Steinhoff International challenges

Meeting report

Opening Remarks
Mr Carrim acknowledged that the Steinhoff debacle could easily be one of the biggest corporate scandals the country had ever seen. Understandably, there was a lot of anger and anxiety within the country and beyond. The Joint Committee was acutely aware that this was an unfolding story. However, Members would want to establish the role of regulators and what was being done in respect of the challenges. Parliament could not sit back and should ensure that regulators are also held to account as they are legally mandated to carry out their oversight roles on corporates. This was no more than an initial briefing that would provide the basis for the Joint Committee to develop an overall strategy and programme to exercise Parliament’s oversight responsibility in respect of the regulators and other bodies investigating Steinhoff.

Mr Godi emphasised that the involvement of public funds would always be a trigger for Members. The meeting was the beginning of an interactive process and at the end of it, wrongdoers, if any, would have to take full account of their transgressions.

Steinhoff presentation
Ms Heather Sonn, Acting Chairperson, Steinhoff N.V, took the Joint Committee through a presentation and gave some insight on where the company was after the 5 December collapse. She expressed the company’s full commitment in dealing with its challenges. It has had to reset; which was the basis for the appointment of a new executive committee among other changes. Steinhoff was deeply aware of the impact the debacle has had on pension funds, the Steinhoff brand and the nation at large. The company was working towards getting answers about what really happened and ensuring that transgressors are prosecuted.

She gave Steinhoff’s undertaking that it would uncover the truth, fix what went wrong and prosecute wrongdoing, but noted that because of the investigations under way it was constrained in what it could communicate publicly. Steinhoff was working constantly to maintain and improve liquidity of the group to enable continued trading by its operating companies, to preserve and restore value for all of its stakeholders, including lenders and shareholders. Management and the board are working hard to establish stability in the group, to finalise reliable financial statements and to ensure that the investigations are far enough advanced to enable the company to begin taking the legal and other necessary steps it intends to take based on the findings. Steinhoff will communicate more fully in public as soon as it was able to do so. Unfortunately, it was not yet at that point. This does not mean that it was unwilling to communicate. The company had to advance its work far enough to be able to communicate publicly without harming or constraining potential prosecutions and other actions that may arise. It would have preferred to be able to answer Members’ questions more fully, but hoped the Joint Committee understood that the time for this will arrive in due course. Steinhoff would be happy to come to Parliament to provide those answers as soon as it was in a position to do so.

Mr Steve Booysen, Independent Non-executive Director, Steinhoff N.V, described the dramatic discovery of the alleged accounting irregularities. He only received confirmation of alleged accounting irregularities at 9.45am on 5 December 2017. As soon as the confirmation was received, the former CEO Markus Jooste was called in to explain the transactions, accounting entries and, more importantly, the cash flow of certain transactions. Mr Jooste sent an SMS to him, which led him to conclude that it was confirmation of the accounting irregularities. Steinhoff executives waited the whole day for Mr Jooste to make a presentation about the alleged irregularities, but he did not pitch up. Mr Jooste then offered his resignation to the group’s chairperson at 7.45pm that evening. The time period in which the allegations were investigated might seem long, but this was because there was ‘collusion’ – not only inside the company but also outside it as well.

The resignation of the CEO on 5 December 2017 and the postponement of financial statements triggered a significant share price decline and a liquidity crisis. In the announcement on 5 December 2017, the company confirmed that PwC was appointed to conduct an independent forensic investigation to uncover the facts of what went wrong. The scope of the PwC forensic investigation is unlimited and includes all supervisory and management board members including the audit and risk committee members. International financial and liquidity advisers, Moelis and AlixPartners, were also appointed (10 December 2017) together with Linklaters and Werksmans as legal advisers. PwC had been given an unrestricted scope with unlimited access to the Group. Their investigation will independently establish the facts of what went wrong. PwC has made good progress and in the next few days will advise what the focus of their further investigations will be. Steinhoff was also working with Deloitte to finalise the 2017 consolidated financial statements, and the restated 2015 and 2016 results. Steinhoff has cooperated fully with regulators in all relevant jurisdictions, and will continue to do so. Steinhoff was entering the next phase of broader lender engagement and was now in a position to develop some strategic options. Management had to move very quickly to deal with the immediate crisis, but also of importance in looking after and retaining the jobs of the 130 000 employees. The company employs 130 000 people, 50 000 of whom are in South Africa. The retention of their jobs is of paramount importance to the group.

