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It is not often that we see the details of how businesses are committing $ 7.4 billion worth of fraud.
Steinhoff International Holdings, a former empire of retailers and other companies in Europe, Africa, Australasia and the United States – including the Mattress Firm, now bankrupt – has collapsed in December 2017 when he announced the discovery of "accounting irregularities", without mentioning amounts nor methods. He then hired PricewaterhouseCoopers (PwC) to investigate.
The company has published an 11-page overview of PwC's report on the forensic investigation. The PwC report remains under lock and key. I guess he names the leaders by name, whereas this summary does not do it. The amount of accounting fraud detected so far amounts to 6.5 billion euros, or 7.4 billion dollars.
But they still do not know the full extent. According to the general overview, "there are still a number of unanswered questions, particularly regarding the identification of the true nature of the ultimate counterparties or beneficiaries of various transactions".
Nevertheless, we rarely know how to commit a $ 7.4 billion fraud.
Here are the nuggets that I extracted from the report:
"A small group of former executives from the Steinhoff Group and other non-leaders, led by a senior executive, structured and implemented various transactions" from 2009 to 2017 "who had the result of substantially inflating profit and asset values Steinhoff group over a long time. "
"The PwC investigation revealed a communication model which shows that senior management is asking a small number of other Steinhoff executives to execute these instructions, often with the help of a small number of people not employed by the Steinhoff group. . "
"Fictitious and / or irregular transactions were concluded with parties that would be, and appear to be, independent third parties of the Steinhoff Group and its officers, but which now appear to be closely related to and / or have strong indications of control by the same small group of persons mentioned above. "
"Fictitious and / or irregular income in many cases, was created at the level of a middle holding company of the Steinhoff group, then allocated to underperforming entities of Steinhoff so-called "contributions" this has taken many different forms and has resulted in increased revenues or reduced expenses in these operating entities. In most cases, the operating entities received cash for contributions from another Steinhoff group or from companies other than Steinhoff (funded by Steinhoff), which resulted in intercompany loans and receivables. "
"The Transactions identified as irregular are complex and involve many entities over several years and have been supported by documents including legal documents and other professional opinions which in many cases have been created subsequently and retroactively. "
"The PwC report identifies three main groups of legal persons [Campion/Fulcrum Group, Talgarth Group, TG Group] which were counterparties of the Steinhoff Group with respect to the transactions that were the subject of an investigation. Other entities were also identified with the conclusion that there was a the practice of using names of similar entities and changing the names of companies, resulting in confusion between. "
Revenue generation and asset value inflation were generated through four categories of transactions, some of which were "concluded to mask the extent of overvaluation of assets":
1. Creating profits and assets
"The PwC report notes that some entities in the Steinhoff Group have recorded sales or perceived benefits or revenues from entities that are alleged to be unrelated to the Steinhoff Group, but which now appear to be closely related to and / or have strong evidence of control by the society. Steinhoff Group or certain of its former employees and / or third parties or former directors. "
The "fictitious and / or irregular transaction income" recorded during the survey for the years 2009-2017 amounted to 6.5 billion euros (7.4 billion dollars), year:
"The revenues from these transactions were often not paid to the Steinhoff Group by the so-called independent entities, which resulted in borrowings or other debts owed to the Steinhoff Group which had little or no economic substance and which, as that such, did not colonize. "
2. Overestimation of assets and reclassification
"The non-recoverable receivables resulting from the fictitious or irregular revenues generated by the transactions described above … were subsequently settled either by compensation mechanisms or reclassified in different assets."
"In a number of cases, non-recoverable debts have been offset by inter-group payments and the assignment of debt. As a result, the loans were transferred between entities of the Steinhoff Group and around supposedly independent entities. These netting agreements and / or debt transfers resulted in a movement of borrowings, which were accounted for as repayments by the original party. "
"In other cases, often through so-called independent entities, bad debts have been reclassified into different asset classes, for example, cash equivalents, increases in the value of fixed assets, increases in the value of trademarks or goodwill. These reclassifications gave the impression that the non-recoverable debt had been settled and that the values of other assets were inflated. "
3. Asset and Entity Support
"The resulting inflated asset values were then substantiated, for example:
- increase the rent payable in terms of intergroup leases for properties based on assessments that may not have been reliable;
- increase royalties payable under intergroup royalty agreements for brands; and or
- orchestrate intergroup payments and debt transfers to demonstrate the settlement of cash equivalents ".
"These inflated costs have been included in operating companies' results, increasing the cost base and, in some cases, increasing the losses of these entities. This had the following effects:
- losses incurred by the operating entities could not support the acquired goodwill; and
- the operating entities did not contribute positively to the Steinhoff group's results. "
4. "Contributions"
"The losses in the operating entities were mitigated by the Steinhoff Group, which then allocated the fictitious or irregular income that had sometimes been created in the Steinhoff Group's intermediate holding companies to the various Steinhoff business units via contributions. In many cases, these contributions to operating companies were settled in cash by other companies in the Steinhoff Group, thus creating the impression (internal and external) of their substance. "
"These contributions have had the effect of:
- operating entities appearing to be potentially more profitable than they actually were (in circumstances where contributions were greater than the inflated costs charged to that entity);
- allow forecasts to bear the price paid for the acquired entities to be respected; and
- enable operating entities to meet their budget (although budgets often include contributions). "
"The contributions of the Steinhoff Group entities to the operating entities of Steinhoff would generally eliminate consolidation; but before elimination, these contributions contributed to the profitability, liquidity, solvency and value of goodwill acquired by the operating company. "
"On the other hand, the fictitious or irregular incomes described [above] and registered with intermediary holding companies did not eliminate the consolidation because they were recorded as coming from allegedly independent entities, which inflated the profits of the Steinhoff group. "
That is why, dear reader, this is how a large corporation can commit massive fraud for nine consecutive years for the benefit of its leaders, apparently on the pretext that it is not a problem.
In the United States, the FDIC has published its summary of the 2018 performance of the more than 5,000 banks it regulates. And there are juicy bank nuggets. Lily… US banks report "unrealized losses" of $ 251 billion on investment in securities in 2018, a record since 2008: the FDIC
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