“People who commit financial crimes are entirely motivated by greed”.

During the past ten years the company Aholds went on a big buying spree in the USA and
Europe and it set out to allow the local operations control theslves and used the new
companies it bought as the means of growth. Aholds then looked to acquire companies in
other fields outside of groceries and foods and that is when the company rad aground on the
rocks (Cody 2003)

During may 2006 a court in the Netherlands charged three management executives of the
Dutch company Royal Ahold NV (Ahold) aone the largest food retailers in the world with
fraud. The three management executives were found guilty of accounting fraud that nearly
sent the company into bankruptcy and the former CEO C. van den Hoeven (Hoeven) and the
former CFO M. Meurs (Meurs) were sentenced to nine month suspended sentences and fined
200 000 euros each. The other executive J. Andreae was a given four month suspended
sentence and fined 120 000 euros and the judge stated that the three had betrayed the trust
placed in them by shareholders and damaged the reputation of all Dutch companies.
The fraud consisted of Ahold overstating pre tax earnings by 966 million dollars and the
USA holding which was called US Foodservice (USF) comprised 856 million dollars of the
fraud total. In February 2003 after the management of Ahold stated that the reported earnings
were not correct the share price dropped by 65 percent and the market capitalisation dropped
from 30 billion euros to 3.3 billion euros.
The auditor DELOITTE and TOUCHE found irregularities and issued a letter dated February
2003 stating that it could not stand by the correctness it had certified for the previous
accounts it had audited but the SEC commission stated this was far too late and the
irregularities should have been found much earlier (Economist 2003)

In 1993 Hoeven became CEO of Ahold and started the company expanding so as to compete
with Walmart and Carrefour and bought supermarket chains all over the world and Hoeven
promised in 1993 to achieve 15 percent annual growth per share in earnings and he achieved
this every year this until 2002. Hoeven gave out 19 billion euros to purchase 50 new
companies around the world and sales grew to 63 billion euros.

In the USA Ahold had the second largest food retailer in the USA called USF amongst
others.
After Ahold took over USF in April 2000 KPMG was responsible for financial due diligence
and found that promotional expenses had not been properly recorded and a second audit found
balance sheet items not reconciled and the whole promotional expense system from vendors
was not correct.

Despite these gross irregularities Hoeven and Meurs of Ahold went ahead and bought USF. In
the subsequent investigation by the SEC it was found that USF had lied about earnings from
1998 and in many cases had just manufactured promotional allowances.

According to social learning theory people learn to engage in crime in the same way they
learn to engage in conforming behaviour and that is through association with or exposure to
others and this may describe the crimes committed by the USF management but not the
conduct of Hoeven and Meurs of Ahold who went ahead and bought USF despite the reports
of irregularities. Albert Einstein stated "Two things are infinite: The universe and human
stupidity; and I'm not sure about the universe" (Encyclopædia Britannica 2010).
I therefore suggest that Hoeven and Meurs followed what I found described as the General
Theory of Stupidity by Albert Einstein and although this is quoted somewhat tongue in cheek
it is a truly accurate description of the conduct of Hoeven and Meurs throughout the Ahold
disaster.

Social learning theory is stated to be primary or intimate groups like the family and peer
group having an especially large impact on what we learn. Association with delinquent
friends is the best predictor of delinquency other than prior delinquency. However, one does
not have to be in direct contact with others to learn from them; for example, one may learn to
engage in crime from observation of others and this may describe the reason for crimes
committed by the USF management. Most of social learning theory involves a description of
the three mechanisms by which individuals learn to engage in crime from others: differential
reinforcement, beliefs, and modelling.

