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Royal Ahold is a major international supermarket operator based in Netherlands. Over three generations of Heijin family had been managed Ahold. The history of the company's origins to be traced back by the founder of Albert Heijn in the year 1887, when he is at the age of 22. He continues his father's grocery store in Zaandam, as a family business. Along by 1897, he had successfully increased store from 1 to 23 in different parts in the Netherlands. Following this further, the first Albert Heijin branded products were introduced in 1911. Simultaneously in 1970s, it became the largest grocery chain in the Netherlands, likewise expanded into liquor stores and cosmetic stores. Pursuing this further, the company expanded internationally in Spain, the United States and Portugal in the 1970s.In the meantime, the company expanded to Latin America, Central Europe and Asia in the latter half of the 1990s. In fact, Ahold enters the U.S. market for the first time by acquiring the BI-LO supermarket chain in the Carolinas, Georgia and Tennessee. Subsequently, Ahold expanded its business by acquires its second U.S. Giant Food store in Pennsylvania, New Jersey, New York, Maryland, Virginia and West Virginia in 1981. In spite of, Albert Heijn retires in 1989. Yet, Ahold succeeded by Pierre Everaert as Ahold President and CEO, the first non-family member to hold the position. Moreover, Ahold enters the New York Stock Exchange in 1993. In fact, the company grows by time to time. On the contrary, the company falls on 2003 by the fraud in accounting.
On the days before April 2000, Ahold was involved in retail activities in the US. However, the days April onwards, Ahold decided to acquire its share of US$ 26/share in February 2000. Meanwhile, there were two teams were sent to conduct the diligence. One team was carried out the financial diligence whereby they found out promotional allowance had not been accounted in an improper formal system.
The leading to disclosure
In 2002, Ahold has ordering huge amount of products from its suppliers in its efforts to meet its revenue target. The company known that it would not be able to meet its previous annual target of over 15% growths. Nevertheless, the company did not plan to make payments to suppliers for the products ordered. In order to meet the targets, the company top executives also asked all its regional managers and branch managers to order large quantities of products from the manufacturers, the statement announced on October 2002.
However, Deloitte (Deloitte Touche Tohmatsu, one of the largest international accountancy and professional service firms) reported accounting irregularities at Ahold. After Deloitte reported the accounting irregularities at Ahold on 12 February 2003 for the restated financial statements for fiscal 2000 and 2001, a large American law firm (White & Case LLP) authorized by Ahold to investigate the problem issues and with the help of forensic accounting advisors from a global consulting and internal audit firm (Protiviti Inc).
Concurrently on February 2003, the CEO and CFO resigned by following charges of financial irregularities. In March 2003, a few additional accountancy firms conducted additional investigations of the account of Ahold such as PrincewaterhouseCoopers (PWC). In addition, U.S. Securities and Exchange Commission (SEC - an independent agency of the United States government) also conducted on the accounting fraud of Ahold.
Through the investigation, SEC found that the management of Ahold had been overstating its operating income by recording as higher promotional allowance since 1998. According to SEC, "USF (Ahold) artificially inflated its operating income by recording promotional allowance that were not earned in the period recorded, and in many cases were entirely fictitious".
Moreover as in result over a year of investigation by SEC, the SEC accused that the former executives in the USF (Ahold) of pocketing huge amount of bonuses from the fraudulently revenue in 2001 and 2002. The executives claim to have bonuses from the revenue target that they had met. They intentionally increase the promotional allowance to show higher income in order to get extra bonuses.
As in the result from the investigation, SEC announced the result to the public that Ahold overstated net sales by approximately US$ 30 Billion for fiscal years 2000 to 2002 and net income by approximately US$829 million.
On the 13 October 2004, SEC charges the three former executives by leading Ahold, the retailers in the world with fraud. The former CEO and CFO were issued nine-month suspended in prison with a fine of â‚¬220,000 (â‚¬1 = US$ 1.294) each. Besides, a European executive board member and former vice president of Ahold also been charged to received a four month suspended in prison and a fine of â‚¬120,000.
Losses of Ahold
Indeed, the company (Ahold) started to face to the brink of bankruptcy after the report of accounting fraud. On 2003, Ahold had pulled out from the Asia and Brazil market. Along with that, Ahold sold the Bi-Lo and Bruno's chains in the United States. Furthermore, in February 2003 after Ahold announced that the earning for the financial year was overstated, its shares fell by more than 65%. Moreover, In April 2004, Ahold announced that a debt of â‚¬920 million would be pay back.
Hence, after the hard time of adjustment and budgeting strategic, Ahold's ranked as Top 75 North American Food Retailers based on 2006 fiscal year estimated sales of $24.0 billion.
The reasons that lead to accounting frauds in such case are such in, poor financial and accounting controls. A good accounting control may prevent these to be happen. It is because an accounting control is to help to limit management involvement in preparing the financial statement. It also help to ensure the validity and accuracy of its own financial statements where do not ensure compliance with laws and regulations. The financial controls should tighten in order to prevent more accounting frauds.
Besides, weak internal control system of the parent company over its subsidiaries is another that led this case to happen. A strong internal control system is design to discourage errors or irregularities.
Moreover, lack of transparency in accounting procedures is also one of the reasons that cause the management in this case to fraud in account easily. Account should not open to the public. In addition, it can prevent the linking of management's compensation with the achievement of revenue targets.