Management Accounting And Control Accounting Essay


The Royal Ahold downfall in February 2003 was mainly due to the corporate culture driven by stakeholder/shareholders approach that demanded constant economic and profit growth irrespective of weaknesses in corporate governance. These weaknesses in corporate governance in conjunction with the corporate culture lead to irregularities in accounting practices, lack of transparency and unethical behavior. Each year Royal Ahold's executive management team set aggressive earnings growth and revenue targets and pressured their management team members to achieve those goals. The incentive plan was based on accomplishing these goals and managers who met their targets were awarded large bonuses. Considering Royal Ahold's decentralized operational model along with an attractive incentive plan to attain unrealistic revenue and earnings targets, formed an environment that flourishes fraud particularly when there are also weaknesses in corporate governance.

In 2003, Royal Ahold independent auditors discovered numerous irregularities in the company's accounting records. Criminal and civil lawsuits were filed against the company when these accounting irregularities were discovered. The corporation went into a complete disastrous status due to the accounting scandal, fraudulent activities at US Foodservice subsidiary, resignations of senior management, and Deloitte & Touche findings of reporting inflated net sales and operating income for at least last 3 to 4 years. Shareholders lost a lot of money as the share price dropped from $10.69 to $4.16 per share within a day.

Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

This report focuses on reasons of Royal Ahold's meltdown by analyzing its growth strategy through acquisitions and the absence of internal as well as external oversight of management's strategy. This report discusses the inter-relationship amongst the lack of corporate governance and lack of accounting transparency which led to the downfall of Ahold.


The Netherlands based Royal Ahold is one of the leading and world's largest international retail grocery chain and food service companies. Royal Ahold was started as a family business in 1887 from a small grocery store in western Holland. On its 100th anniversary in 1987, the queen of the Netherlands granted the appellation "Koninklijke" that means "Royal" in English. Since then, it was known as Royal Ahold. Starting 1990, the company experienced very strong growth mainly through acquisition and by 2001 it became one of the largest international retailer in the grocery food industry. In 2003, the company had to face a massive accounting scandal resulting in serious loss to shareholders and corporate image.

Growth Strategy

In the 1990s, Royal Ahold owned several retail chains that include Albert Heijn supermarkets, Gall & Gall liquor stores, Etos health and beauty care stores, Peapod online food retailer and Scandinavian. In the US, Ahold owned and operated Giant Food, Stop & Shop and Tops market. Approximately, 75% of the company's sales came from US. During 1990s, Ahold grew very rapidly through acquisitions and majority of those acquisition were in US or South America. By mid 1990s, Ahold became stock market favorite due to its rapid growth. In order to maintain the growth rate to keep the stockholders interest in the company, Ahold's management very aggressively pursued its growth strategy via acquisitions and acquired over 60 companies between 1998 and 2002. Regardless of competitive market conditions, the company maintained its growth in the late 1990s and early 2000s. Majority of its growth was driven by its US food subsidiary know as US Foodservices Inc. Due to the economic crisis in 2001, the organic growth outlook was less favorable compare to the past, Ahold's management continued to focus on improving gross profit margins and earnings growth. Ahold's growth strategy was quite different from Wal-Mart and Carrefour. As mentioned above, Ahold grew via acquisitions of retail store chains and continued to operate them under their own brand, local identity and management.

Accounting Irregularities

In 2003, Royal Ahold announced that it had overstated earnings by over $500 million for the past two years related to promotional allowance program at US Foodservice subsidiary. Furthermore, the company declared that five joint ventures (ICA Ahold, Jeronimo Martins Retail, Disco, Bompreço, and Paiz Ahold) should not have been reported as fully consolidated in Ahold's financial statements as they were not fully owned by the company. According to US GAAP, ownership in a joint venture where the partner owns between 20% and 50%, should be reported using Equity method. Royal Ahold reason to fully consolidate these joint ventures in its books was based on the letters stating Ahold had full control over these joint ventures. These control letters were nullified by separately signed side letters that rejected the interpretation of the control letter. Ahold did not hold more than 50% share in any of these joint ventures mentioned above and in each of the shareholders agreements signed with its partners mentioned that the partners had equal rights in all decisions. Thus, Royal Ahold did not have any control over its joint ventures and it should have recorded them using Equity method.

Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

Auditors initially did not receive those side letters and only the control letters were provided to them. Therefore, they were unaware of the existence of side letters. In October 2002, the executive board members became aware of the existence of one of side letters related to ICA. They informed the chairman of the audit committee who then initiated the enquiry and found that these joint ventures could not be fully consolidated.

Vendor Promotional Allowance

Prior to 2003, the accounting guidelines for vendor promotional allowances are not clearly defined and generally promotional allowances were contractually negotiated between the manufacturer and the retailer for a period of time in future. The accounting guidelines did not mention how these promotional allowances should be recognized. Therefore, Royal Ahold recognized promotional allowances based on estimates that it would purchase the required volume from the Vendor. The allowances were booked in advance based on future purchasing target agreements made with suppliers or manufacturer, even though the required volumes for these allowances were never actually met. With economy slowing down in 2001 and 2002, it became apparent that the purchasing volumes estimated by the company would not be reached. Therefore, at that time Ahold should have reverse the promotional allowances that had been recorded already and rather some of Ahold's employees did not properly follow the process and made it a massive accounting scandal.

Royal Ahold's enquiry revealed that two executives of US Foodservices used these promotional allowances to make their unit's earning growth healthier than actual amount and cost of goods sold to be underestimated. In addition, to hide their error from the auditors, these executives produced forged document by convincing several vendors and asked them to sign letters confirming the existence of these allowances and mentioning they have been either paid or owed to US Foodservices. They also misrepresented cash payments made by the vendors at year-end for the following year's prepaid promotional allowance by presenting it as the payment for the fabricated promotional allowance receivable of the current year.

It is obvious that that these kinds of fraudulent accounting practices are not sustainable and can easily be tracked and cause significant damage to the organization as it did to Royal Ahold.

Corporate Governance and Leadership

Royal Ahold was operating under a much decentralized model and each subsidiary's management team was empowered to run the operation of their subsidiary as they wanted. This was clearly the case for US Foodservices who cooked the books however they wanted by playing around with promotional allowances. Promotional allowance receivables were booked in advance prior to agreed volume purchase and payment of the products by US Foodservices. Another example discussed above was related to fully consolidating joint ventures by using control letters without disclosing the side letters that made those control letters null and void. Both of these examples clearly show that there was lack of transparency and information disclosure with the different levels of management hierarchy. In addition, the incentive plan was based on meeting aggressive targets to achieve earning growth and profit increase. Management team was rewarded with hefty bonuses for meeting these targets. The combination of reward structure, decentralized operational model, lack of transparency and information disclosure promoted unethical behavior to fictitiously show revenue growth and profit increase.

Both CEO Van der Hoeven and his CFO Michael Meurs did not have formal accounting training and they were not only managing the core business but also making large deals to acquire other companies. Further, all members of the board consisted of people internally promoted from the acquired subsidiaries. The board members monitored same subsidiaries they used to manage previously. Although, this practice was consistent with Royal Ahold's strategy of keeping management from acquired subsidiaries, it represents poor internal control over management.


The financial fraud at Royal Ahold transpired due to the lack of transparency and information disclosure. The issue may have been avoided if the corporate culture at Ahold was not driven by the shareholder approach to the business which placed significant load on Ahold's management to maintain its growth objective.