Reference no: EM131046724

Ahold - Rapid Global Expansion and the Group Audit

Story In 2003, Koninklijke Ahold N.V. (Royal Ahold), a 115-year-old Netherlands company, had 9,000 stores in 27 countries that served 40 million customers a week, and owned or had interest in about 9,000 supermarkets as well as discount and specialty stores in some 25 countries in Asia, Europe and the Americas. In February 2003, Ahold revealed improperly booked profit of approximately $1.12 billion. (Sams 2003) Ahold's auditor, Deloitte & Touche (DT), discovered the company's accounting irregularities as part of its 2002 year-end audit. As a result of the discovery, Ahold had to restate its audited financial statements for 2001 which had been given an unqualified audit opinion. (Weil 2003) Speaking at the company's annual meeting, Henny de Ruiter, in his last official engagement as Ahold chairman, said that Ahold's supervisory and executive boards felt responsible for the "horrendous" events. He added that Ahold would not replace DT, saying there was no evidence the auditor knew of the fraud prior to its discovery. (Bickerton & Watkins 2003) Irregularities involving improper booking of vendor allowances were discovered in US subsidiaries US Foodservice and Tops Markets. The company's Disco subsidiary engaged transactions that were illegal and improperly accounted for. Unauthorized side letters (supplements to contracts) created errors of consolidation regarding joint ventures in SwedenNorway, Brazil, Guatemala and Argentina. (Mirabella 2003) Ahold's executive and supervisory boards ordered an investigation by a forensic team from PricewaterhouseCoopers (PwC). For the period April 1, 2000 (the effective date of Ahold's acquisition of US Foodservice) to December 28, 2002, (the end of Ahold's 2002 fiscal year), PwC has identified total overstatements of pre-tax earnings of approximately $880 million. Of this amount, approximately $110 million relates to fiscal year 2000, approximately $260 million relates to fiscal year 2001, and approximately $510 million relates to fiscal year 2002. In addition, PwC identified approximately $90 million of adjustments required to be made to the opening balances for US Foodservice at the date of its acquisition. This consists of a reclassification of such amount from current assets to goodwill primarily as a result of required write-offs of vendor receivables. (NACS 2003) The forensic accounting work at Albert Heijn, Stop & Shop, Santa Isabel in Chile, Ahold's operations in Poland and the Czech Republic, and the ICA Ahold Scandinavian joint venture found no evidence of financial fraud. (NACS 2003) The main problem in the US was improper booking of vendor allowances. The allowances are a broad industry term that covers everything from vendor payments for prime shelf space in a store, to rebates awarded to retailers who hit sales targets for suppliers' products. These payments were allegedly booked too high and were, in some cases, booked without the manufacturers' permission. Subsidiaries were also faulted for booking vendor allowances as revenue, when, in most cases, they should be booked as a reduction in the cost of sales. Ahold says that Tops was principally to blame for $29 million in overstated income. Another of its US subsidiaries, US Foodservice, overstated its pretax income by $880 million over three years. (Glenn 2003) Cees van der Hoeven, Ahold's Chief Executive, took the retailer on a worldwide buying spree, from Chile to Thailand, running up net debts of around ∈13 billion. Ahold began its buying spree in 1976 when it acquired a Spanish supermarket and the Bi-Lo chain in the American South. In 1996, it bought Stop & Shop for $2.9 billion and added dozens of chains in Latin America, Europe and Asia. It tried to buy Pathmark Stores in 1999, but that deal was blocked by the US Federal Trade Commission. Ahold subsequently turned to food service for growth, acquiring US Foodservice for $3.6 billion in 2000 (Knowledge@Wharton 2004). Also, in 2000, Ahold acquired PYAO Monarch for $2.57 billion and paid $75 million for Peapod. Ahold's broad strategy was to buy regional supermarket retailers and gain economies of scale and savings through consolidation of back-office and buying operations. Other chains sought to do the same thing, modeling themselves on the successful expansion of chain drugstores. However, grocery stores are more complicated than drugstores and depend to a greater extent on regional suppliers and marketing (Knowledge@Wharton 2004).

Discussion Questions

¦ Discuss ways that a buying spree like that of Mr Van der Hoeven can create problems for the group auditor?

¦ What pressures may be applied to the management of newly acquired divisions that would encourage misstatement of income?

¦ What special audit procedures should be applied to an audit of an acquisitive company?