The company will continue to strengthen the leadership team and is in the process of appointing an internationally experienced Chief Restructuring Officer. The international clusters have been stabilised and near term liquidity has largely been secured. The group has put in place appropriate legal and technical support in each region. The boards, management and staff have been working around the clock to keep the businesses running, and was now entering the next phase of broader lender engagement and are now in a position to develop some strategic options. On 30 January 2018, the chairman of the audit committee reported transgressions to the authorities in terms of the Prevention and Combatting of Corrupt Practices Act 2004 (PRECCA). Based on investigations to date, the former CEO, Markus Jooste, had been reported to the Hawks in terms of Section 34(1)(b) of PRECCA on suspicion that he has committed offences thereunder. The matter was now in the hands of the Hawks for further investigation and prosecution. He expressed Steinhoff’s commitment to disclose on an ongoing basis and would do so to Parliament working on restoring trust and leave no stone unturned.

Mr Booysen reaffirmed the company’s commitments. The Group was deeply aware of the impact on investments, pension funds and the reputation of the company, of business and the nation. It will uncover the truth, fix what went wrong and prosecute wrongdoing, and will communicate fully on an ongoing basis. It had co-operated fully with regulators and will continue to do so. It was working constantly to maintain and improve liquidity of the group to enable continued trading by our operating companies, to preserve and restore value for all of its stakeholders including lenders and shareholders.

Briefing by Mr Christo Wiese
Mr Christo Wiese, Major Shareholder: Steinhoff, explained how he got involved as a major shareholder in the Steinhoff group. Steinhoff has always had a specific philosophy- it adheres to principles of integrity, professionalism, with much emphasis on having full trust in the management. He had first met former CEO Jooste in 1982, and was impressed with him at the time. In 2011 he sold his property and shares to the Steinhoff group and became a small shareholder. Having watched the progress of the company he thought it was a good investment. He was then appointed as a director in 2013, and was impressed with the way it was run, with good governance. In 2015 he sold his company PepKor to Steinhoff, making himself the largest shareholder. The intention was to consolidate all his businesses. In September 2016, aside from the R30 billion, he injected R25 billion to assist the company. He had invested a total of R55 billion in Steinhoff by December last year and was unaware anything was wrong. Normally when one is in a business - and responsible- the problems can be seen coming. The sales go down, the liquidity dries up, people start leaving the sinking ship, and corrective action can be taken– but this came like a bolt out of the blue. The first time he became aware of difficulty, was three working days before the accounts had to be finalised for the board meeting in December. It was then decided to appoint PWC as a forensic investigator alongside statutory auditor Deloitte. The most frustrating thing was that much could not be said until the auditors have completed their investigations.

Johannesburg Stock Exchange (JSE) presentation
Ms Nicky Newton-King, JSE CEO, said the JSE shares the Joint Committee’s concerns regarding the serious impact that the recent disclosures by Steinhoff International Holdings N.V (SNH) has had on investors and welcomed the Joint Committee’s attention to this issue. It was indeed disappointing that, notwithstanding South Africa’s highly regarded corporate governance and accounting standards, an event such as this could happen in one of the largest companies. That said, JSE’s current regulatory environment has, it believed, sufficient tools to investigate and sanction (whether criminally or civilly) improper behaviour or a failure of any entity or person to exercise their legal responsibilities properly.

The JSE is a secondary regulator of Steinhoff. It has four different parts registered on the JSE. In 2017, a South African subsidiary of SNH, Steinhoff Africa Retail Limited (“STAR”) listed on the JSE. Steinhoff Services Limited, another South African subsidiary of SNH had established a domestic medium-term note programme under which 11 bonds (“Steinhoff bonds”) are listed on the JSE. Steinhoff Services Limited was in the process of seeking note-holder approval to amend the terms of the Steinhoff Bonds in order to allow for early redemption of the bonds. If the amendment is approved, the bonds will be redeemed before the end of February 2018. Steinhoff Investment Holdings Limited, also a South African subsidiary of SNH had listed a perpetual preference share on the JSE. The JSE is the primary regulator in respect of STAR, Steinhoff Investment Holdings Limited preference share and the Steinhoff bonds.

She gave an overview of the extent of JSE investigations on Steinhoff. Following the announcements by SNH in early December 2017, the JSE launched two investigations, by the Issuer Regulation and Market Regulation Divisions, to respectively – determine whether there had been any breaches of the JSE’s Listing Requirements, including any breaches in relation to previous financial disclosures and any potential false statements made by SNH; and identify any instances of potential insider trading in SNH shares ahead of announcements on 4, 6 and 10 December 2017. The Market Regulation Division completed its preliminary review of trading in SNH shares ahead of the SNH announcements on 4, 6 and 10 December 2017 and provided the details of the review to the Directorate of Market Abuse (DMA) for further investigation into possible insider trading. Once SNH publishes its 2017 annual financial statements, the PWC forensic investigation has been completed and any accounting irregularities are disclosed, the Market Regulation team will conduct a broader review of trading activities. The scope of the review will be determined by the DMA in the course of its investigation, once it has been determined which individuals had knowledge of the accounting regularities or alleged fraud and at what time the said individuals became aware of the irregularities. The JSE has engaged extensively with SNH to ensure that full, equal and timeous disclosure is made regarding matters that are price sensitive. The engagement with SNH is ongoing.

