Europe's Enron: Royal Ahold, N.V.

Abstract

Royal Ahold, N.V., is a large multinational company based in The Netherlands that was founded in 1887 by Albert Heijn. Three generations of the Heijn family oversaw the company's retail grocery business. In 1989, the company hired a professional management team. The new management team expanded Royal Ahold's operations by purchasing grocery chains around the globe, resulting in the company becoming the third largest food retailer in the world. In 2000, the company diversified into the wholesaling segment of the huge food industry when it purchased U.S. Foodservice, a large food wholesaler based in Columbia, Maryland. Royal Ahold's professional management team established aggressive earnings and revenue goals for the company each year and pressured their subordinates to achieve those goals. An incentive compensation plan awarded large year-end bonuses to managers of operating units that met or surpassed their financial goals. Royal Ahold's decentralized operations, when coupled with the strong incentives to achieve unrealistic earnings and revenue goals, created an environment in which fraud often flourishes. In early 2003, Royal Ahold's independent auditors suspended their fiscal 2002 audit of the company when they discovered numerous potential irregularities in the company's accounting records. Subsequent investigations documented that the company had improperly included the operating results of foreign joint ventures in its consolidated financial statements, had accounted improperly for initial acquisition costs related to several of those joint ventures, and had materially overstated “promotional allowances” due from company vendors. The disclosure of the massive accounting fraud resulted in criminal and civil lawsuits being filed against the company and its top executives in both Europe and the United States. This case examines accounting, auditing, and control issues pertinent to multinational companies. In addition, the case examines recent controversies arising between and among international regulatory agencies and rule-making bodies within the accounting and auditing disciplines. Finally, the case illustrates important risk factors commonly associated with financial statement fraud.

Do United States accountants' personal values match the profession's values (ethics code)?

“…Other post-SOX accounting frauds at companies listed on US stock exchanges include HealthSouth (Beam and Warner, 2009), Royal Ahold (Knapp and Knapp, 2007), Lehman Brothers (Dowd, 2016) and American International Group (Armstrong and Balch, 2015). While the revelations of major accounting frauds are direct examples of accounting failures, they are not the only measures of such failures.…”

Shareholder protection, ownership concentration and FDI

“…It may become easier for parent's managers to explicitly or implicitly encourage the local employees of the subsidiary to participate in misconduct. For example, in the case of Royal Ahold, a company in The Netherlands where legal shareholder protection is much weaker than in US and UK, the managers received minimal penalties for corporate fraud whereas in US they would have received more than 10 years in prison for a conviction on the same facts (Knapp & Knapp, 2007).…”

FAR Research Project: What do we know about group audits?

“…Foodservices, it is not hard to imagine how coordination and communication challenges between the Netherlands-based group auditor and its U.S. affiliate could lead to audit deficiencies, and a failure to discover ongoing fraudulent activities at Ahold's subsidiary U.S. Foodservices. The group audit of Royal Ahold comprised dozens of individual operating units, which were very loosely organized under one corporate umbrella, rendering planning and coordination extremely challenging (Knapp & Knapp, 2007). In the United States, PCAOB board members and inspectors suggest that group audit deficiencies include unresolved problems between the group and component auditors, insufficient audit testing and/or audit documentation, or, in egregious cases, non-performance of the requested work (Doty, 2011b;Munter, 2014;PCAOB, 2016b;.…”