Another prominent theory in this area is the routine activities perspective, advanced by
Cohen and Felson(1979) and is argued that crime is most likely when motivated offenders
come together with attractive targets in the absence of capable and effective security
measures.
USF management bought from vendors and sold to hotels, schools, sport stadiums, restaurants
etc and gained a large part of its profits from promotional allowances and these were rebates
from vendors for selling large volumes and for promoting the vendors products.
No system was ever in place to determine promotional allowances by the management and no
written contracts with suppliers were entered into regarding the discounts according to USF
management and average percentage rates were set by the marketing department for all
suppliers on total monthly sales.
This rate was set up every time a new company was acquired and these averaged estimates
were sent to the accounts department who debited the total receivables to promotional
allowances and put the credit into reducing cost of sales and there was no consideration
whatsoever to each supplier. Money from suppliers under promotional allowances was
credited to a separate account and only totals were then deducted from accrued receivables.
Deloitte during the audit in 2001 stated that the promotional allowances were to be kept on an
individual account basis and that it was proving impossible in the audit to reconcile the
individual accounts. Deloitte stated that USF management ignored their demands and carried
on with the opaque system in-place and that by the second quarter of 2002 the average
percentage rate had risen to 7.32 percent due to acquisitions according to USF management
but Deloitte stated that it was not possible to reconcile outstanding claims with payments
already received.
For year end accounts USF was supposed to send out statements of account to suppliers
setting out transactions and the amount payable by the supplier to the retailer but in reality
only letters from USF to suppliers stating allowances due to USF were sent out and all
confirmations of accounts were undertaken for Deloitte by the purchase department of USF
thus just about breaking every principal on which independent auditing is based.
Complicating the issue was the fact that USF also had 15 different computer systems from its
various acquisitions which it did not integrate and there were no uniform supplier codes
anywhere so that when management from USF stated in 2002 that negations from suppliers
resulted in even better allowances and that operating income was higher it was nearly
impossible to check this.
USF started buying large quantities of goods from suppliers and booked the promotional
allowances before the goods were sold as they realised they were not going to achieve the 15
percent growth over 2001 sales that was group policy.
The upper management in USF told all regions to buy large amounts of food thus receiving
discounts that varied from 10 percent to 40 percent for USF and the USF employees were
made to understand their very jobs were at stake if they did not comply with the instructions
to buy huge quantities ( Stecklow, Raghaven and Ball 2003).
In February 2003 Deloitte advised that three confirmation letters were incorrect and the
figures involved were very large as for instance in the case of the supplier Heritage Bag, USF
stated they were due 11 million dollars but Heritage Bag stated it was only 1 million dollars.
This was also the case with other suppliers and Deloitte advised Hoeven that the amount ran
to several hundred million dollars and on 23 February 2003 Ahold announced that the
earnings were over-inflated by 500 million dollars. In the subsequent investigation by the
SEC it was found that USF had lied about earnings from 1998 and in many cases had just
manufactured promotional allowances. Gross accounting fabrications allowed for examples
such overstated earnings by 18 percent for the six months ending January 2000 and which
included gross accounting violations referring to expenses should have been recorded in the
income statement buy were not. A forensic audit showed that the sum involved for the years
2000, 2001 and 2002 was probably as high as 856 million dollars. The management at USF
were blamed for having a totally opaque accounting system, for failing to track the
promotional allowances, for lying the existence of fixed promotional allowance contracts to
Deloitte, supplying false letters of agreement to suppliers stipulating to Deloitte the
promotional allowances that were due.
The times Deloitte sent reports to Hoeven and Meurs they were ignored as it was found by the
courts that Hoeven and Meurs sid not have proper understanding of accounting procedures
and little understanding of promotional allowances.
Four upper management of USF were charged with fraud by the SEC as they gained huge
bonuses for inflating the earnings of USF and one manager was charged with insider trading.

Hoeven and Meurs resigned in the wake of this and there was a loss of 1.2 billion dollars
announced for trading for just the year 2002 and Table 1 below shows the problems with the
accounting in 2000 and 2001.

Table 1: Accounting fraud: Dutch GAAP re-statements in 2000 and 2001and

Reconciliation of Dutch and US GAAP net earnings

Dutch
 GAAP
US
Adjustments
GAAP
Year Net
Earnings Goodwill Provisions Reorganization Joint Software
Financing Other Net
ventures
earnings

1991 125,159 -6,307

13,591 132,444
1992 138,422 -9,471
17,662 146,613
1993 155,698 -11,298
13,286 157,686
1994 185,842 -20,117
12,322 178,047
1995 207,187 -34,050
12,888 186,025
1996 286,982 -36,409 22,689 -36,712 -15,200 -4,300
13,033 230,084
1997 423,754 -100,647 43,330 -19,890 -
31,585 314,961
1998 547,199 -96,095 -54,535 -7,378
8,335 397,526
1999 752,107 -147,378 -28,630 -19,202 10,109
6,473 573,479
2000 1,115,991 -300,266 -21,434 -1,143 -5,360
5,821 793,609
Restated 920,000 -289,000 -1,000 -57,000 -128,000 -
64,000 61,000 442,000
2001 1,113,521 -728,210 -57,556 33,219 -5,360 -
269,970 34,164 119,808
Restated 750,000 -214,000 33,000 -588,000 -30,000 -
311,000 106,000 -254,000
2002 -1,208,000 -3,225,000 -26,000 119,000 117,000 -
97,000 -8,000 -4,328,000
2003 -1,000 -398,000 14,000 -122,000 -
133,000 -107,000 -747,000

Note: Table shows the reconciliation of Ahold’s net earnings in Dutch GAAP to US GAAP as
originally filed with SEC and later restated in 2002 (in € thousands).