The JSE has also engaged with the Frankfurt Stock Exchange (FSE) a number of times to understand their approach to regulating similar issues. In summary, the FSE takes the same approach as the JSE, focusing first on timeous disclosure and suspending as a last resort. The JSE has considered whether a suspension of trading in SNH's shares would be in the public interest if it could help to promote a fair and transparent market and protect the interests of investors. The JSE believed that under the circumstances where SNH has disclosed as much price sensitive information as it was able to, it would be detrimental to the interest of investors to prevent them from trading SNH shares on the JSE. It should also be noted that the FSE has not suspended trading in SNH shares. This meant that if the JSE were to suspend trading in SNH, it would place investors trading on the JSE at a disadvantage to those who were able to trade the SNH share on the FSE.

On the way forward, the JSE was unable to complete its investigations until SNH publishes its 2017 annual financial statements, the PWC forensic investigation has been completed and any accounting irregularities have been disclosed. Once this information is made public the Issuer Regulation Division will conduct a comprehensive review of SNH’s compliance with the Listing Requirements and the extent to which SNH published false financial statements. An assessment of the outcome of the investigations will be conducted to determine whether any changes are required to the JSE’s Listing Requirements or internal processes.
The Market Regulation Division will conduct a further review of the trading in SNH shares once it receives further guidance in this regard from the DMA. As the JSE looks to the way ahead, there are two separate areas of focus - to complete the investigations once the necessary information becomes available. This will determine whether any criminal or civil sanctions are appropriate; and a review of whether this incident indicates that the role of other stakeholders in a company (large shareholders; analysts; managers; auditors; board members) should be strengthened. The JSE had started consultations in this regard. There is a long road ahead before the cause of this event is clear and the relevant sanctions have been taken. The JSE will continue to engage with SNH, the FSE, the FSB and the DMA to bring its investigations to a conclusion as soon as is reasonably possible.

Discussion
Ms T Tobias (ANC) asked if Mr Wiese was convinced that the total assets Steinhoff was currently holding would continue to be traded and if the group would maintain its liquidity. Was Steinhoff going to be a profitable business going forward?

Mr D Maynier (DA) noted the Joint Committee was getting different versions on what culminated into the “bolt out of the blue”. The truth when it comes out would be that former CEO Jooste was behind the debacle and that the scandals had been going on for decades. The board had monumentally failed in its fiduciary duties. He asked about the nature of charges which were laid on the former CEO to the Hawks.

Ms P Mabe (ANC) asked if there was any possibility that the scandals were a result of collusion. Why was Mr Jooste the only person who resigned and who was being fingered; how about the entire management? Also, how was Steinhoff hoping to recover lost funds?

Ms R Lesoma (ANC) asked if it was the norm to interchange auditors within one company; both foreign and domestic. If that was the norm, what systems were in place to ensure foreign auditors comply with domestic standards?

Mr C Ross (DA) asked about the roles of the audit and risk committees in terms of oversight, reporting and disclosure within Steinhoff.

Ms V Mente (EFF) asked about the link between the former CEO’s resignation and the suspicious activities. She asked the JSE to elaborate in terms of the market abuses it was referring to.

Mr F Shivambu (EFF) asked if Mr Wiese was sure he only became aware of the irregularities days before the collapse. He wanted to know if Mr Wiese has any companies in countries regarded as "tax havens" like Switzerland.

Mr S Mncwabe (NFP) said the indication was that there were no early warnings before the collapse. How robust was Steinhoff’s risk management framework if such an event could not be foreseen?

Mr N Kwankwa (UDM) expressed disbelief that the former CEO could falsify balance sheets without the knowledge of the rest of the management and the board. Mr Wiese must be honest and fully explain to Parliament on what really transpired.

Ms P Kekana (ANC) asked about the effectiveness of the JSE in policing market abuse. Has anyone been prosecuted so far? Is there need for more stringent regulations to limit complexities? 

Mr T Brauteseth (DA) asked for a full report from the JSE about everybody involved in such abuses before and during the Steinhoff incident.

Mr N Paulsen (EFF) asked what measures or means aside from auditors were used to pick up on financial irregularities. Also, he could not imagine only one person pulling off such a sophistication case of fraud.

Mr D Topham (DA) asked how it was possible for the cash-flows to be routed so that they did not attract auditors’ scrutiny for a period of three to four years.

