The recent release of “Steinheist” on MultiChoice Group’s streaming service platform, Showmax, details arguably the costliest corporate scandal in South Africa’s history, namely, Steinhoff. We want to share with you what we learnt from previous corporate scandals that helped us avoid not only Steinhoff but others (e.g., Tongaat). At First Avenue Investment Management, we long recognised the importance of calibrating the potential for the catastrophic risk of permanent loss of net asset value and market value associated with financial statement fraud.

In this article, we will begin by introducing a concept known as earnings management and detailing how and why a company’s management team partakes in it. We will then discuss Steinhoff and Tongaat Hulett as two case studies of financial statement fraud in corporate South Africa. We will conclude the article by describing the framework we employ at First Avenue to combat the risk of earnings management and financial statement fraud.

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