Case 1 – Ahold: Is That the Dutch Translation of Enron? Read “Ahold: Is That the

Question

Case 1 – Ahold: Is That the Dutch Translation of Enron?
Read “Ahold: Is That the Dutch Translation of Enron?” pages 228-233 in Understanding
Business Ethics. Thoroughly answer the questions that follow the Case Summary below.

Case Summary
Royal Ahold was established in 1887 in the Netherlands and is the world’s largest food
distributor. It became a publicly traded company in 1948 and the controlling family released
control of the company in 1989. After it became a management controlled firm, Ahold’s strategic
focus shifted toward aggressive growth with an annual goal of 10 percent growth in EPS.

Furthermore, another aggressive goal was that Ahold was expected to double its profits and sales
every five years. As a result, Ahold had to constantly acquire more and more companies in order
to achieve these aggressive goals. Being a management controlled firm allowed the
concentration of power of a few stockholders (the family) to dissolve and it led to a weak
governance structure since there was no longer a core group of stockholders that had sufficient
power to help direct the decision making process of top management.
Differences in accounting standards between the Netherlands and the United States allowed
Ahold to apply goodwill obtained from an acquisition against Ahold’s stockholders equity so
there would be no net impact on Ahold’s reported profitability. This approach is not allowed in
the United States where Ahold would have had to amortize the acquired goodwill over a time
period up to 40 years which would have a direct impact on Ahold’s profitability. This accounting
standard was in effect at this time. In 2002, Ahold admitted that they had been involved in off-
balance sheet transactions which were considered “material” from an accounting perspective.
In February 2003, Ahold released reports of profit levels which were much lower than expected.
This lower profit level was due primarily to Ahold’s involvement in promotional allowances.
One of Ahold’s subsidiaries in the United States, U.S. Foodserve was recording promotional
allowances from suppliers before they had actually received the money. It was estimated that the
allowances had been incorrectly recorded to the value of approximately $850 million.
Promotional allowances are rebates given by suppliers in order for a retailer to promote its
products. Ahold would record promotional allowances so that they would reduce Ahold’s costs
which would increase their reported level of profits. This is not the correct way to book these
allowances. Ahold then generated falsified information that the suppliers were forced to sign to
show its external auditors when they reviewed the transactions between Ahold and its suppliers.
In January 2005 the United States Justice Department filed criminal charges against nine vendors
who committed the allowance fraud with Ahold. Ahold’s CEO Cees van der Hoeven and CFO
A. Michiel Meus resigned after they were charged with fraud and conspiracy to commit fraud.
The total amount of the fraud was estimated to be $30 billion in sales, $3.3 billion in operating
income and $829 million in net income.
The new CEO of Ahold, Anders Mobery, was the former CEO of Ikea and organized a
shareholder’s meeting in March 2003 that focused solely on corporate governance issues and
Ahold. During the same time period, the new corporate governance standards were established in
the Netherlands called the Tabaksblat Code. In September 2003, Ahold paid the Dutch
government $10 million in fines for the fraud and another $10 million in September 2004 for
presenting fraudulent financial statements. In November 2005, Ahold paid $1.1 billion to settle
all outstanding stockholder claims. In May 2006 a Dutch court found both van der Hoeven and
Meurs guilty of fraud and fined them each $287,430 (225,000 Euros). They both received a nine
month suspended sentence.

Players in the Ahold Fraud

Cees van der Hoeven - Title: Former CEO Charge:Fraud, Conspiracy Results: Nine Month Suspended Sentence (225,000 Euros) Fine

A. Michiel Meurs - Title: Former CFO Charge: Fraud, Conspiracy Results: Nine Month Suspended Sentence (225,000 Euros) Fine

Barry Schofield - Title: Food Distributor Charge: Insider Trading,Fraud, Conspiracy Results: Six Months Home Owner Detention ($741,232) Fine 3 Years Probation

Michael Resnick - Title: Former CFO of Ahold’s U.S. Foodservice  Charge: Conspiracy Results: 6 Months Home Detention 3 Years Probation

Mark Kaiser - Title: Former Head of Marketing Ahold’s U.S. Foodservice Charge: Fraud, Conspiracy,False Financial Filings Results: 7 Years in Prison ($50,000) Fine

Suzanne Brown - Title: Former Controllerof Ahold's U.S. Foodservice Charge: Fraud Results: ($100,000) Fine  5 Year Ban on Being an Officer or Director, 5 Year Suspension from
Practicing Accounting

Case 1 Questions:
1. Identify some of the benefits of moving from a family-run business to a management-
controlled business.
2. There were several other large corporations involved with the wrongdoings at Ahold.
What made the individuals involved at these other companies feel that they were not a
part of the fraudulent activities at Ahold?
3. Why did the management at Ahold continue to think that many of the issues were not
material?

Explanation / Answer

1. Identify some of the benefits of moving from a family-run business to a management-
controlled business.

A management controlled firm has a diverse shareholding where there are multiple stakeholders and it is answerable to them. It has been seen that a management controlled firm which gets listed needs to establish better governance structure and there is a better place for merit in a management controlled firm.

*These are generalized statements. One can find family run business acting in perfectly ethical manner and at the same time, one can find management controlled business, not having ethics up to the mark.
2. There were several other large corporations involved with the wrongdoings at Ahold.
What made the individuals involved at these other companies feel that they were not a
part of the fraudulent activities at Ahold?

It is the confidence of not getting caught or believing that they are helping a partner and are not directly benefiting from the fraud, hence, they will remain unscatched. These assumptions may be found to be wrong on a later date.

3. Why did the management at Ahold continue to think that many of the issues were not
material?

It may be a wrong interpretation of law. However, in most cases, the management I believe were fully aware that what they were doing. Its a belief that they will not get caught which makes them to believe that issues were non material.

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