The US Foodservice Accounting Fraud

By: Pallavi Vyas

Raiyan Rahmath Ronak Jain

Anvesha Sinha K.Jitesh Kumar

Introduction To AHOLD

• Started in Zaandam near Amsterdam,1887.• Run by the Heign family for Three generations.• Taken over by Albert Heign in 1887.• Listed on the Amsterdam Stock Exchange in 1948.• Got the name Ahold in 1973 & was made the parent

company.• In 1989 it became a professionally run company.• In 1993 Hoven took charge of Ahold and sales rose to 12.3

Billion Euros.• In 1996 started operations in various countries like

Spain,Thailand,Poland,China & Brazil.

• Under Hoven Ahold went under major expansion spree.• 15% Annual Growth from 1995-2002.• Under him Ahold became the Third largest RETAILER in

the world.• In 2003 had over 9000 stores across the world under 10

different names.• Its operations were spread across Eastern Europe, the

US, Asia & Latin America.• In the US had 1600 stores and the Second Largest

Foodservice distributor-USF.

USF• Second Largest Foodservice distributor in the US.• Acquired by Ahold although the glitches reported by the

Investigating teams.• USF was engaged in purchasing goods from vendors & re-selling

them to customers.• Derived a substantial part of income as Promotional Allowance.• Deferred from supplier to supplier.• Auditor-Delloitte informed the parent company of many

irregularities being carried out by the MGT. of USF in reporting the Promotional Allowance.

• Led by Mark Kaiser & Tim Lee.

Recommendations given by Delloitte to Ahold.

• Delloittee recommended that USF should follow an account by account system of calculating the promotional allowance.

• Should not follow Historical method of calculating P.A. Problems Detected in USF.-Lack of common IT platform to keep information integrated.-The entry was not made considering Individual supplier.-Was applying a uniform rate of rebate.-Instead of statements of accounts, conformation letters were

used.-Faking of confirmation letters.-The letters stated balance of P.A. according to USF’s officials.

Events Leading To The Disclosure

• USF not able to achieve Annual Target of 15% over Sales in 2002.

• Orders large quantity from Suppliers & Manufacturers.• Books P.A. immediately rather than booking it after the

payment is made to the Suppliers & Manufacturers.• USF Regional Offices were forced to place orders for

large quantities.• Due to this USF had huge Inventory & had to sell goods

at a loss.

• In January,2003 a Former employee with Alliant sent a mail to the Investor Relation Department of Ahold regarding the Fraud.

• He alleged that this was carried out by the Top Mgt. of USF to secure Higher income by booking Higher P.A.

• In February,2003 a Delloitte employee conducting the investigating found 3 letters of suppliers which created certain problems.

The Investigation.

• On February,2003 authorized a investigation by law firm White & Case LLP.

• Forensic Accounting Advisors Protiviti Inc.• Price Waterhouse Coopers,SEC & Morvillo PC

were also appointed to investigate the fraud.

Findings.

• SEC found that USF has been overstating Operating Income by recording higher P.A. since 1998.

• P.A. were wrongly accounted & instances of realizing income when not meant to.

• SEC alleged that auditors did not take adequate steps to bring out the irregularities.

• Selling of various MFG. Assets to United Signature Foods & getting into loss making contracts with it.

• PWC found that USF had falsely declared pre-tax earnings could be as high as 856 million US $.

• PWC said that Ahold did not have a good internal control system.

• The report also indicated of the corrupt practices being followed by USF employees.

• Morvillo blamed that USF Mgt. did not implement proper control mechanisms & Accounting systems in the company.

• According to ECACA the CEO & CFO of USF were primarily responsible for weak internal control system.

• Miller’s leadership style was questioned as Miller preferred working with Loyalists & new employees found it tough to work with him.

• The report also alleged that the 2 auditors who were suspended did not have adequate knowledge of the accounting procedures of P.A.

The Aftermath• Four of the former Executives i.e. Kaiser,Lee,Resnick & William

Carter were indicted for pocketing huge bonuses by fraud.• Miller,Hoeven & Meurs resigned.• Apart from inflating profits,Lee was accused off insider trading.• 9 employees of the food industry were indicted for false

statements.• In October,2003 Ahold reported a loss of 1.3 Billion Euros & a

revised Sales figure of 54.2 Billion Euros(12.3 Billion less).• Ahold settled a case of 1.2 Billion $ filed by its shareholders

which led Ahold to get into a selling mode & sell its ventures.

Action Taken.

• Anders Moberg of IKEA & Larry Benjamin were appointed as the CEO.

• Financial control systems were being tightened.• Brian Hoterak was appointed CFO for the US Ops by

the Chief Business Controlling Officer.• A new division was created to handle Aholds Capital

budgeting & Strategies.• New teams were created.• A new IT system was launched which helped in

integration of data.

• In 2003 November, a Corporate Restructuring Plan was Launched called ‘Road To Recovery’ which spelled out the objectives of Ahold.

• The plan focused on 4 areas-Reengineering the food retail business.-Recovering the value of USF.-Reinforcing Accountability.-Restoring the financial position of Ahold.

Thank You.