Mr Carrim asked if there was a deadline to PWC investigations. Secondly, he advised Steinhoff to follow up with the Hawks. Lastly, he asked how Mr Wiese not see this coming as a business person?

Mr Godi felt the Steinhoff presentation did not cover information the Joint Committee needed to know. The JSE seemed to be exonerating Steinhoff. How do we have such a spectacular collapse and everything seems to be fine?

Mr Wiese replied that he does not have companies in any of the tax havens. As to why the Steinhoff board was ‘asleep at the wheel’ while alleged accounting irregularities were being committed and had failed in its fiduciary duties, detecting fraud within a company was hugely difficult for board members, especially if the CEO was allegedly involved. Cleverer people than this board have been duped before by people committing fraud. This was with reference to many instances around the world of companies of a similar or bigger size where this had happened. Until the report of forensic investigators PwC was finalised, it was not possible to say how the alleged accounting irregularities had occurred. The auditors (Deloitte) that raised concerns last year were the same auditors that had been doing so for the last ten years. So they are admitting that they had missed things. Auditors are a company’s first line of defence. He emphasised that Steinhoff‚ which operates in 33 different countries‚ was an immensely complicated business‚ with a multitude of subsidiary companies. The only way to run such a group was in a decentralised manner‚ with different companies in the different countries.

Mr Louis du Preez, Commercial Director, Steinhoff, indicated he was constrained to give Members the amount of losses as it was price sensitive information, the number in the public domain is €6 billion. There was no update on when the PWC investigation will be complete but Steinhoff will give clarity as soon as it was in the position to do so.

Mr Carrim said even with constraints, Mr du Preez could give Members more information than he had done.
When did the audit committee chairperson become aware of the challenges given that Mr Wiese indicated he only got to know three days before the collapse?

Mr du Preez replied that this was a personal question about personal knowledge. He needed to take legal advice on this.

Mr M Hlengwa (IFP) said Members were being taken for a ride, they were getting "tip of the iceberg answers".

Mr V Smith (ANC) could not understand why Steinhoff could not provide the information. The Companies Act obliges directors to carry out fiduciary duties. Thus, he could not understand why Mr du Preez would need legal advice before they could respond.

Mr Booysen stated there was a German magazine article, and with this auditors raised issues for management to resolve. He was made aware on 14 November, but confirmation of irregularities only took place on 3 December 2017. The collusion was also outside the company which made it very complex.

Ms Sonn stated that they were not here to evade questions. Stakeholders had to ensure that the integrity of the PwC process had to be protected. Werksman is the instructing attorney dealing with PwC on behalf of Steinhoff.

Mr Carrim said Members’ questions had not been answered satisfactorily. Written questions will be forwarded and Steinhoff would be expected to respond within ten days.

Mr Maynier commented that the Steinhoff sitting was in "shambles" because Members were unable to cross examine witnesses. The meeting was an international embarrassment.

Mr Carrim warned that Members must be careful because there were other processes underway. He reiterated that this was a preliminary briefing, not a hearing and Members would forward written questions. Regulators must do their job and must be held accountable. Parliament would get a clearer idea to enable it to make decisions as to how the matter should be handled. 
 
Ms Newton-King stated that interests of local investors are protected by allowing dual listing only for those with regulatory schemas similar to JSE’s. The investigation into Steinhoff was not going to finish soon. However, the JSE was committed to making sure that disclosures can happen timeously. She was not convinced that the Steinhoff matter shows a gap in South African law, but there was space to consider whether checks and balances were working. Fraud by its very nature is a complex crime. 

National Treasury presentation
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, took the Joint Committee through a presentation on the Steinhoff debacle. Normally, Treasury would know very little about a company like Steinhoff. Most information Treasury had was second hand information. However, its paramount focus was the risk to the South African economy and financial stability. Treasury’s concern was whether different regulators in SA and Europe were indeed talking to each other. It was important that different regulators talk to each other. Even though investigations were taking place, they must work with regulators. This was a very sophisticated crime and brilliant auditors even missed it. The fact that South Africa has regulations reduced the exposure of the government pension fund, other pension funds and savings vehicles as well. There was need for greater transparency and swift responses to the challenges.

