. The SENS statement continued: “With regard to the audit of the statements for the year ended 30 September 2017, not yet completed their review of certain matters and circumstances. These matters and circumstances were raised by the criminal and tax investigations in Germany (as reported previously).” Steinhoff said that no additional information had been obtained to change the group’s existing views on the investigation: “The Company expects to publish the audited 2017 consolidated financial statements before 31 January 2018.”But these pretty explanations really meant nothing . . . and so the snowball began to roll.WednesdayOn Wednesday 6 December Steinhoff had to issue another SENS statement. “New information has come to light today which relates to accounting irregularities requiring further investigation,” Steinhoff’s supervisory board announced.The board announced that it had, in conjunction with the group’s auditors, approached another audit firm, PwC (Pricewaterhouse Coopers).“Markus Jooste, CEO of Steinhoff, has today tendered his resignation with immediate effect and the board has accepted the resignation,” the announcement continued. Wiese, chairman of the supervisory board, was appointed as interim executive chairman of the group in order to “assist with managing the group’s various retail interests around the world”. The supervisory board sought to reassure shareholders that Steinhoff was still stable and profitable.The announcement sent shockwaves through the business community, but the knockout blow was still to come. It came in the form of a research report issued by a New York investor group just a few hours after the news of Jooste’s resignation made the headlines. The group’s name is Viceroy Research.ViceroyViceroy Research is a small, anonymous investment firm consisting of three men, who describe themselves as “protectors of shareholders”. Viceroy became world-famous overnight with the release of a damning report that revealed various irregularities in Steinhoff ’s financial statements.The Viceroy report was issued on Wednesday 6 December, the same day Steinhoff confirmed it was investigating accounting irregularities. The 37-page report detailed how and where Steinhoff apparently contravened the rules. All that was known about Viceroy at that stage was that they had a basic website created on the popular, low-cost WordPress platform, and that they were based in the US.The report on Steinhoff spread fast. That week, the Steinhoff share price dropped like mercury on a cold day. From R50,25 on Monday 4 December, the closing price fell to R45,65 (Tuesday), R17,61 (Wednesday), R10,00 (Thursday) and hit R6,00 on Friday. There was wide speculation about the identities of the individuals behind Viceroy Research. Observers surmised that they were specialist short sellers who would make a lot of money if Steinhoff ’s share price crashed.Short sellers are speculators who pay to “borrow” shares from shareholders. This is a risky practice and can either make such speculators rich or ruin them financially if the price unexpectedly rises. Shorting, a legal market practice, is also known as “bear speculation”.Simon Brown of Just One Lap says that dedicated short sellers elsewhere in the world are often more aggressive than their South African counterparts. It later emerged that Viceroy Research is a regular bear.On its website Viceroy describes itself as a group of individuals which sees the world differently. Under the tab “Contact us” the group states: “Questions, Information, Doomsday plans?” Under another tab is this bit of trivia: “At the peak of tulip mania, in March 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman.”The Viceroy report contained information that hit the Steinhoff share price like a ton of bricks. Viceroy claimed there were three companies that were used to do business with Steinhoff but did not appear on the group’s balance sheet. The three companies were Campion, Southern View and Genesis. In turn, these companies were controlled by existing and former Steinhoff executives, including a previous group CFO.Viceroy maintained that most of Steinhoff ’s investments and loans were “used to finance the companies to take over Steinhoff subsidiaries that suffered losses”. According to Viceroy, these companies were therefore used to obscure losses and inflate earnings. Viceroy initially remained anonymous while the storm raged. In response to inquiries, the group told the Bloomberg news service: “We believe the research should do the talking.”Viceroy described their work as “investigative research” and said they use simple instruments such as Gmail and WordPress for their site because Viceroy is not “a marketing machine. We are a small team of professionals.” They acknowledged that their focus was to research companies where “signs of accounting irregularities and possible fraud are found”.Steinhoff had not been on Viceroy’s radar at all until the group decided to acquire Mattress Firm at $64 a share – more than double the closing price on the day the deal was announced. Viceroy told Business Day that it had essentially started looking into Steinhoff from “maybe mid-year (2017)”: “It was a bit like War and Peace. This was like a big novel, there were a lot of names, there were related-party transactions, even down to major transactions like Pepkor. There were many signs that something was wrong.”After the publication of the Viceroy report, Steinhoff ’s share price continued to fall and the rating agency Moody’s downgraded Steinhoff ’s credit rating to junk status. The Steinhoff collapse was not limited to South Africa. The financial shockwave was felt around the globe. In America, four of the largest American investment banks, JPMorgan Chase, Bank of America, Citigroup and Goldman Sachs, announced they jointly had more than $1 billion of loans linked to Steinhoff. The embattled group owed a total of $22 billion to international banks.Under increasing pressure, Fraser Perring, Viceroy’s leader, eventually lifted his head above the parapet and agreed to an interview with Bloomberg. Perring is a former social worker who started shorting stocks while working as a child protection officer in Lincolnshire, England. At one stage, he decided to change careers and started to speculate on the stock exchange on a full-time basis. He made more money in his first three months as a full-time investor than he had in 10 years as a social worker.Perring founded Viceroy Research with two colleagues, Gabriel Bernarde and Aidan Lau, both Australians. The trio began collaborating in 2016 after Perring learned that the two Australians were researching the same company. Viceroy Research announced that they were indeed short sellers.Viceroy initially considered Mattress Firm as a share to short and was therefore shocked to see Steinhoff’s bid price: “Either the market was