Firm Mattresses? Yes. Firm Financials, Not So Much

Steinhoff International Holdings NV (Steinhoff), which owns well-known mattress retailer Mattress Firm, was recently recognized as one of the worst fraud cases of 2019 in an article from the Association of Certified Fraud Examiners’ Fraud Magazine. The situation first came into view in December 2017, when Steinhoff announced an investigation into accounting irregularities identified during the course of the audit of its 2017 financial statements. CEO Markus Jooste resigned on the same day the investigation was announced. The investigation caused Steinhoff to withdraw its 2016 financial statements and delay the issuance of its 2017 financial statements. In its 2018 half-year report, Steinhoff disclosed the following:

 

Management is reviewing the validity and recoverability of certain assets of which the overstatement was initially estimated to be in the region of €6 billion. In addition, it has since emerged that the apparent overstatement of profits and the accounting treatment of transactions which appear to not be at arm’s length, combined with increased discount rates resulting from increased risk profiles have resulted in material additional impairments of goodwill, intangible and other assets.

Fast forward to March 2019, when Steinhoff released a document summarizing the results of the forensic investigation to date. As shown in the chart below, the investigation revealed significant fictitious or irregular transactions recorded from 2009 through 2017 involving allegedly independent third-party entities. In truth, these entities were found to be either closely related entities or otherwise have indications of management control from Steinhoff Group or its former employees. The recorded transactions with these entities involved profit and asset creation and in many cases resulted in loans or other receivables that lacked economic substance.

Following the announcement of the accounting investigation, Steinhoff has faced many challenges, including:

• Markus Jooste, former CEO, and other executives are no longer with the company
• Steinhoff’s financials have been restated
• Several legal proceedings have been initiated against the company
• Steinhoff’s market capitalization has plunged (see figure below).

 

Factors at play in the Steinhoff situation, as with many financial statement frauds, included internal control problems, breakdowns in oversight, and weak governance. In the context of Dr. Donald Cressey’s fabled “fraud triangle” (pressure, opportunity, and rationalization, factors such as these often create the opportunity for fraud to be committed.

Steinhoff, for its part, has recognized the need for stronger governance. According to its June 2019 Quarterly Update, the firm rolled out a Remediation Plan “that is aimed at addressing previously identified weaknesses and substantially enhancing standards of corporate governance and control.”