The encyclopedia · Finance & Accounting · Financial decision · 2003
Ahold overstated profits by $1.1B — and lost two-thirds of its market value
Ahold's US Foodservice arm booked vendor rebates it had not earned, inflating profits by about $1.1 billion. The 2003 disclosure toppled the CEO and CFO.
Royal Ahold · U.S. Foodservice · 2003-02
What happened
Royal Ahold was a Dutch grocery giant, one of the world's largest food retailers, with a large American arm called U.S. Foodservice. In the early 2000s U.S. Foodservice struck 'side letter' agreements with suppliers that let it book promotional allowances and rebates as income before they were actually earned. The practice inflated the group's reported profits.
On 24 February 2003 Ahold announced that its 2002 results would be far lower than previously indicated and that its 2001 and 2000 accounts would be restated. The company had overstated its pre-tax profits by about US$1.1 billion. Chief executive Cees van der Hoeven and chief financial officer Michael Meurs left, and Ahold's shares fell by roughly two-thirds in Amsterdam.
The restated accounts showed the damage: a swing from profit to a net loss of about €1.2 billion in 2002, a goodwill write-off of roughly €1.3 billion, and shareholders' equity almost halving, from about €5.5 billion to €2.6 billion. Ahold sold assets to survive, settled a US securities class action for about US$1.1 billion in 2006, and agreed a US$10 million settlement with the SEC in 2004.
Why it happened
- U.S. Foodservice used side-letter agreements with suppliers to recognise promotional rebates as income before the conditions for earning them were met.
- Group management either did not see or did not question the aggressive accounting, so overstated profits flowed up into Ahold's consolidated results for years.
- When the practice was finally disclosed, the restatement was so large that it destroyed investor confidence, wiped two-thirds off the share price and forced out the top executives.
The lesson
If a subsidiary's margins look better than its industry, look at how it books income. Ahold's US arm pulled vendor rebates forward for years; the restatement nearly sank the whole group.
Aftermath
Ahold survived by selling businesses and cutting debt, and it later merged with Belgium's Delhaize to form Ahold Delhaize, again one of the world's largest grocery groups. The scandal prompted a multi-year SEC case and a US$1.1 billion class-action settlement, and it remains one of the largest accounting failures in European corporate history, often taught alongside Enron and WorldCom as a case of earnings management running off the rails.
Sources
- SEC EDGAR — Royal Ahold N.V. restated 2002 consolidated financial statements (Form 6-K exhibit, 1 October 2003): the 24 February 2003 restatement announcement, U.S. Foodservice vendor-allowance arrangements, the swing to a €1.2B net loss, a €1.3B goodwill write-off and shareholders' equity falling from about €5.5B to €2.6B
- Wikipedia — Ahold (the roughly US$1.1B overstatement of pre-tax profits, the departures of CEO Cees van der Hoeven and CFO Michael Meurs, the two-thirds share-price fall, the 2004 SEC settlement and the 2006 class-action settlement)
spotted an error? The club wants to know.
More like this
Tesco overstated its profits by £263 million — and the new CEO had to confess it
Baugur Group, Iceland's retail empire, collapsed in the 2008 financial crisis
Meta's 'designed for privacy' glasses shipped users' intimate footage to Kenya reviewers
Somewhere, someone solved the problem this company failed at. 2nd Opinion →
Comments · 0
Sign in to join the comments.