Home > Legal and Reg Issues > Corporations Under Fire

Corporations Under Fire
Accounting Practices of Ahold, Fleming, K-mart and Others
Spell Big Trouble

By Bob Houk

Reprinted with permission from Outlook Magazine. Bob Houk is with CoAMS, Inc., a Chicago-based firm specializing in trade promotion management, consulting, services, and software.

Ahold gets caught fudging the numbers

The latest round of troubles began when Ahold s U.S. Foodservice division, which supplies restaurants, hotels, schools, and such, admitted in February 2002 that their results were off by about $500 million.

The trouble seemed to stem from multi-billion dollar acquisitions that Ahold made in 2000 and 2001 that didn't pay off as quickly and as well as anticipated. US Foodservice compensated by claiming discounts and rebates in its 2002 earnings statements that it had not in fact earned, because its purchases had not reached required thresholds.

By itself, the news of a major corporation having an accounting discrepancy of such magnitude would be a pretty big deal - The Economist referred to it as "Europe s Enron". But the Ahold situation is bigger than it would otherwise be, because it has had knock-on effects on others, and because it is part of a series of such embarrassments.

Effects on others

Ahold s problems have had major ripple effects on some of their suppliers. The first reported problem came with Kraft - shortly after the situation was made public, Reuters reported that "Shares in Kraft Foods Inc. traded lower ... continuing a two-week decline one analyst said was related to investor concern about its business with the troubled US Foodservice unit of Dutch grocer Ahold NV."

But that was just the start. On 3/27, the Wall Street Journal weighed in with: "The investigation into (US Foodservice) could expand to envelop two of the US food industry's biggest names, Sara Lee Corp. and ConAgra Foods Inc...."

The question had arisen over whether supplier personnel had helped US Foodservice by confirming to Ahold s auditors that rebates had been earned, when in fact they had not: "US federal investigators have received general information showing that representatives of big food firms colluded with executives of US Foodservice to inflate supplier rebates...." The article went on to say that, "The development is likely to rock the $500 billion US food industry and has broad ramifications for the way food concerns sell their products to distributors."

Although the Journal article said that Sara Lee denied the allegations, by 4/8 The New York Times reported that, "The Sara Lee Corporation said yesterday that three of its sales representatives had signed off on inaccurate rebate amounts for US Foodservice...."

ConAgra also confirmed that its sales reps had signed off on incorrect rebate amounts, one discrepancy amounting to $6 million.

The Times also said that the investigation had expanded to "at least six American food companies", naming Tyson Foods and General Mills, and that "stocks were battered by investors last week, as concern mounted that the food industry might be rife with accounting scandals."

Effects on Ahold corporate

In addition to the obvious effect of having to restate $500 million, Ahold had to dump its CEO and CFO, and was reported by Reuters on 3/14 to possibly be losing business. A few accounts were reported to have moved and, "In a memo to clients, The Hale Group, a food industry consultant, suggested that manufacturers shift their business to regional distributors."

Ahold was also reported to be preparing to sell off some of its businesses to stabilize its finances.

And more

The Ahold/Sara Lee/Conagra/et al. mess would be bad enough by itself, but it s even more serious when viewed in light of some of the other allowance-related problems that have beset manufacturers and their customers recently.

In early March, the SEC announced an investigation of Fleming. Knight-Ridder on 3/6 wrote that the government was "scrutinizing Fleming's accounting practices and its financial arrangements with its vendors." They board of directors simultaneously announced that the CEO, Mark Hansen, was being axed.

By 4/2, we were reading in the Boston Globe that they were in Chapter 11, in part because "the confidence of suppliers, who typically ship goods paid for on credit, was ... undermined by questions about Fleming's accounting, analysts said."

So Fleming followed Kmart into Chapter 11. And the two events are related not only in that Kmart s bankruptcy had an obviously huge impact on Fleming, but also because Kmart, it was learned after its Chapter 11 filing, was engaging in similar accounting practices.

According to news articles summarized on Rod Harmon s website: "When Kmart filed bankruptcy, its auditors discovered that Kmart had not been properly documenting its vendor allowance agreements. Kmart itself has admitted that it had reported $92 million in questionable allowances during the first three quarters of 2001. Kmart was recognizing and forecasting income from undocumented vendor allowance agreements."

Harmon also reports that the US Attorney s office and a grand jury are looking into the matter and that criminal charges may be filed.

And of course, these events follow disclosure last year that Bristol-Myers Squibb had been channel-stuffing to the tune of a billion dollars, and high-profile investigations of other manufacturers for questionable practices related to allowances.

And then, as if the issue were not already reaching critical mass, a French firm of financial analysts issued a warning about Safeway, the UK grocery chain (unaffiliated with the US company of the same name), which is currently up for sale. The British paper The Guardian ran an article under the title "Safeway accused of making suppliers pay". The article says that the analysts worry that Safeway is a poor investment because it may be excessively dependent upon vendor allowances

The New York Times ran a similar article the same day, commenting that, "The analyst's report comes at a time when there are growing concerns over the way food companies account for rebates, essentially payments from suppliers tied to volume sales."

What is of particular interest in the concern over Safeway s dependence on allowances is how minor that dependence is, compared to most American retailers. According to The Times: "(The analyst) said he expected rebates at Safeway to total as much as £50 million ($80 million) for the financial year that will end on March 30, or about 12% of pretax profit for the period." Compare that to trade funding that can amount to 6%-15% of a typical retailer's revenue (according to AMR Research). Since profits are in the low single digits for most retailers, that means that trade funding is usually more than 100% of profits. If Safeway UK is vulnerable at 12% ....

Back to FASB Menu

Updated as of 09/01/2006