The company is under investigation in at least three jurisdictions. Steinhoff is subject to many jurisdictions, but primarily Dutch, German and South African laws apply in different degrees. The company is incorporated in Netherlands, primary listed in Germany and secondary listed in RSA. More than one jurisdiction involved meant that the investigations are complex; and the company may question jurisdiction of many prosecuting and regulatory authorities depending on where the alleged crime was committed. The current criminal investigations were initiated and led by German prosecuting authorities, and also Dutch prosecutorial office. European investors have also initiated a class action suit, joined by South African investors (including PIC). The primary problem identified was accounting fraud. However, at this stage, very little information was known except for the Steinhoff announcement on “accounting irregularities” in early December 2017, leading to resignation of then CEO Markus Jooste. He noted that regulatory authorities generally do not have the power with regard to criminal prosecutions

On the impact on South African investors, SA investors can buy Steinhoff and related shares listed on the JSE.
The Government Employees Pension Fund (GEPF) (not under Pension Fund Act) through the Public Investment Corporation (PIC) is the second largest shareholder in Steinhoff – about 10%. However, PIC losses are estimated to be less than 1% of the total assets of the Fund. Private pension funds constituting at least 75% of total industry assets, reported average exposures of 0.92%, whereas the largest long-term insurance entities, representing 80% of the market share, reported exposures in the range of 0.3% - 2.1%. However, a number of early lessons have been learnt from the Steinhoff debacle. Foremost being the downsides of having complicated corporate structures and the need to strengthen requirements for greater transparency for regulated companies. Further analysis and investigation is needed to better understand the implications for South Africa investors, given the scale and nature of the fraud (including acquiring expertise) to improve coordination across  financial sector regulators as well as other relevant regulators/government departments (without compromising the integrity of the investigations). In conclusion, Treasury did not think, at this stage, any of the risks could not be handled and curtailed.

Financial Services Board (FSB) presentation
Mr Olano Makhubela, Deputy Executive Officer for Pensions, FSB, indicated that pension funds in South Africa are estimated at R4 trillion. When the Steinhoff news broke, FSB requested pension funds to report their exposure to Steinhoff. 948 out of 1080 reported having investments with the company. In rand value the total loss of investment was estimated at R18 billion. This was not an actual loss; it would only become actual or locked-in once assets are sold. However, members of defined contribution funds (DCF) will experience some loss at exit due to overall market impact. For defined benefit funds (DBF), there would be no adverse implication to active members as DBFs provide a pension guarantee based on formula. However, onus was on the employer/fund to manage/re-assess assets or inject capital to ensure commitments are met. For DCFss, some adverse implication to members could be due to direct exposure to market movements, but impact seems limited. The indication was that compliance with the provisions of Regulation 28 of the Pension Funds Act was not breached, and preliminary information suggests that limits of 15% in respect of equity and 10% for debt instruments, per individual entity, had not been breached.

Mr Solly Keetse, Head of Department: Directorate of Market Abuse, FSB, told the Joint Committee that the FSB was investigating the publication of false and misleading information on the market. Trading of shares in August, November and December 2017 were to be investigated. The FSB will also require information from the JSE about Viceroy Research and it has been in contact with the American Securities and Exchange Commission to obtain details of Viceroy. FSB was currently investigating two cases of possible insider trading (section 78 of the Financial Markets Act, 2012 (FMA)) and one case of possible false, misleading or deceptive statements, promises and forecasts (section 81 of the FMA).

FSB was in constant liaison with German regulators. It wrote to BaFin (Germany) on 15 December 2017 pursuant to the IOSCO MMoU, requesting assistance obtaining information with regards to its Steinhoff investigations. Inter alia, FSB requested information on any investigations being done by BaFin with regards to Steinhoff and the scope of their investigations. It also requested (i) information from the Frankfurt Stock Exchange (Steinhoff’s primary exchange listing); (ii) obtaining information regarding the status of the investigation conducted by the Prosecutor’s Office in Oldenburg, Germany. FSB has received a reply from BaFin providing some information but the rest of the required information will be provided soon.

On the extent of its interaction with Steinhoff, the FSB had informed Steinhoff’s Company Secretary that it had lodged three market abuse investigations in terms of section 78 and 81 of the FMA. The share trades under investigation refer to the periods of August 2017 and November/December 2017. 15 December 2017. Steinhoff reverted to FSB informing that Werksmans will represent them and that they will forward the information requested by the end of January 2018. Thereafter, Steinhoff announced recently that it will be restating its 2015 and 2016 financial statements. Until FSB has received the restated financials, it will not be in a position to finalise the section 81 investigation. FSB also wrote to AFM in Amsterdam on 16 January 2018 pursuant to the IOSCO MMoU requesting their assistance in obtaining information necessary for our Steinhoff investigations. They have confirmed receiving our letter of request, and are awaiting their further response. In this case, the allegations against Steinhoff were of accounting irregularities. FSB has registered two possible cases of insider trading. FSB has over the last ten years handed out penalties of R100 million, quicker than the Criminal Justice System.

