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SOUTH Africa is emerging from an era of unparalleled financial irregularity. First it was the Guptas and then, late last year, the news broke that Steinhoff, a darling of the JSE, was facing collapse due to corporate accounting irregularities.
Losses from Steinhoff are expected to amount to more than R100bn, far exceeding the amounts the Guptas are accused of looting in over a decade of state capture.
And the biggest victims of the debacle are millions of government employees who contribute towards the Government Employees Pension Fund, which keeps 400 000 pensions afloat.
If Steinhoff goes bankrupt, which is not ruled out, 130 000 jobs across the world will be threatened.
Mark Graham, an associate professor in the College of Accounting at the University of Cape Town (UCT), says there would be far fewer situations such as these if non-financial personnel were suitably equipped to understand financial statements and finance jargon, enabling them to spot the irregularities and blow the whistle before things get out of hand.
Graham, who also convenes the Finance for Non-Financial Managers programme at the UCT Graduate School of Business (GSB), says all organisations – be they government departments, major corporations or small businesses – would benefit if staff other than finance directors and accountants had even basic financial knowledge.
Learn to speak the language of business
“Finance is the language of business, so if more people understand this language more may be ready to expose possible problems, in the same way that Eskom’s group executive for legal and compliance, Suzanne Daniels, courageously blew the whistle on the Guptas’ involvement in state capture at the parastatal,” he says.
The advantage of being able to correctly interpret financial statements and understand the financial landscape is that individuals don’t have to rely on other people to explain the numbers to them.
They are empowered to make up their own minds and, crucially, to recognise the red flags when they see something is amiss.
As Magda Wierzycka, Sygnia Group CEO, put it in a recent Daily Maverick article: “When I looked at the financials of Steinhoff (not my day-job, by the way) it took me exactly half an hour to figure out that the structure was obfuscated, that financial items made no sense, that the acquisition spree was not underpinned by any logic and too frenzied to be well thought out, and that debt levels were out of control.”
“You need to be able to examine the financial health of the organisation, identify problems and inefficiencies and contribute towards improving financial performance – regardless of which sector you are in,” agrees Graham.
Know what to look for
Some red flags to watch out for, says Graham, are high levels of debt or reported profits that seem too good to be true.
“While debt is critical for leverage and an important tool to help a company expand and grow, excessive debt can prevent them from being agile because lenders often place restrictions on loans, locking companies into a strategic path that might no longer be good for them,” comments Graham.
He adds that as Wierzycka pointed out, this was a warning sign that was there to be seen in the Steinhoff financials.
Inflating current period earnings on the income statement by artificially inflating revenue and gains or by deflating current period expenses is also a favourite tactic in corporate fraud, says Graham.
“This makes the company look better on paper.”
There are many examples of companies that went belly-up after posting some spectacular revenues. One of the best examples locally is Leisurenet.
It was regarded as a hugely successful company in the 1990s, and then imploded in 2001. It emerged that the company had been treating 75% of the revenue from a two-year gym contract as accruing in the first year, a process known as “upfronting”.
“Companies have also been known to do the exact opposite and deflate current period earnings on the income statement by deflating revenue or by inflating current period expenses,” says Graham.
“There are many reasons why a company may want to appear weaker than it actually is – for example, it may want to discourage a potential buyer.
"Similarly, all of the bad financial information surrounding the company in one period could be transferred to the current period when the poor performance can be attributed to the current macroeconomic environment.”
For Graham, getting more people to understand how the ebb and flow of finances in an organisation can make or break it has been a lifelong commitment, and is at the heart of what he teaches to students at the business school.
“Participants on my programme will learn how to read an organisation’s financial statements and explore their parameters. They will be given the tools to analyse cost behaviour and financial performance and will participate in creating a financial plan,” he says.
“It is all about giving more people the knowledge and confidence needed to create value for their organisation.”
- Kumeshnee West is director of executive education at the UCT Graduate School of Business. Views expressed are her own.
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