__________________________________________________________________________________________
The collapse in the share price of Ahold is shown in table 2 below.
Table 2 ---Stock price of Ahold from 1995 to 2010 --Koninklijke Ahold NV ADR
--- AHONY

Retrieved from http://www.morningstar.com/1/1/4432-ahony-koninklijke-ahold on 20th November 2010

In March 2006 after a long investigation the courts in Holland found that Meurs was to bear
the most blame for the accounting fraud and that Ahold was too concerned with achieving the
double figure growth every year and although it was made aware of the incorrect controls
inside USF when the company USF was bought, Ahold management did not react.

Because Ahold co-operated with the SEC in the USA, disclosed all the accounting fraud and
removed all the management who had caused the problems and thereafter fixed internal
controls and accounting procedures and implemented a proper corporate governance the SEC
did not levy any fines. The corporate governance that was implemented was based on the
principals in table 3 below.
Table 3: OECD principles of corporate governance most of which were totally ignored by the Ahold management prior to 2002

Corporate governance should protect shareholder rights

Basic shareholder rights include the right to elect members of the board
Shareholders have the right to participate in decisions concerning fundamental corporate change ((amendments to governance,
authorization of shares, sale of the company)
Shareholders vote in general shareholder meetings (whether this is in person or in absentia)
Capital structures and arrangements that give certain shareholders a disproportionate degree of control should be disclosed
Market for corporate control should be allowed to function without anti-takeover devices
Shareholders, including institutional investors, should consider the costs and benefits of their votes
Corporate governance should ensure equitable protection of all shareholders, including minority and foreign shareholders
Corporate governance should recognize the rights of stakeholders as established by law and encourage the active co-operation
between the corporation and stakeholders
Corporate governance should ensure that timely and accurate disclosure is made on all matters regarding the corporation
(including financial, performance, ownership and governance)
Corporate governance should ensure the strategic guidance of the company, the effective monitoring of the management by the
board, and the board’s accountability to the company and shareholders
Board should act on a fully informed basis with due diligence and in the best interest of the
company and shareholders
Board should treat all shareholders equally
Board should ensure compliance with the law
Board should fulfill certain key functions, including
- Reviewing and guiding corporate strategy; setting performance standards; monitoring
implementation and corporate performance; overseeing major capital expenditures,
acquisitions and divestures
- Selecting, compensating, monitoring and when necessary, replacing key executives and
overseeing succession plans
- Reviewing key executive and board remuneration, and ensuring a formal and
transparent board nomination process
- Monitoring and managing potential conflicts of interest of management, board
members and shareholders
- Ensuring the integrity of the corporation’s accounting and financial reporting systems
- Monitoring the effectiveness of its corporate governance practices
- Overseeing the process of disclosure and communication
Board should exercise objective judgment on corporate affairs independent, in particular, from
management
- Board should consider assigning non-executive members to tasks where there is the
potential for conflict of interest
- Board should devote sufficient time to their responsibilities
Board should have access to accurate, relevant and timely information

Note: Table above is based upon a summary of the Organization for Economic Co-operation and Development’s (OECD)
Principles of Corporate Governance authored by the Ad Hoc Task Force on Corporate Governance in 1999.

Cohen L. and Marcus F. (1979) Social Change and Crime Rate Trends : A Routine Activity
Approach, American Sociological Review, 44 (4), 1979, pp. 588-608

Cody S. (2003)The Jay H. Retailing Initiative, Wharton 2003 Economist 2003

Europe’s Enron.(2003) Economist. March 1 2003

HarperCollins Publishers. (2010). In Encyclopædia Britannica. Retrieved December 07, 2010,

from Encyclopædia Britannica Online:
http://www.britannica.com/EBchecked/topic/850417/HarperCollins-Publishers
HarperCollins Publishers, 10 East 53rd Street, New York, NY.

Stecklow S. and Raghaven A. and Ball D. (2003). How a Quest for Rebates sent Ahold on
an Odd Buying Spree The Wall Street Journal March 6, 2003.