Royal Ahold’s Case Write Up

Executive Summary The campaign discusses the kinglike Aholds the major events that light-emitting diode to the demise of a great European company. The fictional character presents well-nigh of the attain issues in the atomic number 18as of leadership, out none of hand, audited account and account statement fraud that resulted in their hazard. The case identifies the conundrums do by the forethought in selecting the im congruous increase system and fillip scheme that encouraged unethical behaviour from the older precaution. The events presented agitate and highlight vigilance and governance issues, which are so important in managing global companies.After analysis of the cases and fiscal statements, I bring forth come with questions and concerns on the counselling and fiscal statements that could endure got caught this earlier on. Questions to be implyed and cultivate of approving bud conducts, corporate strategy, risk lateralitys would oblige reprimandd concerns on the management style. Some of the separate exhorted actions for tabular array and its various charges would pitch discouraged the improper management practices. Some of these questions might beat surfaced real issues and / or encouraged the chasten practice.I found various news report standards, ch everyenges of global audit process in this case it was led by Deliotte. The CEOs and leadership growth strategy was the reward and recognition was improper. The exit of acquisitions made during the 90s and continuous pressure was put on all subsidiaries to grow the sales by 15% were bad decisions. This alone led to many other problems within the company. The CEOs growth strategy and desire to quickly grow the company put immense pressure on all other companies and senior management to somehow meet the CEOs expectation.It all resulted into fraudulent activities and ultimately disaster of great company. I recommend adopting changes to incentive plans, non- pecuniary c oncomitantors be component part of success criteria. In measuring financial success, working capital ratio, inventory days, receivable and payable targets should be part of incentives. Above all, I recommend changes to the control board committees and ensuring their work is freelance was also important, i. e. audit committee, establishment of HR committee to raise issues and better the boilers suit organization culture. The case also highlights the issue of multiple news report standards being practiced in actually country.A standard corporate wide story standard in royal Ahold must consecrate been used. Both remote and essential auditors must shake up report ed numbers in a consistent approach. I recommend that auditors had direct reporting to board and should puddle empowe trigger-happy and trained to odor for documentation and management buildings in their audit process. Had they dig deep on all athletic fields of concerns of material importee they might shake found side letters. I piss also highlighted other recommendations including the controls in the accounting standards and in preparing financial radicals.Incentive plans and corporate strategy be naturalistic to avoid unwanted behaviors. Tone of the snuff it management including the boards, assignment of responsibilities be clearly stated and periodically measured. Student id 250712690 1 watchfulness Accounting Exam Problem Identification The case depicts another case of fail of governance and line of business ethics. This appears to be a fraud and not just accounting mis deal outs. By 2003, the time of the case, Enron, WorldCom and few others had already identified the need of business ethics and corporate governance.Royal Ahold series of events happened mainly due to greed and unethical behaviour but what really underlies is the objective setting, growth strategy and, rewards recognition criteria set by management. The case also presents issues of cost accounting, in terms of, when to apply the manufacturing rebates. Consolidation of subsidiaries and colligation ventures also played a role in this fraud. It also shows bad governance, flaws in external audit, failure of internal audit functions and to some degree their competency. Leadership strategy Royal Aholds CEOs strategy of 15% growth year-over-year was very aggressive.The reward and recognition structure close to the sales number was improper as it led management of all subsidiaries and other business units to increase the tax income and meet the targets. CEO unbroken communicating to board and dealholders the expectation around the sales strategy and likelihood of meet these targets. Consequently, it created a culture whereby senior management were under pressure to meet the sales objective. The senior management and head of subsidiaries must have felt that missing the sales targets is not even an option. Accounting Fraud The case presents few medium-large issues of accounting.Firstly, the issue is of the incorrect accounting treatment of manufacturing rebates and promotional allowances. My opinion is that rebates cannot decrease the cost of goods un slight 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 mensuration of goods thence they could have sold. They booked 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 accounting fraud problem is the accountants preparation of Royal Aholds parent company financial statements. They consolidated the financial statements including some of the joint ventures when Royal didnt even had control over them. Royal Ahold did not own much than 50% of these sum 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 pass over 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 missed as accounting standards in many countries is different. External auditors, even though they whitethorn all be of Deloite, of one country only audits that country statements, so they whitethorn not be well-known(prenominal) what might be happening in other parts of the company.However, the Royal Ahold parent company auditors are responsible to have an oversight of companywide audit and should be held responsible for over -looking these fraud ulent transactions. Internal audit and boards audit committee failed to detect any of the misrepresentation either. On surmount 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 climax 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 review 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 surgical incision and the external auditors. Each should have independently reviewed management controls and financial statements and raise concerns and issue s. Raising Red FlagsIn my opinion, the governance structure and audit committees and external auditors were sufficient enough to handle or uncover much(prenominal) fraudulent activities had they been critical, created the right 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 chase 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 mid 90s management post 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 internal 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 economic climate. This may have led the management behaviour in meeting the targets.As board member, I would have asked CEO to explain the strategy of rewards and recognition, mainly on top line bonus as it is a wrong 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 eventually it was bought by HP in 2003). I would tried to cultivate the board and hence the CEO to consider a more comprehensive rewards strategy. From my experience bonus strategy plays a big role in company culture. The other important factor that develops the management carriage is what CEO likes to render.It seems Royal Aholds CEO, Cees van der Hooven, wanted to hear from all his subsidiaries and Joint Ventures that sales targets are being 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 leading cause of Royal Ahold demise. His aggressive acquisition approach would have resulted in integrating 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 impacted.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 unfounded initiative the corporate strategy was carrying high risks at all operational 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 understood 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 laborious 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 authority on the acquired company, the company financial statements cannot be consolidated. Royals accounting practice o f consolidation will first bump up the revenue numbers. This was by design done to beef up the revenue figures. This may have resulted bigger bonus for the senior management. Also, the rest period sheet would be more attractive to the shareholders (and potential shareholders). To explain this here is simple illustration conjure up Current Assets Assets Total Assets Current Liabilities Liabilit ies Total Liabilities Shareholders Equity 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 equity 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 sheet side, the equity method would only show true Assets number, as per the investments made in the JV by Royal Ahold. The financial ratios (e. . debt to e quity or quick ratio and so on ) will not be as appealing as it started to sound with consolidated statement. Risk Controls As board member, I would have influenced the entire 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 violate in the culture and mind-set of the senior management that 15% growth is not unrealistic and has created an attitude to meet these targets in any way possible. This encouraged the wrong doings and possible frauds that started to take place in 1999-2001. Although it is not very clear from th e 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 formal 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 around 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 entire incorrect accounting treatment of manufacturing allowances and rebates. General ReserveRoyal Ahold is present 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 gain to the 1. 5B euros in other provisions. This is should have been a red flag. Other Recommended Preventive Measures Besides the concerns and red flags mentioned above, I would have raised based on what I would have seen.I would have also taken following measures to prevent this from happening. Incentive (Bonus) Structure The bonus structure cannot solely be based on financial goals. The b onus structure has to base on non-financial goals as well. Within financial goals all aspects to kept in mind when designing 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 responsibility of audit committee that internal and external auditors have an open communication.Besides audit of the true 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 direction. IT schema I would have asked internal audit committee to ensure all IT systems are audited to ensure proper controls are in place. Usually, in fraud IT systems controls could have loo p 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 across the globe 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.