undervaluing it by 100%, or Steinhoff was overpaying by 100%,” Perring said in the Bloomberg interview. “And if it’s too good to be true, something is up.” Steinhoff’s $64 a share for Mattress Firm was 115% more than the share price the day before the takeover bid was announced.Just before Jooste’s resignation, Viceroy’s research report on Steinhoff was close to completion and the firm shared its report on social media a few hours after the resignation.If you don’t understand . . . don’t investA big question mark hangs over the actions of the investment and financial community in South Africa. The industry consists of highly qualified and specialised people who are paid generously to look after other people’s money and pensions. How did so many of them completely miss the Steinhoff signs? Steinhoff ’s collapse was a severe knock, especially for the pension funds that had invested heavily in its shares.Wayne McCurrie, a senior asset manager at Ashburton Investments, told CNBC Africa that the Steinhoff debacle is the biggest corporate scandal in South Africa to date: “It’s the biggest one I know of, that’s for sure. Regardless of what everyone is speculating about, all of us actually know very little. The minimum facts are available to us. The only thing we are totally sure of is that there were definitely accounting irregularities. It is not alleged, it’s a fact.”Seeiso Matlanyane, an analyst at Prescient Investment, said Steinhoff was a darling company, a top-40 share: “We saw it on the Springbok jersey. Everyone assumed that nothing like this could ever happen to the system. If you weren’t on the lookout for the worst possible scenario, which this is, it was easy to overlook.”The golden thread that runs through many of the explanations is the fact that Steinhoff’s books were so complex to analyse. Allied to this was the steady rise in the group’s share price over many years. Perhaps it would have helped if asset managers took heed of the counsel of Warren Buffett, the “Sage of Omaha” and surely the world’s most famous investor. One of Buffett’s rules for investing: never invest in something you don’t understand.Commentators’ first responseKieno Kammies, the energetic host of the breakfast programme on CapeTalk in Cape Town, as always did not hold back and ripped into the Steinhoff board and Jooste two days after Jooste’s resignation: “Read Steinhoff ’s code of conduct. What a joke! Listen to this: ‘The group must comply with all of the legal obligations in each country in which it conducts its business. The group also depends on the trust of its customers and other third parties that must be safeguarded at all times by acting honestly and with integrity.’ This is bullshit on paper.”Kammies’ guest was Magda Wierzycka, the well-known CEO of asset management group Sygnia. In 2017, Wierzycka emerged as a fearless campaigner for justice by firing auditors KPMG because of their involvement with the notorious Gupta family’s operations in South Africa. In an interview with Hanlie Retief, published in Rapport in September 2017, Wierzycka is described as “a hurricane striking an island.” On the KPMG debacle, she said: “I realised with shock: damn it, my auditors are involved with the Guptas.”The morning after Jooste’s resignation, Wierzycka had this to say about Steinhoff: “How does it affect you? Most asset managers held Steinhoff as an investment in their portfolios. The largest investor was the Government Employees Pension Fund (GEPF), whose assets are managed by the Public Investment Corporation (PIC). This fund lost R14 billion.”Wierzycka described how she visited the Steinhoff website on the day the bombshell hit and began analysing the figures: “I read a horror story of a company that borrowed money at an incredible pace and acquired companies all over the world in a frenzied manner. Anyone who knows how long it takes to buy a single company and integrate it with an existing business, knows it cannot be.”Wierzycka examined the group’s income statement and balance sheet: “It boils down to the following: profits were obscured in order not to pay tax. It appears that they grossly overstated their revenue line and created fake earnings to lure investors into buying shares.”Wierzycka did not spare the financial industry: “This really is a big scandal. The very first thing I was taught in the business world is: remember, management lies. Be sceptical, be suspicious. Question everything. Look at every number.” (Warren Buffett once said there are only two numbers in a set of financial statements that you can trust: the dividend and the page number.)Wierzycka continued: “Things had gone very wrong here (at Steinhoff). If you were an analyst working for one of the large asset management companies, surely one red flag after another should have popped up. And you should never have gone anywhere near that company, and yet so many big asset managers did. Did people invest in this company because the share price kept going up? Or was it the charismatic leadership at the top?” Wierzycka asked.Then she lit into Wiese and the directors: “They knew. I mean, they were on the board of directors. Directors look at financials every single day. No acquisition decision would have been made without his sign-off. We are talking about a company that took on a tremendous amount of debt. We have only scratched the surface. If you are a majority shareholder or a very large shareholder in the company, you are on the board of directors and you are involved in all the decisions that are made. I do not for a moment think he (Wiese) was unaware of the strategy of the company and what they were trying to do.”That evening, Bruce Whitfield reminded his Money Show listeners about his interview with Wiese a few months earlier. He also pointed out the enormity of the crash: “It was a chaotic day for a company in which there were decades of friendships. Three-quarters of the value, more than R180 billion, was wiped out. In August, a small story was published in a German magazine. Wiese very much denied everything then.”The crater in the balance sheetOn 7 December Steinhoff issued the following SENS statement: “The supervisory board has today given further consideration to the issues subject to the investigation and to the validity and recoverability of certain non-South African assets of the company which amount to circa €6 billion.” The simple explanation? The board discovered that there was a hole of about R95,4 billion in Steinhoff’s books. That is R95,4 thousand million rand, about a sixteenth of the South African government’s annual budget.On Monday, 4 December 2017, the share price was R50,25. Five days later, it stood at R6,00.40The collapse of Steinhoff was in full swing.- This is an excerpt from the book, Steinhoff: Inside SA’s Biggest Corporate Crash (Lapa Publishers), by James Brent-Styan available nationwide.