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The Way of Internal Control Failures

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Internal Control Failures can be caused by many varying factors, such as, lack of management supervision, low accountability, checks and balances, separation of duties, physical audits, standardized documentation, and approval authority. It is very important for a company to be aware of all of the requirements needed in order to have a smooth functioning business. If a business begins to slack even the slightest it could leave an opening for a failure or fraud to occur. Considering Steinhoff International, because of failure of the auditors, Deloitte South Africa, uncovered fictitious and irregular transactions and incomes. From this failure, former executives and other non-Steinhoff executives were able to perform fraud over the course of about 8 years.

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Steinhoff is an international holding company, investing in a diverse range of retailers. “For 20 years, global retailer Steinhoff International Holdings NV thrived off deal-making from the U.S. and the U.K. to South Africa and Europe. Now, some of those transactions are back in the spotlights, and not in a good way,” (Accounting Today, 2019). Currently, Steinhoff has a percentage of investments in Mattress Firm (50 percent), Pepco Group (100 percent), Conforama (100 percent), LIPO (100 percent), Pepkor (71 percent), and Greenlit Brands (100 percent). Before the fraudulent actions had occurred, it is evident that the business was very successful and highly reliable according to the investees and the business itself. It was not until the fraud had occurred that investees began losing trust in the internal controls and management of the business.

According to Wolf Street, the fraudulent action that has taken place was through a small group of former Steinhoff executives and selected non-Steinhoff executives. Led by the Senior Management Executive, they were able to create and implement various transactions under different categories and labels in order to retrieve money from the business. Though at the same time these transactions where making the business seem highly profitable and successful to possible investors and investees. These various transactions implemented by the small group were under labels, such as, “contributions,” making auditors and employees look at them without suspicion or speculation. Similar to the 2001 Enron Case, Steinhoff failed to identify these transactions, resulting in many years of unknown actions of fraud and embezzlement.

The affect upon the finances of the company was found through the research of PricewaterhouseCoopers. The PwC’s investigation identified, “what it described as fictitious and irregular transactions with parties that appeared to be closely related to the same small group of people. Irregular transactions with eight firms not tied to the Steinhoff group from 2009 and 2017 amount to 6.5 billion Euros (7.36 billion U.S. Dollars),” (Accounting Today, 2019). Prior to the investigation Steinhoff announced that the business would cooperate fully with the investigation along with pursuing any claims that have been set against those who showed to be responsible for the fraudulent conduct outlined in the report provided by PwC.

In addition to the fictitious and irregular transactions, “The PwC Report finds that certain Steinhoff Groups entities recorded sales to, or received benefits or income from, entities that were purportedly independent of the Steinhoff Group but which now appear to be either closely related to and/or have strong indications of control by the Steinhoff Group or certain of its former employees and/or third parties or former management,” (Wolf Street, 2019).

From this scenario the Steinhoff took a hit in the business community. Deeming them untrustworthy, unethical, and a risk as a whole. Though with the assistance of the PwC the company was able to reveal all that had occurred. The actions had cleared the shareholders’ equity accounts, which led to many resignations throughout the company, including Markus Jooset, Chief Executive, who was impactful towards putting Steinhoff on investors lists. Though his resignation seemed suspicious he did not have any relation to the fraudulent actions occurring. The company reach out to all of their stakeholder to apologize and to explain how the situation was being handled. It was difficult for Steinhoff to recover from all that had occurred. Although over the past two year they have been able to restore their credibility and regain investments and partnerships.

Through Steinhoff International Holding N.V. there is a document written from the management board to the stakeholders of the company for each ending quarter. As a continuing effort to provide best assurance to stakeholders they wrote, “We continue to implement the Remediation Plan. Work in the period was concentrated on the completion of improvements to policies and procedures in respect of financial accounting, conflict of interest, and supplier and contract management. The ongoing implementation of the Remediation Plan will remain an area of focus throughout the 2020 financial year,” (Steinhoff International Holdings N.V., 2020). Throughout the letter they show an operational review for each of the companies invested into. Having this type of information available to the stakeholders and the public is helpful towards creating that reassurance and reliability upon the business.

In addition to the letter to stakeholders the company also has an annual report available to the public explaining each point of how the business keep accountability of their internal controls following this incident. For their beginning statement they write, “The Management Board is responsible for managing the risks associated with the Group’s activities in consultation with, and reporting to, the Audit and Risk Committee and the Supervisory Board,” (Steinhoff International Holdings N.V., 2020). Under this there are explanations covering Significant Risk Events, Risk Management and Internal Control Environment, Material Risks, Risk Interconnectivity, Financial Risk, Compliance Risk, Risk Financing, and Remediation Plan. All of these help towards bettering and re-establishing a strong internal control system throughout the Steinhoff Company.

Found specifically under the Internal Control Environment description it lays out the framework to which management should follow. This includes, strategic direction and objectives of the business; the nature and extent of risks facing the business; the extent and categories of risks regarded as acceptable; the likelihood of identified risks materializing and their impacts; the ability of the business to reduce the incidence of, and impact on the business of, risks as they materialize; the effectiveness of the implemented risk response plans; the cost of risk response plans and processes relative to the exposure and benefits obtained. The reason for the internal control and risk management systems and processes it to provide assurance to stakeholders that any and all uncertainties that could have an impact on the business are taken care of correctly.

According to the Risk Management Framework Flowchart there are three important categories in which different levels of management are accounted for. The first category is Oversight, consisting of the Steinhoff International Holdings N.V. Board and the Audit Risk Committee. This group receives all of the important information concerning the risk(s) from the following two categories. The second being the Management Board and Group Risk Management, and Operational Management, Operational Entity, and Local Governance Committee. Lastly, the third category entails Operational Entity, Local Governance Committee, and Group Internal Audit Functions.

Establishing a basis of internal control is extremely crucial toward maintaining a stable and reliable business. The can of Steinhoff seems to be most interesting though since the majority of the time students read about investors being cautious about the company that they are investing into. In this case, it is the opposite, where the investees learn to be more cautious towards the investors. Since Steinhoff showed to be a profitable company, the investees assumed that they would be able to have reliable business partnerships. 

Though this turned out to be incorrect causing Steinhoff to lose its investments/partnerships, leaving the investees looking for new shareholders. As seen after the conclusion of the investigation it is evidential that Steinhoff was able to create an efficient system in order to keep internal controls under strong support and accountability. With the Risk Management system, they also enable themselves to identify and assist with solving any risks in the earlier stages rather than when it causes more damage to the company.   

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