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Steinhoff says accounting probe examines possible overstatement of earnings

Steinhoff International Holdings NV, the embattled South African retailer, on Feb. 28 disclosed limited details of an independent investigation into its accounting that suggested it may have overstated earnings.

The company said in a statement that the accounting irregularities related largely to the group's central European business, where it operates brands such as Poco and Lipo — sellers of furniture and household goods — and Pepco, which sells clothing, footwear and accessories.

It said the investigation, which PriceWaterhouseCoopers is conducting, is "substantial, complex and time-consuming," involving the company's auditor, Deloitte, as well as regulators and current and former employees.

"A key focus area of the PwC investigation is to review certain off-balance sheet structures and transactions, including those with certain closely related parties," Steinhoff said in the statement. "The company's expectation is that such structures and transactions will have resulted in historical revenue and assets in certain parts of the group having been overstated ... resulting in historical profits of the company having been materially overstated." Steinhoff did not provide a time frame.

The company, which is incorporated in the Netherlands and has its primary listing on the Frankfurt Stock Exchange, is embroiled in a legal dispute with a former joint venture partner over Poco. On Feb. 20, a Dutch court ruled Steinhoff to reverse its decision to consolidate 100% of Poco and to restate its 2016 accounts based on a 50% controlling interest.

Poco will be changed to a 50% equity accounted interest from a 50% controlling interest, Steinhoff said. The impact of a 50% equity accounting versus a 50% controlling interest is neutral. It noted that disputes with its former joint venture partner were ongoing.

Steinhoff, which owns Mattress Firm in the U.S., owner of the Sleepy's brand, and U.K. discount chain Poundland, disclosed Dec. 6, 2017, that it was investigating apparent accounting irregularities. It has been unable to report its consolidated financial statements for the fiscal year ended Sept. 30, 2017, and it has said earnings for fiscal years 2015 and 2016 need to be restated.

CEO Markus Jooste resigned Dec. 6, 2017, with immediate effect. On Jan. 30, Steinhoff said the chairman of its audit committee had reported Jooste to the Directorate for Priority Crime Investigation, known as the Hawks, on suspicion of committing criminal offenses. S&P Global Market Intelligence has been unable to reach Jooste for comment.

"PwC has already conducted interviews with certain group executives (current and former) and has collected raw data from computers, cell phones and servers (with the assistance of digital forensics) and documentation analysis," according to the Feb. 28 statement. "The investigation aims to determine the background for certain transactions and agreements resulting in the alleged irregularities and compliance breaches."

Steinhoff added that its accounting issues have sparked various legal proceedings, including a collective action by the Dutch Investors' Association and investigations by the South African Financial Services Board, the Johannesburg Stock Exchange and the South African Companies and Intellectual Properties Commission.

The Feb. 28 statement included a trading update for Steinhoff's fiscal first quarter ended Dec. 31, 2017. Stripping out Poco, Steinhoff said retail revenue for the quarter fell 5% year over year to €4.86 billion from €5.10 billion a year earlier. Retail revenue from Europe and the U.K. increased 2% year over year to €2.73 billion from €2.66 billion, while retail revenue in the U.S. fell 16% to €638 million from €760 million.