What's going on?
Shares of international retail giant Steinhoff plunged as much as 66% on Wednesday following the resignation of the company’s CEO (tweet this). He’s alleged to have helped cook the company’s books, concealing hundreds of millions of dollars of losses.
What does this mean?
Based in both South Africa and Germany, Steinhoff is Europe’s second-largest furniture retailer and has a substantial retail presence in Africa. It also owns a number of household brands around the world, including Poundland in the UK and Sleepy’s in the US.
Allegations recently surfaced that Steinhoff made false statements about its earnings, inventing bogus sales in order to hide major losses inside the company. Steinhoff had been contesting the allegations – but investors are clearly fearful that the resignation of its CEO and his deputy is an indication of guilt. The company has appointed one of its biggest shareholders as its interim CEO, and he’s called in a major accounting firm to review its books for any irregularities.
Why should I care?
The bigger picture: Accounting scandals can end up decimating a business.
Not only do dodgy dealings tarnish the reputation of companies (or entire industries), but they can result in hefty fines and write-downs that cause massive financial loss. Toshiba, for example, almost had to declare bankruptcy after it uncovered accounting fraud at one of its American subsidiaries. Steinhoff, which is now at significant risk of going under, may try to follow Toshiba’s example and sell off parts of its business (like Poundland) in an effort to survive.
For markets: Few were expecting Steinhoff to tank so severely.
Steinhoff is a historic German company with headquarters in South Africa, but its stock has been trading on German exchanges since 2015. Similar German stocks to Steinhoff have pretty much all had an excellent year, and most market experts were expecting Steinhoff to do just as well (although it seems that a number of astute investors were shorting its stock).