South African Reserve Bank (SARB) presentation
Mr Kuben Naidoo, Deputy Governor and Registrar of Banks, SARB, gave SARB’s perspective on Steinhoff. The Reserve Bank does not regulate Steinhoff. SARB’s role is purely that of supervisor or regulator of banks, but had done a detailed analysis of risks posed by the global retailer. While the collapse of Steinhoff may result in significant losses for banks, lenders and investors, SARB was of the view that this will not result in financial instability. Since the collapse, SARB is investigating whether any exchange control laws or regulations have been breached. It should however be noted that SARB does not regulate Steinhoff as it is not a financial institution. He expressed the Reserve Bank’s readiness to cooperate with local and international regulators and law enforcement authorities. In conclusion, SARB could only judge the impact definitively after a fairly deep analysis was concluded.

Discussion
Mr Maynier asked if FSB carried out any investigations into Steinhoff prior to 5 December 2017. Also, was the FSB aware of a report by a JP Morgan official which made devastating findings on Steinhoff? If FSB was aware, what did it do about it?

Ms Tobias asked if SARB attached any conditions to Steinhoff listings in Frankfurt. Was Steinhoff prepared to pay the R100 million penalty that could be set by FSB?  She pointed out the need to maintain investor confidence in the country. The Steinhoff scandal went beyond the question of financial sector stability. 

Mr Shivambu said there were attempts by Treasury and FSB to trivialise the Steinhoff collapse. Also, Treasury and SARB were trivialising the amount and impact of the debacle on pension funds. The arguments by these institutions must be dismissed. It seemed as if auditing firms, regulators and the Reserve Bank were complicit in these crimes. These were serious crimes which must be dealt with decisively.

Mr Godi felt Treasury was faced with a contradictory position. On the one hand they needed to reassure the people but they also need to stress the fact that "every cent of public money must be accounted for". The two elements had to be emphasised at the same time. He asked if FSB was doing anything or just waiting and dependent on the Germans. He did not want to be left with the impression that regulators were reliant on the Germans for information. Certainly, FSB could be doing something on the ground on the basis of the available information.

Ms Kekana expressed worry about what seemed to be regulatory capture at play.

Mr Carrim indicated that international regulators already flagged the irregularities two years ago. The question was whether FSB acted on this.

Mr Momoniat stated that Members’ frustrations were understandable. Up to R200 billion in shareholder value could have been lost due to the collapse in Steinhoff’s share price. Aside from local and international investors, a big loser was the Government Employees Pension Fund whose 9% holding fell from R23 billion to R3 billion in value. For the crimes that have been committed people must go to jail; there was no doubt about it, He apologized for trivializing this. Treasury was worried about people panicking, and clearly it was important for Treasury to make people understand that their pensions are safe.

Mr Naidoo said his testimony was not an attempt to trivialise the problem. The scandal damages the integrity of the sector, and there was need to ensure stability. Meanwhile, Steinhoff International has applied to the SARB for permission to take money out of the country to help with its liquidity challenges abroad. While the Bank did not want money to be taken out of the country, it was also cognisant of the fact that the liquidation of the group would have severe implications on its local operations, including jobs as well as savers. He reiterated that the Bank was investigating whether any exchange-control laws or regulations had been breached by Steinhoff. He did not believe there had been contraventions but said a definitive answer would emerge only once the forensic audit was complete.

Mr Makhubela said the FSB had never investigated Steinhoff before. The only time the FSB became aware was when it came across the publication in a German magazine. However, should Steinhoff be found guilty it will not be able to avoid any penalty that the FSB imposes on it. He assured the Joint Committee that the investigation will be expedited as soon as all information is obtained. The possible penalty for Steinhoff was not set, and could be higher than R100 million. It will depend on what will be uncovered by the ongoing investigations. Two cases were being investigated; one for insider trading and the other for false and misleading reporting. He reiterated that FSB has received some information on insider trading from the JSE which it was currently scrutinising. With respect to the second count, FSB was waiting for the restatement of financial statements for the past three years from auditors Deloitte.

Mr Carrim said Members did not get a sense that regulators were taking this matter as seriously as they should, particularly the FSB. For instance, clear timelines were not being provided. This is a very technical complex and elusive matter. He urged them to be clearer. Members would like a more decisive sense of movement.

Independent Regulatory Board for Auditors (IRBA) presentation
Mr Bernard Agulhas, CEO, IRBA, stated that IRBA had picked up some irregularities in Steinhoff as far back as 2016. IRBA had the power to initiate investigations, conduct inspections, and apply disciplinary measures against auditors. However, it was limited in terms of sanctions it could impose. On status of the Steinhoff investigation, the case was opened in December 2017. Deloitte had to respond by early February 2018, and IRBA could commence only its investigation thereafter. IRBA was not responsible for accounting investigations and only looks at auditors. Currently, IRBA was prioritising the following: managing risk of loss of confidence in the profession; focusing capacity on high profile cases; doubling investigation resources; enforcing cooperation with the IRBA and act on non-cooperation; revision to sanctions approach and penalties; and cooperating with other regulators for assistance in investigations. There had been instructions from Parliament to expedite the investigation and to conclude high profile cases. Pursuant to this, IRBA had set dates for the commencement of KPMG investigations as well.

