Royal Ahold’s Case Write Up

Executive Summary The effort discusses the princely Aholds the study events that led to the demise of a great European political party. The ca expend presents both(prenominal) of the trace issues in the argonas of lead, scheme, take stocked account and chronicle fraud that resulted in their disaster. The casing identifies the problems made by the direction in selecting the indecent issue strategy and inducing plan that encouraged u take inhical behaviour from the sr. guidance. The events presented tinct and highlight focus and validation issues, which atomic number 18 so important in managing global companies.After analysis of the cases and financial statements, I cast come with questions and concerns on the steering and financial statements that could discombobulate caught this earlier on. Questions to be asked and process of favor adapted reception budgets, incarnate strategy, risk turn backs would call for everyplaceturnd concerns on the management style. just about of the separate recommended actions for visiting card and its various commissions would pose discouraged the improper management practices. Some of these questions major power hire surfaced real issues and / or encouraged the obligation practice.I found various accounting standards, challenges of global audit process in this case it was led by Deliotte. The chief executive officers and leadership offset strategy was the reward and intelligence was improper. The turn of acquisitions made during the 90s and continuous contract was put on all subsidiaries to grow the gross gross by 15% were bad decisions. This alone led to m any(prenominal) other problems within the caller-up. The CEOs return strategy and desire to quickly grow the fellowship put immense pressure on all other companies and senior management to any(prenominal)how play the CEOs expectation.It all resulted into double-faced activities and ultimately disaster of great company. I recomme nd adopting changes to incentive plans, non-financial factors be part of success criteria. In measuring financial success, fly the cooping slap-up ratio, inventory days, due and payable derrieres should be part of incentives. Above all, I recommend changes to the shape up committees and ensuring their work is independent was also important, i. e. audit committee, geological formation of HR committee to raise issues and improve the overall validation culture. The case also highlights the issue of multiple accounting standards being practiced in very dry land.A standard corporate wide accounting standard in purplish Ahold must(prenominal) take for been used. Both remote and infixed auditors must be in possession of report ed numbers in a self-consistent approach. I recommend that auditors had direct reporting to shape up and should throw away sceptered and trained to look for documentation and management structures in their audit process. Had they labour deep on all beas of concerns of material significance they might require found side letters. I kick in also highlighted other recommendations including the looks in the accounting standards and in preparing financial papers.Incentive plans and corporate strategy be d stimulate-to-earth to avoid unwanted behaviors. Tone of the top management including the batting orders, assigning of responsibilities be producely stated and periodically measured. Student id 250712690 1 instruction Accounting Exam Problem Identification The case depicts a nonher case of fail of governance and argumentation ethics. This appears to be a fraud and not just accounting mistakes. By 2003, the time of the case, Enron, WorldCom and a couple of(prenominal) others had already identify the need of business ethics and corporate governance. kingly Ahold series of events happened principally collect to greed and unethical behaviour but what really lowlies is the objective lay, growth strategy and, rewards recogn ition criteria set by management. The case also presents issues of salute accounting, in terms of, when to apply the manufacturing rebates. Consolidation of subsidiaries and marijuana cigarette imagines also vie a role in this fraud. It also shows bad governance, flaws in extraneous audit, failure of intragroup audit functions and to close to degree their competency. Leadership strategy kinglike Aholds CEOs strategy of 15% growth year-over-year was very aggressive.The reward and recognition structure around the gross sales number was improper as it led management of all subsidiaries and other business units to increase the revenue and meet the targets. CEO kept communicating to board and shareholders the expectation around the sales strategy and likelihood of skirmish these targets. Consequently, it created a culture whereby senior management were infra pressure to meet the sales objective. The senior management and head of subsidiaries must require felt that miss the s ales targets is not even an option. Accounting Fraud The case presents few big issues of accounting.Firstly, the issue is of the incorrect accounting treatment of manufacturing rebates and promotional allowances. My sagaciousness is that rebates cannot simplification the cost of levelheadeds unless there is a certainty of getting the rebates. If the rebates are uncertain they cannot decrease the cost of goods incorrectly. From the case, it appears that management ordered much amount of money of goods then they could have sold. They schedule the rebates at time of goods received and decrease the cost of goods prematurely. (Assumption It is not very clear from the case, if these rebates were booked as income or adjusted against the cost of goods i. . decrease in cost of item. I have assumed that Royal Ahold accountants decreased the costs (prematurely as per above paragraph). If these were booked as income, then it is even a bigger fraud and not an accounting error) Second acco unting fraud problem is the accountants preparation of Royal Aholds parent company financial statements. They amalgamated the financial statements including about of the joint ventures when Royal didnt even had control over them. Royal Ahold did not own more than 50% of these joint Ventures and did not have the control of the decision making.They created fraudulent paper work to show they had control on these join venture companies. This is a pure fraud as they created agreements to satisfy auditors and try to hide the real facts. Audit Both external auditors and internal auditors (and audit committee) failed to detect any of the accounting issues. It could have been disoriented