Download Koninklijke Ahold NV

Koninklijke Ahold NV
How a lack of controls led to a $1B charge
Koninklijke Ahold NV
Overview
 Royal Ahold acquires US Foodservice for $3.6B in April 2000
 Fraud revealed in February 2003
 Players: Mark Kaiser and Timothy Lee
 Scheme: Exploit lack of controls to over-accrue for vendor
rebates
 Results: Overstatement of acquisition balances $90M, 2000
earnings $110M, 2001 earnings $260M, 2002 earnings $510M
Aftermath
 Fired – Mark Kaiser, Chief Marketing Officer
 Fired – Timothy Lee, Exec. VP Purchasing
 Resigned – James Miller, CEO
 Resigned – Cees van der Hoeven, Ahold CEO
 Resigned – Michael Meurs, Ahold CFO
 Stock drops 61% on 2/24, 17% on 2/25
 Earnings overstated $880M, Pre-Tax Charge $1B
''It is a very disappointing result,'' said Dudley Eustace, Royal Ahold's
interim chief financial officer
How Was It Detected?
 ConAgra
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
Late January/Early Feburary, accounting dept found
unqualified sales representatives verifying inaccurate US
Foodservice rebates
Alerted US Foodservice and Deloitte & Touche
 Ahold Internal Investigation

Discovered irregularities in February
 Deloitte & Touche

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Discovered irregularities during its 2002 audit
Gave Ahold a clean bill of health in 2001 (~$250M in fraud)
What Went Wrong?
Cause 1: Company Culture
 Acquisition Race
CEO, Hoeven, spent $19 billion over 10 yrs to buy
companies in 30 countries
 Opening balances at the US Foodservice was
reduced by $90 million due to the fraud
 Due diligence conducted by Merril Lynch and
Ahold

 Pressure to Increase Profit

“go-go” atmosphere gone too far
Cause 2: Personal Gain
 Inflate earnings to increase bonuses
 Sales representatives at suppliers
may have been paid off
Cause 3: Shady Industry Practice
 Lack of Transparency
 Improper acceleration of revenue
recognition
 Rebates for volume/time/shelf-space
sales
 False inflation of retailer's profits
 Explains the magnitude and the duration
of the fraud
Cause 4: Weak Control Mechanism
 At acquisition, US Foodservice warned Ahold
that internal control systems on promotional
allowances were “not good at all”
 Efforts were made to improve control systems
but no significant improvements
HOW COULD THIS FIASCO
BEEN PREVENTED?
Due Diligence & The Issue of Fraud
 The Financial Times, dated 5/9/03, reported that
Dudley Eustace, Ahold then interim CFO,
commented that “the fraud should have been
detected during the process of due diligence.”
 Eustace further comments that “The company
[Ahold] has been flying blind with inadequate control
systems. Once you added collusion to create fraud,
you had a recipe for disaster.”
 “When you are doing due diligence, you are not
looking for fraud.”
If Conducting Due Diligence, Then
Questions To Be Asked Consist Of…
 What is the company’s current policy for tracking
and accruing for rebates receivable?
 Are rebates receivable currently tracked or
estimated?
 How does your company currently ensure that
rebates receivable are monitored by the internal
audit function for adequacy?
 What are the current procedures for approving
rebate programs?
Financial Statement Analysis
 Examine & compare the ratio of rebate income to
gross sales to previous year and budget
 Examine & compare the ratio of gross sales to
rebates receivable to previous year and budget
In General, Questions To Consider
 Company receive rebates from vendors? If so, in





what capacity?
Vendor rebates based on complex & opaque
formulas linked to specified volume targets?
Company accrue for rebates receivable?
An unexplained increase in rebate income?
Rebate income increased as a percentage of gross
sales?
Rebates receivable increased as a percentage of
gross sales?