Discussion 
Ms Kekana said IRBA was flagging important issues which called for Members’ attention. There was need for amendments to relevant Acts to strengthen IRBA’s hand as a supervisory body.

Mr Smith commented that Steinhoff had not done what it was supposed to do. Hence, what was IRBA doing to investigate? Members hear Deloitte has been auditor for Steinhoff for the past 20 years. What were the implications of this on audit quality?

Mr Shivambu questioned IRBA’s effectiveness. He asked IRBA to give an indication about the investigations it had successfully dealt with. He wanted a list of cases that IRBA has investigated and the possible sanctions imposed. Members had to check if the current framework was prohibitive enough to deter such practices.
A lot of cases have been brought to their attention but there has not been much indication that they are being investigated. The African Bank and KPMG cases were cases in point. There must be a political re-think on how corporates should be regulated. All over the world, there has been an increase in financial crimes, largely because of collaboration with audit firms. The close relationship between corporates and audit firms compromised proper accounting processes. He indicated that the top 100 companies on JSE are involved in some auditing malpractice with auditing partners.

Mr Godi said regulators could and should do more than what they had done. Members would not want to have investigations that start and never end. Regulatory bodies should also influence positive behaviour. Maybe regulatory instruments needed to be sharpened.

Mr Mathale agreed that although there might be need for sharper instruments, regulators could do more than what they had done within the current frameworks.

Mr Maynier said Steinhoff’s off- balance sheet entities were probably not audited by Deloitte. So the question was who were the auditors? Also, Steinhoff needed to disclose all information about auditors, directors and shareholders of all entities so as to address the question of independence and conflict. He indicated that Members received a letter from the public, which alleged that former CEO Markus Jooste and CEO of Deloitte were old school friends. Do the investigations traverse such relationships?

Mr Agulhas replied that IRBA was the oversight body for audit firms, but does have limitations. IRBA could only act within its powers. IRBA will require time to go through files, but accounting irregularities did fall within its mandate. It had not been able to go through information provided by Deloitte in relation to Steinhoff because most staff was busy with KPMG investigation, but IRBA was prioritising and fast tracking this. He noted that auditing firm of 20 years was relatively short compared to others; IRBA has seen some at a 100 years. However, mandatory audit rotation rule which kicked in last year, allows for ten years only. Also, IRBA investigates 80- 100 cases at any time, and prioritizes high profile to public interest cases. It will also have to be careful with what it can share about the investigation, so it does not compromise the process.
 
Government Employees’ Pension Fund (GEPF) presentation
Mr Abel Sithole, Principal Executive Officer, GEPF, said the Steinhoff situation was not static and thus GEPF was monitoring the movements. The share price continued to be volatile and GEPF could not determine the overall impact up until the investigations on the alleged malpractices were concluded. The bottom line was the value of its investment at Steinhoff depreciated although at this point in time the losses had not been realised. However, GEPF had taken a decision to keep its shares with Steinhoff as there was potential that the current share price would recover. Prior to the crisis, the GEPF owned 428 million shares in Steinhoff, which were worth R24.1 billion on 30 November 2017. However, at the depth of the Steinhoff crisis in December, it owned 415 million shares, which had depreciated to R2.5 billion. The share price continues to be volatile as the company seeks solutions and the market awaits the outcome of the investigation into accounting fraud.

As part of its interventions, the GEPF issued a press statement reassuring pension fund members that their benefits had not been changed by these events as the GEPF is a defined benefit pension fund. A special Investment Committee meeting was held between the GEPF’s investment committee and the PIC as the Fund’s investment manager. It was agreed that the PIC, on behalf of the GEPF, would address the corporate governance shortcomings with Steinhoff and that the investigations must be credible and transparent and involve PIC in an observer status. The Steinhoff events highlighted the importance of corporate governance at the Fund’s investee companies.