as accounting standards in many countries is different. External auditors, even though they may all be of Deloite, of one country scarcely audits that country statements, so they may not be familiar what might be happening in other parts of the company.However, the Royal Ahold parent company auditors ar e trustworthy to have an oversight of companywide audit and should be held responsible for over -looking these fraudulent transactions. Internal audit and boards audit committee failed to detect any of the misrepresentation either. On top of that in Netherlands there were two boards (Governing Board and Supervisory Board) and both boards werent able to detect or raise red flag on any of these problems and misrepresentations. Management having two sets of paper work with JV (Joint Ventures) without coming under the investigation shows incompetency of audit functions.Governance / Audit Structure The way the governance and audit structure was laid out at Royal Ahold, there were five different committees and entities were responsible to redirect examination accounting and financial controls and practices that could have asked questions and raise concerns (red flags). They were The governance board, supervisory board, the audit committee, internal audit section and the external audito rs. Each should have independently reviewed management controls and financial statements and raise concerns and issues. Raising Red FlagsIn my opinion, the governance structure and audit committees and external auditors were able enough to handle or uncover much(prenominal) fraudulent activities had they been critical, created the pass away controls, empowered the internal auditors and obviously asked the right questions while reviewing the financial statements and other management documentation. As part of board, I would have asked questions following questions, or have acted when seen abnormalities. This would have helped me in identifying issues, concerns and in raising red flags on the Royal Ahold 1999-2001 financial statements.Also some of them are related to middle 90s management billet and strategy. Strategy and Growth Approach The target of meeting 15% year-over-year in sales, especially in US in 2000-01 when economy was in recession should have alarmed the board and i nternal auditors. They should have investigated how the sales targets are being achieved. It is not easy to meet 15% sales in US food industries under this stinting climate. This may have led the management behaviour in meeting the targets.As board component, I would have asked CEO to explain the strategy of rewards and recognition, mainly on top thread bonus as it is a upon choice. (I have personally worked at Compaq during 1999-2000 and have seen the issue of top line bonus and commission on sales. This led to Compaqs continued crises and at last it was bought by HP in 2003). I would tried to influence the board and consequently the CEO to consider a more comprehensive rewards strategy. From my visualise bonus strategy plays a big role in company culture. The other important factor that develops the management attitude is what CEO likes to hear.It seems Royal Aholds CEO, Cees van der Hooven, wanted to hear from all his subsidiaries and Joint Ventures that sales targets are b eing met every quarter. I would have influence the management style and company culture to be protected by changing (or diluting) this approach. CEOs attitude and leadership style was one of the booster cable cause of Royal Ahold demise. His aggressive acquisition approach would have resulted in integration issues within the company. As board member, I would have asked the management plans on integration and how culture of the organization would not be negatively wedged.I would have created the board HR committee to influence management not to allow the negative impacts on the organization culture, integration within the organization, rewards and recognition be such that it would not have allowed the culture to deteriorate. The cultural issues, integration issues and above all greed among the management team members was uncontrolled in Royal Aholds accounting scandal. The growing number of acquisitions was extremely questioning initiative the corporate strategy was carrying high risks at all functional levels including controls, integration that may have led to frauds.Also, this had potential to be a reputation risk as well. In my opinion, board should not have approved such an aggressive corporate growth strategy. Consolidated Statements Although Royal Ahold ownership is less than 50% in some Join venture companies, they showed controlling interests in some companies. To me an agreement paper presented by the management is not sufficient. I would have asked the significance of Royal Aholds control and ask management which areas of Joint Venture management we have been making decisions on.If we are making decisions, even though we dont own more than 50%, what are the risks associated with these decisions. As a board member, I would have unsounded how Royal Ahold has influenced the Joint Venture management. I would have also asked audit committee to understand the management structure of Joint Ventures. Taking a step further, assuming that 20% share would have given Royal Ahold right to appoint a board member on Joint Ventures Board, I would have understood from the Joint Venture board member (through Royal Ahold appointed director) how the joint ventures decision making process really works.By asking such questions and efforts in trying to understand from the board and management of Joint ventures how the organization is actually structured and working. If Royal Ahold does not have a controlling self-confidence on the acquired company, the company financial statements cannot be consolidated. Royals accounting practice o f consolidation will first break up the revenue numbers. This was purposely done to beef up the revenue figures. This may have resulted bigger bonus for the senior management. Also, the balance carpenters plane would be more attractive to the shareholders (and potential shareholders). To explain this here is undecomposable illustrationParent Current Assets Assets Total Assets Current Liabilities Liabilit ies To tal Liabilities Shareholders legality Debt to Equity Ratio Subsidiary Consolidated 3 7 10 1 3 4 4 10 14 4 1 5 3 7 0. 5 1. 5 3. 5 8. 5 3 2. 5 5. 5 2. 3 0. 6 1. 5 As illustrated in the hypothetical example above example, by consolidat ion the debt looks more attractive then it would have looked otherwise in the parent company. The debt to legality shows debt-to-equity of ($1. 