Royal Ahold NV - The US Foodservice Accounting Fraud

            
 
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Case Details:

Case Code : FINC044
Case Length : 18 Pages
Period : 2000-06
Pub Date : 2007
Teaching Note : Available
Organization : Royal Ahold NV, US Foodservice
Industry : Retailing
Countries : US/Netherlands

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Excerpts

Accounting Fraud at US Foodservice

Before the acquisition of USF in April 2000, Ahold was mainly involved in retail activities in the US. After Ahold decided to acquire USF at US$ 26 per share in February 2000, two teams were sent to the USF to conduct due diligence.

The first team carried out financial due diligence and found that in a report dated August 1999 by KPMG, the auditors of USF, it was stated that promotional allowances had not been accounted properly. The report mentioned that there could be an error in reporting income and recommended that USF should adopt a more formal system to account for promotional allowances...

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

Events Leading to the Disclosure

In the last quarter of 2002, USF started ordering large quantities of products from its suppliers in its efforts to meet its revenue targets. The company had realized that it would not be able to meet the annual target of over 15% growth over 2001 sales. USF booked the rebates it was supposed to receive from the suppliers immediately but did not make payments to them for the products ordered. In order to meet the targets, in October 2002, top executives in USF asked all its regional managers to order large quantities of food supplies and other products from the manufacturers...

The Investigation

Immediately after the accounting irregularities in USF were reported by Deloitte, on February 12, 2003, the company authorized an investigation by law firm White & Case LLP and by forensic accounting advisors from Protiviti Inc. In March 2003, Morvillo, Abramovitz, Grand, Iason and Silberberg PC (Morvillo) and PricewaterhouseCoopers (PWC) conducted additional investigations of the accounts of USF. SEC also conducted a probe on the accounting irregularities at Ahold. In the investigation conducted by SEC, it was found that since 1998, USF had been overstating operating income by recording higher promotional allowances.

According to SEC, "USF artificially inflated its operating income by recording promotional allowances that were not earned in the period recorded, and in many cases were entirely fictitious." SEC instigated public administrative proceedings against two of the auditors of KPMG, who had audited and reviewed financial statements of USF in the year 1999 and for the first two quarters of the year 2000...

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