As an accountant, it’s important to be aware of the different warning signs and characteristics of fraudsters. To steer clear of corrupt businesses, you need to be on the lookout for both obvious and subtle red flags.
Here at Gusto, we aim to empower accountants by providing invaluable resources and information. That’s why we, along with our partners at CPA Academy, presented an enlightening webinar all about financial fraud. We released our webinar titled, “Fraud: Steinhoff’s Overstated Profits and Dane Cook’s Embezzling Half Brother,”, and you can watch the entire presentation here.
In this article, we’ll share helpful highlights from the webinar presented by Greg Kyte, founder of Comedy CPE, and Caleb Newquist, editor-at-large at Gusto. You’ll learn all about a fascinating case of financial statement fraud committed by Steinhoff International and its former CEO, Markus Jooste.
Steinhoff’s Markus Jooste
Markus Jooste became the CEO of Steinhoff International in 2000. In 2017, he resigned his position shortly before the public discovered Steinhoff International’s overstated profits. Jooste and a group of executives were responsible for overseeing an extreme case of financial statement fraud. Jooste and his team overstated the company’s earnings by $7.4 billion.
“It’s the biggest accounting scandal that’s ever happened for a company based in South Africa. This was ground shaking, and it resulted in a $12 billion valuation write down for the company. … The average loss from all the types of occupational fraud … [is] $1.5 million. We’re talking $7.4 billion on this one.”– Greg Kyte
Although the number of overstated profits greatly exceeded the average amount lost to fraud, Markus Jooste didn’t display overwhelming signs of corruption. Greg and Caleb noted that Markus Jooste was a charismatic CEO with an aggressive management style, but those are common characteristics among many CEOs. During his time with Steinhoff International, Jooste was highly regarded and believed to be a successful leader:
“No one challenged Markus Jooste, … [and the] reason why people didn’t challenge him is because he was good at his job. Now, obviously, part of him being good or appearing like he was good at his job was because he was committing this fraud, but it’s a weird thing that kind of folds in on itself where you’re finding success through fraud, so you continue that fraud to continue that appearance of success. There’s really kind of this vortex that can suck you in on so many different types of frauds—it’s unbelievable.”– Greg Kyte
Markus Jooste appeared to be running the company well, but part of the reason why was because of the company’s overstated profits and hidden losses. Jooste and the other executives committed financial fraud for over eight years, so the company’s appearance of success largely resulted from corporate fraud.
ACFE red flags for corporate fraud
The Association of Certified Fraud Examiners (ACFE) lists a series of red flags grouped into two different categories: personal life and work duties. Some of their personal life red flags included living beyond their means, financial difficulties, family problems, and addiction.
Although Markus Jooste lived an extravagant lifestyle, there’s no proof of any financial or personal problems leading up to the Steinhoff International scandal. Greg noted that Markus Jooste owns a series of racehorses and could potentially have issues with gambling, but there was no proof that he had a gambling addiction.
The second classification of red flags from the ACFE is work duties. Some of the red flags within the “work duties” category include close association with vendors or customers, control issues, irritability, suspiciousness, defensiveness, and “wheeler-dealer” attitude.
The main red flag that Markus Jooste demonstrated was a “wheeler-dealer” attitude, meaning that he was aggressive when it came to the growth of Steinhoff International:
“Steinhoff had an intense culture of growth, and they were heavily focused on success. Again, if you’re looking at fraud, you’re looking at the fraud triangle. It seems pretty clear, again, in retrospect, that Steinhoff culture was definitely putting some pressure … that may have been the reason why this was happening, but I also think that maybe Jooste put a fair amount of pressure on himself too.”– Greg Kyte
The fraud triangle includes three categories: opportunity, rationalization, and pressure. One red flag Markus Jooste demonstrated was the overall pressure he faced to grow the company.
Although it is easy to see red flags with Markus Jooste and Steinhoff International in hindsight, there weren’t clear corruption indicators until the German government raided its offices in 2015.
Greg speculated that Markus Jooste may fall into the category of not displaying red flags leading up to the financial scandal:
“85% of fraudsters exhibit … at least one behavioral red flag, but what I think is more interesting is that 15% of fraudsters exhibit no red flags at all. I think that Markus Jooste might’ve been that guy.”– Greg Kyte
Markus Jooste didn’t leave clear behavioral signs that he was engaged in fraud, but he did engage in corrupt behavior as the scandal was coming to light. In 2017, he engaged in insider trading.
“In late 2017, Markus Jooste called up three of his [friends] and was like, ‘Hey guys, just so you know, I think in the near future we might have a valuation problem with some shares of Steinhoff. Maybe this is a good time to liquidate some of those [shares].’ … He was convicted of insider trading, and was fined $9 million.”– Greg Kyte
German prosecutors charged Markus Jooste with insider trading because he tipped off associates of the problems at Steinhoff International. As of 2021, the case against Markus Jooste for accounting fraud is still ongoing.
Steinhoff International’s signs of fraud
One notable ACFE red flag category that Steinhoff International did have were “control weaknesses.” This meant there weren’t proper checks and balances in place. Greg noted shareholders could have known about the situation sooner if the board of directors held more power:
“There were not enough checks on management by the supervisor board. The board of directors didn’t have enough ways to make sure management was reeling things in. … If the supervisor board had dug into stuff more, they maybe could have detected this earlier.”– Greg Kyte
Although better oversight could have mitigated the damage Markus Jooste dealt against the company, it’s challenging to fault the board’s oversight because many companies have a weak checks and balances system. It’s a red flag, but so many companies have an ineffective board that it’s challenging to judge Steinhoff International on that alone. It’s an issue that reverberates across many different companies, and most of those companies haven’t been proven to engage in financial fraud.
Another potential red flag observed by the ACFE was a complicated company structure:
“The other thing they brought up was the complicated structure, … [but] if you’re a multinational company and that’s part of your business strategy, you can’t avoid a complicated structure. These guys operated in over 32 countries, and they had over 40 different brands of 40 different profit centers, so there’s plenty of complexity there.”– Greg Kyte
A company that has a complicated structure may be a red flag, but it’s difficult to avoid having a complex design when you’re a multinational and multi-brand company.
The ACFE provides beneficial information regarding potential red flags of financial fraud, but Markus Jooste and Steinhoff International didn’t exhibit significant warning signs until 2015, which was at least six years after they had started engaging in financial statement fraud.
Learn more about financial statement fraud
It’s easy to see warning signs with Markus Jooste and Steinhoff International now that the scandal is public, but before the German government raided Steinhoff’s offices, people largely didn’t suspect the company of corruption. As an accountant, it’s critical that you’re on the lookout for corrupt behavior in order to avoid working with unscrupulous clients and businesses. It’s important to note that not every individual or company that engages in fraud will exhibit obvious warning signs.
Want to learn more from Greg and Caleb about financial fraud? Read Part One and Part Three of this webinar articles series. In Part One, Greg and Caleb go into more detail about the Steinhoff International case, and in Part Three, they cover a fascinating case of embezzlement. You can also watch the full webinar here.
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