5$1) when consolidated, and ($2. 3$1) when not consolidated. Similarly, other financial ratios would have looked good with consolidation of financial statements.The consolidation resulted in better financial statements hence Royal Ahold used this approach. In actual, this should not have used consolidated method. As per the accounting text, Parent when owns an investee companys 20%-50% should use the equity method of accounting. The equity method would have mainly impacted the earnings on the Income statements. The net income, however, would result the same earnings without changing the revenue numbers. On the balance canvass side, the equity method would however show true Assets number, as per the investments made in the JV by Royal Ahold. The financial ratios (e. . debt to equity or quick ratio etc.tera ) will not be as appealing as it started to sound with consolidated statement. Risk Controls As board member, I would have influenced the consummate board not to approve the corporate strategy as a budget was too aggressive and unrealistic. As pointed out above, realistic targets are extremely important. If strategy is too aggressive and corporate culture is to share good news with the CEO the unrealistic budgets targets may lead to malpractice and improper (fraudulent) activities. In my opinion it is supervisory board obligation to approve only realistic targets.The corporate strategy in the growth years of mid 90s was too aggressive. This has done part of the damage in the culture and wit of the senior management that 15% growth is not unrealistic and has created an attitude to m eet these targets in any way possible. This encouraged the wrong deportment and possible frauds that started to take place in 1999-2001. Although it is not very clear from the case, were there any wrong doing (or activities) in 199798, but in the hind-sight, it appears that some of the issues must have started or existed in that time as well.The board and senior management should actively work on identifying risks to the organization and work on strategies that mitigates the risks. A key here is to have a musket ball risk assessment process on an annual basis. The assessment is under supervision of the board and results are reviewed by the board. Inventory 2001 balance sheet shows 20% rise in inventory, I would have raises some concerns that might have uncovered the management improper decision to order such high quantity of stocks to get the manufacturing rebates. Accounts ReceivableIn 2001, accounts receivable increased by Euros 605M i. e. 21. 2%. I would have asked questions a round the assumptions and likelihood receiving the Account Receivable. More importantly, who owes this receivable to Royal Ahold. This may have been due to the manufacturing rebates included in the accounts receivable. If so, it would have led to the whole issue of management aggressive behaviour on ordering stocks to get rebates. It might have opened up the full(a) incorrect accounting treatment of manufacturing allowances and rebates. General ReserveRoyal Ahold is showing consistently on their balance sheet a general reserve item that is over 5 to 6 Billion euros (approx). This appears to be high, I would have asked on what assumptions these provisions are made. It might have uncovered some of the assumptions that are being made by management. This general reserve is in summation to the 1. 5B euros in other provisions. This is should have been a red flag. Other Recommended load Measures overly the concerns and red flags mentioned above, I would have raised found on what I wou ld have seen.I would have also taken following measures to stay fresh this from happening. Incentive (Bonus) Structure The bonus structure cannot solely be based on financial goals. The bonus structure has to base on non-financial goals as well. Within financial goals all aspects to kept in mind when design the appropriate incentive program. The increase in working capital (inventory, receivables, payables etc. ) is kept at minimum or in line with the net income. The increase or decrease in working capital beyond the realistic proportion to earnings should be discouraged through the incentive program as well.Audit Committee Structure The case presents the audit committee and internal audit department weaknesses and signs of some of their inefficient processes and competency issues. Besides reviewing the audit committee performance, monitoring and control issues were also been found. I would have influence the audit committee to have a metrics of internal audit department. This may have encouraged more objectivity of audit functions and may have aligned management controls to the overall governance issues. It is the responsibleness of audit committee that internal and external auditors have an open communication.Besides audit of the current financial statements, and review of controls and structures, the auditors must identify areas of improvement in controls and work on action plan in improving the organization controls and monitoring process. HR Committee As mentioned above, I would have asked board to create HR committee that takes an active role in setting the controls in the organization. The committee should take an active role in reviewing the annual compensation and objective setting. Committee should have taken an independent review of key hiring decisions and management capability on integration and organization culture.Some key decisions in this area should only made by committee after consulting with the management, audit and boards general direc tion. IT System I would have asked internal audit committee to fancy all IT systems are audited to ensure proper controls are in place. Usually, in fraud IT systems controls could have grommet holes or management may have the ability to bypass some of the checks and balances and/ or segregation of duties. Consistency in financial Statements Royal Ahold had companies in four different continents and in many countries.Financial statements presentation and laws crosswise the macrocosm are not consistent. US GAPP, Netherlands GAAP, IFSA and others are not standard across all countries where the Royal Aholds companies are in operation. While the fact makes a challenge for the board, it doesnt give them an excuse of letting things slip. The board should have worked out with internal and external auditors in creating a minimum corporate standard across the group of companies. It is the flaw in governance and leadership to over-look this fundamental point.