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FrancoisFMarais
 
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Response to 'a Steinhoff guide for dummies'

10 December 2017, 07:47

In response to the article by Jan Cronje published on 8 December 2017:

Thanks for the historical facts.

I would like to offer a simple explanation for Dummies on how the actual accounting irregularities (the perceived fraud) are achieved. As per normal a lot of comments on social media surrounding this issue resolves on normal race card issue and now the latest resolves around the possibility of people losing their jobs.

The race card issue refers to this matter being reported as an accounting irregularity and not fraud because some suggest it is because Markus Jooste is white. I am not going to stoop down to that level of discussion.

So, what are the accounting irregularities? I can almost for certain say that this relates to Off Balance Sheet accounting which took place. How does this work? You have a group of entities all ultimately owned by a holding company. These companies can be owned wholly or partially. IFRS (International Financial Reporting Standards) require that these companies publish consolidated financial statements so that role players like lenders and investors are able to see the bigger picture.

It is this bigger picture that has been hidden. For how long and on what scale we do not know.

Liabilities such as finance agreements are structured in one company, say Company A. Company A then leases the assets to Company B on more favorable terms than would be found on the open market place. To confuse matters a bit more and to justify Companies A and B not being consolidated for financial statement reporting purposes complex shareholding structures via trusts and different classes of shares with different voting rights are developed.

Yes, this is why the designation CA (SA) is such a sought after designation. If you think that our president, Jacob Zuma, can keep people busy for years in courts then you are in for a surprise on how complicated coming court cases in this matter can be. My guess is that they (German authorities) will try and keep things simple and single out on or two major issues such as tax fraud forcing an admittance and fine to find some sense of justice. (In the same way as liabilities can be hidden income and expenses can be transferred from one company to the other and this does not happen without tax consequences.)

Neither the auditing profession nor the organised investment world can afford the general public to understand just how easy it is to perpetrate these kinds of misrepresentations when you have the resources. Economies rely on stability and trust to continue to attract investors and to avoid panic and mass sell-offs like is being experienced with Steinhoff shares.

But someone has to still pay the liabilities of Company A. This is easy when the directors who are also major shareholders in Company B can sell some shares at high prices and then invest the money as loans to Company A in order for Company A to meet its obligations. With the current low share prices this is going to be very difficult to achieve and one will find the cash flow of companies in the group under severe pressure.

Jobs of people employed in the various business units should be safe as long as these business units are profitable in themselves. One might see a sell-off of the business units but businesses cannot operate without employees.

Steinhoff is not the only company that employ these practices. This is the reason why the world has IFRS (International Financial Reporting Standards).

The difference between an accounting irregularity and fraud is the scale on which selective interpretation of IFRS took place. Questions that will be answered in coming months include for how long has this been taking place and why did the auditors only now refused to sign off on the interim results.

At the end of the day I fear the independent auditing profession suffering more damage to its reputation allowing governments to establish more direct control and laws to prevent creative accounting and interpretation of IFRS. This could be a good thing if the governments are good people but then who audits the government?

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.

 

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