It's not often that we get to see the details of how companies commit $ 7.4 billion to fraud.
Steinhoff International Holdings, a former empire of dealers and other companies in Europe, Africa, Australasia and the United States – including the now bankrupt Mattress Company – collapsed in December 2017 when it announced that it had found "accounting irregularities" without mentioning volumes or methods. PricewaterhouseCoopers (PwC) was then hired to investigate.
Now the company has released an 11-page overview of the PwC report on forensic investigations. The actual PwC report remains under lock and key. I guess the name is called leaders by name, while this summary doesn't. The amount of accounting fraud discovered so far amounts to 6.5 billion euros, or 7.4 billion dollars.
But they still do not fully know. According to the overview "there are still a number of unanswered questions, especially in relation to the identification of the counterpart's true nature or the final recipients of various transactions."
Nevertheless, it is not often that we "
Here are the important nuggets I distilled from the report:
" A small group of the Steinhoff Group's former leaders and other non-Steinhoff leaders, led by a senior CEO, structured and implemented various transactions "from 2009 to 201
" Fictitious and / or Irregular Transactions were entered into with the parties stated and proved to be third party entities independent of the Steinhoff Group and its executives, but now appearing to be closely related with and / or have strong indications of control of the same small group of people referred to … above. "
" Fictitious and / or Irregular Income was, in many cases, created at an intermediate Steinhoff Group holding company level and then awarded underperforming Steinhoff businesses such as so-called "contributions" which took many different forms and either increased income or reduced income expenses in the operating units. In most cases, the business units received cash for contributions from another Steinhoff group or from non-Steinhoff companies (financed by Steinhoff), resulting in intercompany loans and receivables. "
" The transactions identified as irregular are complex, involved many entities over a number of years and were supported by documents, including legal documents and other professional opinions, which in many cases were created after that fact and recalled. "The" PwC report identifies three main groups of business entities [Campion/Fulcrum Group, Talgarth Group, TG Group] which were counterparts to the Steinhoff Group with respect to the transactions being investigated. Other business entities have also been identified together with a result of being a practice of using similar unit names and changing company names that resulted in confusion between entities . "
Revenue Creation and Value Adjustment was produced through four categories of transactions, with some transactions entered into" to conceal the extent of the overstatement of the assets ":
1. Profit and Property Creation
" The PwC Report finds that some Steinhoff Group entities registered sales to or received benefits or revenue from entities that were allegedly independent of the Steinhoff Group, but now appear to be closely related to and / or have strong indications of control of the Steinhoff Group or certain former employees and / or third parties or former managers. "
" The revenues from fictitious and / or irregular transactions "found during the survey of the years 2009-2017 amounted to € 6.5 billion per year:
" The revenues from these transactions were in many cases not paid by the so-called independent entities of the Steinhoff Group, which resulted in loans or other receivables due to the Steinhoff Group which had little or no financial substance and which as such was never settled. "
2. Transfer and Reclassification of Assets
" The non-recoverable receivables arising from the fictitious or irregular income arising from the transactions described above were either settled in settlement schemes or reclassified to different assets. " "In a number Of cases, the non-recoverable receivables were settled by the use of intergroup payments and by the allocation of debt. This meant that loans were moved between units in both the Steinhoff Group and around the alleged independent entities. These settlement arrangements and / or debt obligations resulted in the movement of the loans, which were accounted for as repayments of the original lot. "
" "In other cases, often through allegedly independent entities, the non-recoverable receivables were reclassified into different classes of assets, such as cash equivalents, increase in the value of fixed assets, increase in the value of trademarks, or increase in the value of the transferred assets. goodwill. These reclassifications created the impression that the non-recoverable claim had been settled and resulted in other values being inflated. "
3. Asset and Unit Support
" The resulting inflated asset values were then supported by, for example:
- increase of the rent to be paid in the form of intergroup leases for properties based on valuations that may not have been trustworthy,  increase royalties to be paid under intergroup royalty agreements for trademarks; and / or
- orchestrates intergroup payments and assignments of debt to demonstrate settlement of cash equivalents. "
" These inflated costs were included in the operating results, increased the cost bases and, in some cases, added to the losses that these entities have incurred. This had the following effects:
- the losses from operating units could not support the acquired goodwill; and
- operating units did not contribute positively to the Steinhoff Group's results. "
4." Contributions "
" The losses in the operating units were reduced by the Steinhoff Group and then further developed the fictitious or irregular income which in some cases was created to medium-sized holding companies in the Steinhoff group of the various Steinhoff operating units via contributions . In many cases, these contributions to operating companies were settled in cash by other Steinhoff group companies, creating impressions (internally and externally) that they had substance. "
" These contributions had the effect of:
- operating units potentially appearing more profitable than they actually were (in cases where the contributions were greater than the inflated costs allocated to that unit),
- allows forecasting to support the price. paid for acquired units to be met; and
- which allow to meet the operating budget (although budgets often included contributions). "
" Donations from Steinhoff Group entities to Steinhoff businesses will usually eliminate upon consolidation; but before elimination, these contributions contributed to profitability, liquidity, solvency and the value of acquired goodwill in the operating company. "
" However, the fictitious or irregular income described [above] and recorded in medium-sized holding companies did not eliminate consolidation, as it was recorded as originating from alleged independent entities, thereby inflating the Steinhoff Group's profits. "
So dear reader, this is how a distant company can commit massive scale fraud for nine consecutive years, in favor of its leaders, apparently under the poem that it is not a problem until it is a problem.
In the United States, the FDIC has released the 2018 summary of the 5,000 banks it regulates, and there are juicy bank nails Read … US banks report $ 251 billion of "unrealized losses" on securities in 2018, the most since 2008: FDIC
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