Public Investment Corporation (PIC) presentation
Dr Daniel Matjila, CEO, PIC, highlighted that the PIC is a developmental investor with an objective to invest directly in the South Africa economy and drive socio-economic transformation. The PIC is the largest asset manager on the continent with assets under management of over R2 trillion. Listed Equities represents 50% of the assets under management, equating to a significant exposure to all the South African equity stocks. PIC had initially invested in Steinhoff since 2005, 13 years ago. Steinhoff board, although untransformed, was populated by reputable South Africa individuals, including former CEOs of listed financial services companies. The lack of transformation led to a BEE transaction in Steinhoff and further transaction in Steinhoff Africa Retail (“STAR”). The BEE deal allowed the PIC to close its underweight position in Steinhoff. The price decline of 74% between 5 and 12 December 2017 resulted in R12 billion unrealised losses of the overall listed exposure and R5 billion of the unlisted exposure. Given the possible undervaluation of STAR at current spot share price, and the long term nature of PIC’s investment horizon, it is believed that there is still significant value unlock that can be achieved from the STAR shares. In relation to SNH, PIC was of the view that the value of SNH is not zero and that the Board will be under pressure to demonstrate their ability and willingness to unlock value within SNH. PIC would use the opportunity presented by this situation to drive changes to the governance structures and philosophy of these entities, including diversity at Board and Management level.

On interventions after the collapse, PIC was continually engaging Steinhoff and would consider and insist (through a general meeting) on the PIC nominating for appointment of at least two independent non-executive directors on the Steinhoff and STAR Board as well as one Observer seat to the Board Committee tasked with investigating the current situation. PIC is waiting for outcome of forensic investigation to decide on the appropriate actions to take against the company. PIC had engaged with Steinhoff and JSE. There was also need to deal with the dominant personalities of CEO's or board members. PIC would want to use this opportunity to improve governance not only at Steinhoff but also other JSE companies and prevent this from happening again.

Discussion
Ms D Mahlangu (ANC) asked if the PIC had considered withdrawing its investments from Steinhoff and reinvest somewhere else.

Mr Maynier said it seemed there were major holes within the PIC investment committee, particularly in their capacity to analyse the environment. There was no indication that the PIC noticed anything prior to the “bolt from the blue.” What was PIC doing to correct this? He asked PIC for a breakdown of the trust and BEE beneficiaries of the Lancaster structure. Was the deal specifically structured to avoid higher levels of scrutiny?

Mr Hlengwa wanted to know about the reaction of GEPF and PIC upon learning about the Steinhoff collapse. Who did they communicate with and what was their initial reaction and course of action?

Mr Shivambu asked if the PIC was the exclusive manager of GEPF assets presently. What was the essence of its investment strategy? There should be some degree of scientific expectation in the performance of the investment. What was the value of GEPF and PIC interests in STAR? Was there a possibility that Steinhoff could shift its primary listing back to South Africa, from Germany?

Mr Sithole replied that they referred to depreciation rather than losses as the losses had not been realised. Although there was significant depreciation in December 2017, there has been recovery and the expectation is that such a path will continue as the issues were being dealt with. Pensioners needed not to worry. GEPF has not had any direct engagement with Steinhoff directly but through PIC. GEPF unfortunately did not know as everyone else what really happened and were also anxious to see the conclusion of the PwC investigation. There has been no direct engagement between GEPF and Steinhoff but there was an ongoing conversation on the need to invest in other sectors of the economy as well.

Dr Matjila replied that PIC was not aware of the debacle prior and did not see it coming. However, the stock had been growing very well for the past decade preceding the crisis. Therefore, PIC believed there was some value left but decisive decisions would be taken when the report is completed. The investment strategy would not be changed but would be rather enhanced to lay emphasis on developmental projects. Also, governance issues needed to be dealt with and the PIC will be capacitated.

Mr Godi emphasised the need for decisive action. He thanked everyone for the comprehensive engagements. This was a preliminary briefing and further engagements would be pointed and more focused. He urged Steinhoff to cooperate; what went wrong should be exposed and those on the wrong should be identified and held accountable so that the outrage expressed by society must not be seen to be limited but holistic. Also, regulators had to get to the bottom of issues, and Parliament could not be a spectator on issues that have a fundamental impact on the country.

Mr Mathale added that it was not only about what happened but also about what was being done. The stance taken by Steinhoff on its CEO had to be appreciated and the law must take its course. There should be no cover-ups if there was wrong-doing. Decisive action had to be taken. Regulators must also do what is expected of them within their mandated roles. Also, that employees’ pensions were relatively safe was reassuring. 

Mr Carrim urged everyone to stick by their commitments. The Chairpersons will set out the framework for further engagements. Members would submit written questions and Steinhoff was expected to respond expeditiously. The Standing Committee on Finance will accelerate its processing of the Committee and Private Members Bills that seek to ensure greater accountability to Parliament and compulsory representation of workers on the PIC board. It will also expeditiously process legislation to give Independent Regulatory Board of Auditors (IRBA) more teeth to act against irregularities by auditors and write to the Minister of Finance, Mr Malusi Gigaba, to request that amendments by department be brought to Parliament by the end of March for finalization. He appreciated the remarkable synergy between Members of the Joint Committee. 

The meeting was adjourned.