By Alexandra Wexler
JOHANNESBURG -- Steinhoff International Holdings NV said Friday that a probe into accounting irregularities at the furniture retailer found that former executives inflated profits and asset values over an extended period of time.
The unraveling of the fraud at the South African company has taken more than a year, hitting investors across the globe, from pension funds in its home country to some of Wall Street's biggest banks.
Shares in Steinhoff collapsed in December 2017 -- falling 91% -- after it announced that its longtime chief executive, Markus Jooste, had resigned amid accounting irregularities at the company, which owns outlets from the U.S. to Europe to Australia. In South Africa, the company was a trusted blue chip favored by many retail and institutional investors because of the exposure it gave to overseas markets.
The company said the investigation, drawing on a long-awaited forensic accounting review by PricewaterhouseCoopers LLP, found that fictitious and irregular transactions were entered into with the suspect income being allocated to under-performing Steinhoff units.
Steinhoff said the PwC report raised serious allegations, in particular against a senior executive. The company didn't identify that individual, but said none of the executives cited in the investigation are currently employed by the group.
Allegations have swirled since the stock's collapse that Mr. Jooste had used off-balance-sheet entities to hide operating losses and artificially pump up Steinhoff's valuation. The use of multiple sets of auditors in multiple jurisdictions fed suspicions.
Steinhoff said Friday that Mr. Jooste didn't make himself available to PwC interviewers. The retailer's former chief told South Africa's Parliament last year that he had no knowledge of any accounting regularities at the company.
Following the resignation of Mr. Jooste in December 2017, Steinhoff said the accounting irregularities could affect the valuation and "recoverability" of as much as EUR6 billion ($6.8 billion) worth of assets. By mid-2018, Steinhoff had written off EUR12.4 billion in assets.
For the six months to March 31, 2017, the company initially reported a profit of EUR706 million. The result was later restated as a EUR380 million loss, after stripping out the inflated values and intercompany dealings. Since 2017, the company also has slashed the value of its property portfolio by half to EUR1.1 billion.
In 2016, a group of U.S. banks lent EUR1.6 billion to then-Chairman Christo Wiese, Steinhoff's largest shareholder and one of South Africa's richest men. His shares in the company, which served as collateral, were worth 120% of the loan amount, before plummeting to less than 24% after the December 2017 revelation.
Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. took a combined hit to their 2017 fourth-quarter earnings of more than $1 billion from losses and charges related to the loan to Mr. Wiese.
Practically overnight, Steinhoff's maroon-colored branding disappeared from South African wine capital Stellenbosch, where the retailer is based. The company's overseas businesses include Poundland Group PLC in the U.K. and Mattress Firm Inc. in the U.S. -- which filed for bankruptcy protection in October, the victim of increasing competition from discount retailers.
Since its stock's collapse, Steinhoff has limped along under a financial cloud.
The company said it needs to restate its 2015 and 2016 financial results, and has yet to release its audited 2017 or 2018 results. Meanwhile, its stock, whose primary listing is on the Frankfurt Stock Exchange, is trading at around 13 European cents a share, compared with more than EUR5 a share in early 2017.
Analysts have been picking through decades of "related-party" transactions, where companies involving or ultimately controlled by Mr. Jooste or his associates made deals with Steinhoff without declaring their conflicts of interest. The deals, according to analysts, were used to inflate profits or move around bad debt.
In January 2018, Steinhoff's acting chairwoman, Heather Sonn, told South Africa's Parliament that the chairman of Steinhoff's audit committee had reported Mr. Jooste to the South African police for allegedly breaking anti-corruption laws.
In his testimony to Parliament, Mr. Wiese, Steinhoff's former chairman, said the problems at the company came "like a bolt out of the blue," and he described the days after Mr. Jooste's resignation as "absolute turmoil."
In a September appearance before Parliament, Mr. Jooste denied knowledge of any accounting regularities at the retailer and put the blame on the company's auditors. He also blamed a former European business partner -- who has filed multiple lawsuits against Steinhoff -- for creating the uncertainty that led to the plunge in the company's share price.
Mr. Jooste, an accountant by training, served as the company's CEO for nearly two decades, and those who knew him in that role doubted that he was in the dark about the accounting irregularities.
"He would know every number from every division backwards," Brian Pyle, an analyst at Old Mutual Investment Group in Cape Town, said at the time the scandal broke. "You couldn't fox him on numbers, that's for sure."
Write to Alexandra Wexler at email@example.com